Trump's trade war
This week in Talking Finance, it’s all about politics, the markets, the economy and technology.
- Stephanie Peatling, senior writer and deputy bureau chief for The Sydney Morning Herald and The Age based at Parliament House takes me through the week's political news;
- Shane Oliver, Head of Investment Strategy and Chief Economist at AMP Capital takes us through how the markets are responding to Donald Trump's trade war;
- Stephen Koukoulas, Managing Director of Market Economics tells us how the economy is doing; and
- Steve Sammartino, Author and Futurist takes us through the smart home revolution.
Hello and welcome to Talking Finance, I’m Alan Kohler. This week, Canberra is just settling down now after the Barnaby Joyce earthquake, so I thought I’d check in with Stephanie Peatling, Fairfax’s Deputy Bureau Chief in Parliament House in Canberra. Also, Shane Oliver, Head of Investment Strategy and Chief Economist at AMP Capital, takes us through how the markets are responding to Donald Trump's trade war and they’re pretty sanguine about it to be honest.
Stephen Koukoulas, Managing Director of Market Economics and our friend of a long time, tells us that the economy is doing well at the moment or at least doing okay and he’s getting that from the national accounts put out by the ABS this week. Also, Steve Sammartino, Author and Futurist, technology guy, takes us through the smart home revolution. Because I’m seeing ads on TV for Google Home at the moment and wondering what’s going on and should I buy one.
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I’m joined now by Stephanie Peatling, who’s the Deputy Bureau Chief in Canberra for Fairfax. Stephanie, I was thinking that maybe Canberra’s a bit like, at the moment, Christchurch after the earthquake, and everyone sitting around thinking, wow, what just happened? Being Barnaby Joyce, of course. Is it a bit like that?
SP: It is a little bit like that. I like to think of it as like a zombie survival type film where we’re all just kind of staggering around wondering when we’ll next be hit and turn into the undead, but fortunately this week we seem to have a bit of a respite from that and we’re actually talking about policy.
Yeah, well that’s an unusual experience for you. Politics tends to be a sort of a day by day experience I think but what do you think the long term consequences of the Barnaby Joyce affair, if any, will be?
SP: I think it’s actually really interesting. I think where the press gallery at the moment is, is trying to work out what we do going forward, really. I mean, the Barnaby Joyce – this started with a story about his private life essentially and now the Prime Minister’s changed the ministerial code of conduct, your listeners would obviously know about ministers not being allowed to have sex with their staffers but the consequence of that for reporters is, well, does that mean if we know that that’s happening is that a story we should now be reporting on?
And even though the change to the code of conduct would indicate the answer to that is, yes, I think that makes a lot of reporters feel very uneasy because that’s the culture of political reporting in Australia. It certainly has been overseas but that’s something we’re not familiar with here, so I think we’re all trying to adjust to this new reality.
Yes, but obviously if a minister is breaching the code of conduct, then that is clearly a story.
SP: Absolutely. I think the other interesting side to that is declining resources in newsagencies and so on, offices aren’t as big as they used to be and a question that we need to ask ourselves is how much do we put into chasing down one of those stories? Because as soon as we do that it means that we’re not covering another story that we could be doing such as changes to company tax rates or something going on in small business or in other policy areas, so it’s a really challenging situation we find ourselves in.
What about the power setup in the Coalition now, I mean has that shifted in some way?
SP: Yeah, it’s really interesting to watch that, isn’t it? The National Party has obviously always been seen as technically the junior partner in this scenario and certainly the numbers on the floor of the House of Representatives suggests that’s the case, but they’ve really, really flexed their muscle. I mean, they have ministers in Cabinet, they’ve actually got more ministers in Cabinet under the Coalition agreement that was signed with Barnaby Joyce. They put quite a lot of restrictions on what could and couldn’t be done, so I’m not sure if there’s actually been a change in the power imbalance, but I think we’re learning more and more about exactly what the role that the National’s play is and realising and learnings more about the amount of power that they actually do wield at those top levels of government.
And obviously the searchlight of political tension this week has shifted to Trump’s tariffs…
SP: Yes, that’s right.
Do you think it’s going to become or is already some sort of test of Malcolm Turnbull’s strength and perhaps his negotiating ability or something?
SP: I think we’ve seen that he’s actually proved to be very good at that. I mean, just as well. Less than two hours ago we’ve had the White House Press Secretary, Sarah Huckabee Sanders, stand up and give a press conference in which she said that there will be carve-outs for some countries on this issue of the steel tariffs. She named Mexico and Canada and it seems clear from her statements that Australia will certainly be given a look into that. That is definitely testament to how well not only Malcolm Turnbull has played this, but also July Bishop, the Foreign Affairs Minister; Steve Ciobo, the Trade Minister; and also Marise Payne, the Defence Minister.
Because remember that there’s been a very strong line argued that we’re a key defence ally and that we need our industrial capabilities to back that up obviously in terms of the manufacturing of steel, so it’s been a very interesting week.
I think, in fact, Sarah Huckabee Sanders pointed out that the tariff is being implied under the national security provisions of the Trade Act, which provides the out.
SP: Yes, that’s correct and that’s very much how Australia’s been lobbying. Indeed, that’s correct, so it’s been fascinating to watch that play out, but of course we all know the Trump White House is a unconventional style of leadership, shall we say, and you never really know what’s going to happen next. It’s always a case of, watch this space.
Just finally, Malcolm Turnbull’s approaching his 30th negative news poll. I don’t think anyone thinks that he’s going to suddenly get sacked on number 30 but I presume it will be a bit of an event, won’t it?
SP: I think it certainly will and we had the 28th news poll earlier this week. The gap between the Coalition and Labor is not good on terms of a two party preferred basis, but significantly also Malcolm Turnbull has taken a tumble in the preferred Prime Minister stakes against Bill Shorten and that’s not something that we’ve seen in the polling previously. With two more to go, I think all eyes are going to be on this. It would be very interesting indeed if either of those figures shifted significantly. There’s already been talks coming out of the PMO about how they’re planning to manage this event when it happens, this miraculous 30th poll, but you’re definitely right, I mean there’s no mood within the Coalition at the moment to change leader principally because they don’t have anyone really to replace him with.
No, and I suppose the same applies to the Labor Party. I saw a piece the other day that said something to the effect that with Beasley and Latham they were winning in the polls and then managed to lose the election and they were kind of applying that thinking to Shorten and maybe the same would happen. There seems to be a little bit of unease about Shorten and the Labor Party.
SP: Yes, and you can see a little bit of that coming out this week with his statements on Adani being questioned by those always reliable unnamed Labor MPs who don’t really want to put their names to things, but there’s certainly some unease about some of the directions that Mr Shorten has been taking the party in. I think the Labor Party’s done an incredible job over the past few years at remaining a united and disciplined front. I’d be amazed if these kinds of ructions, not that I want to overstate them, became much bigger than this because I think they all know only too well how dangerous a divided party can be and we’re now probably a year out from an election, they really don’t want to have that become the story about the Labor Party which is infighting and brawling and what have you. They really don’t want that to be their narrative going forward.
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Joining me now is Shane Oliver, Chief Economist for AMP Capital. Shane actually the global share markets seem untroubled this week with the prospect of a trade war. Do you think they just don’t think that it will happen?
SO: I think there’s hope around that ultimately a trade war will be averted. I know Donald Trump has used that term in his tweets, but there have been some indications that there might be exemptions or carve-outs for allies, for example, in relation to the US. I guess beyond that, even if the tariffs are implemented which seems highly likely, there’s a hope that other countries will be retrained in their reaction and consequently the markets have sort of taken it in their stride. But there’s still a lot of nervousness around the issue. I think everyone knows the history of the Smoot-Hawley tariffs back in the 1930s and that worry is still there but it’s really a case of waiting and seeing the reaction from other countries.
I guess the Smoot-Hawley tariff came in the context of a depression, the global depression – or at least, an American one. The environment we have of global expansion at the moment…
SO: It’s a very different environment compared to the 1930s. When the Smoot-Hawley tariffs were introduced they actually related to all or most imports into the US and they were 20% across the board. Then other countries did 20% tariffs on imports to their countries as well. It was much broader, but of course it was also associated with the 1930s and you’re right to say the economic environment today is a lot stronger. Just overnight for example, we saw a survey come out of US Chief Financial Officer’s optimism there running at a record level. I think that economic backdrop is also providing a bit of support to investors at the moment.
I was just thinking, how does it feel as an economist to see politicians, like Donald Trump, you know, leaders of the world, basically ignoring economists and in particular economic historians and basically saying, “You wouldn’t know anything!”?
SO: Well, in fact, he did say that. I think it was reported in maybe the Washington Post saying that he was very sceptical of the economic advice and economist numbers. Yeah, it does sound a little bit upsetting. I guess, I started my career as an economist in the era of Ronald Reagan, Margaret Thatcher, Hawk and Keating, and they took on the advice of economists and moved down an approach which gave more weight to free markets and less to government interventions.
To a degree that was in response to the lessons from the 1970s which were that government intervention often doesn’t work, it just makes things worse, that protectionism doesn’t really work in the long term, we just end up with highly expensive unreliable cars and so I thought it was great to go through that period where economic advice was taken onboard and taken seriously. So yeah, I do worry a little bit that we’re now stepping back into a 1960s/1970s world where economic common sense is forgotten about and unfortunately America will pay a price for this but it may be well after Donald Trump is long gone.
Back to the markets, which is what we’re supposed to be talking about now, so are we to conclude therefore that the markets remain glued to what the Fed and central banks generally are doing?
SO: I think ultimately, it’s going to be an issue of what the Fed does, what inflation in the US does and the key issue I think is how severe the Fed tightens relative to the underlying economic conditions. If economic conditions remain strong in the US and globally, that’s going to drive stronger profits. Obviously, rising interest rates in the US will act as a bit of a dampener on that but the broad macro environment is likely to remain positive.
I think the reality is that we had a very smooth year last year, volatility was extremely low particularly in the US when there was no pullback in shares greater than 3%, as we went through last year, so we were due a bout of volatility and I guess a bout of bad news and that’s what we’re seeing at the moment. But the underlying backdrop, I think, still remains pretty positive and it’s right to keep an eye on what the Fed does.
It’s interesting looking at the VIX Index of volatility, I mean it had been bumping along between 9 and 10 for 12 months and then obviously, the beginning of February, popped up to 36, then it’s back down to 18. It’s above where it was, kind of double what it was in fact for most of last year, but well below the sort of spike of early February.
SO: That’s right, volatility is running higher. I mean, there’s a long period there, we would go through night after night, I guess, for Australian investors – night after night where the US share market moves by 0.2, 0.3, 0.4, 0.1 per cent, very small moves. Quite truly now it’s a bit more volatile than that. Last night the US share market at one point was down 1%, it ended flat. But we are seeing a lot more bigger moves, so therefore volatility has certainly gone up. It’s worth bearing in mind that last year was the aberration, it’s very rare to have the VIX contract down at around 9. And now I guess you could argue we’ve gone back to something a little more normal than what we saw through last year.
Just finally, was there anything on the markets this week in Australia that caught your attention?
SO: Well, from a share markets perspective I think we’re still digesting the profit reporting season which has just ended, which I actually think was a very good reporting season. It didn’t have the strength of profit growth that we had a year ago because that surge in iron ore prices and gold prices that had boosted resources stocks had passed, but nevertheless we saw the highest percentage of Australian companies seeing an increase in profits than at any time since the GFC. 74% of Australian companies on my count saw their profits up, highest number since before the GFC in fact. We saw 92% of Australian companies either raise their dividends or at least maintain them.
That’s a reasonably positive backdrop for investors. The strength of dividends I guess there’s a lot of debate about this but it’s also a sign that companies are reasonably confident about your future because you don’t increase your dividends if you think you’re going to have to cut them a little bit later. Economic growth numbers in Australia were a little bit soft but not disastrous. Growth running around 2.4% is nowhere near as strong as it needs or should be. We should be having growth around 3%, still below what the Reserve Bank’s been looking for for many years and we’ve come to the view that the first rate hike in Australia is going to be a 2019 story rather than a 2018 story.
But all of that’s still okay, environment for the Australian share market, the company’s still paying good dividends, prospect of reasonable modest profit growth, keeping the market ticking over. But obviously we are going to be exposed to bouts of volatility coming out of the US and globally.
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Joining me now is Stephen Koukoulas who’s got his own business called Market Economics, he’s also Chief Economist at Dun & Bradstreet. Stephen, the economy continues to expand at least, 27 quarters now in a row, but it’s not doing all that well, is it? I mean, it’s certainly not going above trend.
SK: No. You’ve summed it up nicely there because the economy is still growing, yes it’s an expansion, 2.4% annual GDP through 2017. Yet, not a bad result but it’s still a long way from the times when we’ve got an economy that’s sort of really firing on all cylinders, and that’s probably still a growth rate above 3% in my view. We’ve had yet another year of sub-trend economic growth, the reasons for it are somewhat interesting because I think the numbers show that while there’s evidence that the private sector demand, a bit of household consumption, a bit of a turn in private sector business investment, they’re both looking a little stronger, which is great news.
But the problem with those two components is that there’s a very high import component in the machinery and equipment and of course every motor vehicle that’s purchased in Australia now is imported and that just sort of flows out the back door, if you know what I mean. Bottom line GDP is still okay, but it could be doing better.
If we had Donald Trump in charge he’d fix that import problem, wouldn’t he?
SK: Well, he might fix it in the short term, a bit like his tax policy proposal where, yes, the tariffs – it’s easy to understand why they’re appealing to some people but it’s clearly a disruption to the global economy. I saw a nice little statistic on the aluminium tariffs that Trump’s talking about that allowed 15 cents to the price of a tin of beer because they’re an aluminium tin can. The ‘Joe Six-Pack’ having that dreadful Budweiser or whatever is going to be paying 15 cents more if the aluminium tariffs come through. That’s just symptomatic of the problem, you might restrict your imports of steel and aluminium, but for the people who actually use it in the production train within the US economy, people who make tin cans, they’re going to have to pay more for it.
Back to the GDP, I mean as you say, the net imports detracted half of a percentage from the growth. What other negatives were there that you could see?
SK: There’s evidence that the housing construction cycle is starting to soften too. We’ve seen that building up I guess through the course of the second half of 2017, with building approvals numbers tending to move lower and we’re building more apartments rather than houses and of course that uses less product, less bricks and windows and timber and all that other stuff. We’ve got the housing cycle turning a little bit lower too. As I mentioned, the household consumption side was actually pretty good, 3% through the year, 1% for the quarter.
Even though we consumers are sort of saddled with record levels of debt, the household saving ratio remained very low in the quarter so we’re not really saving all that much money and our ability to spend is sort of constrained by those two things. A curious positive in the numbers was that wages seem to be picking up. There was evidence that despite the rhetoric that we hear about record wage growth, I think that’s a story for 6 and 12 months ago because there’s evidence now that at long last there’s a bit of a pickup in wages and of course when people earn a dollar or two they tend to go and spend it. Maybe that’s the shining light from the national accounts that were otherwise just pretty mediocre.
Was the decline in productivity, 0.8% over 12 months, was that a surprise to you?
SO: Well, sort of, and this is another quirk. Gosh, the data that the ABS produces always throw out these quirks that we’ll only find out whether there’s something there in a couple of years’ time when we look back at the history, but we do know and it’s one of the really good aspects of the economy at the moment is the very strong growth in jobs, that 3.2% I think it is in terms of growth. 400,000 jobs added to the economy in the last 12 months, they’re terrific numbers, there’s no question about it.
But if you think about the mathematics of it, 3.2% job increase, GDP only growing at 2.4%, so as you pointed out, the average output per worker is dropping by 0.8% and that’s a very rare event. I don’t believe our productivity is that bad, I don’t think we’re actually turning up to work and producing less stuff. I think there’s possibly a bit of a quirk in the employment numbers in that a lot of the jobs that are being created and if you look at the component of the hours worked, okay we’ve got a lot more jobs but people are working fewer hours per week on average. Our output actually isn’t all that good that we would be better off with more full-time jobs.
That’s a roundabout way of saying, the productivity numbers look pretty crook for the moment, but it does tell me also that there’s still a fair amount of spare capacity in the labour market, that we can grow the economy a little bit more quickly before we run into genuine concerns about skills shortages, labour shortages and even though wages are picking up, before we actually get to a troublesome pickup in wages, we’re still a long way from that dynamic.
What does it all tell you about interest rates this year?
SK: Well, I think the safe bet – we had the RBA Governor, Philip Lowe, talking earlier this week and we had the RBA statement of course for their regular monthly board meeting, confirming that rates are on hold, no surprises there. Governor Lowe did say that the next move is more likely to be up than down but don’t rule out a shock causing us to do something on the other side. But I think the safest bet for now is that rates are on hold. There’s no way that they can hike them whenever they’ve got inflation below target. GDP growth is slightly disappointing. The housing market’s got evidence that it’s cooling off. Prices are down a bit in Sydney and Melbourne.
Again, nothing to worry about but you wouldn’t want to be hiking rates into an environment where we households have got debt up to our eyeballs and an even very small change in interest rates might cause a significant problem, so bottom line rates are on hold. I’m still of the view that we could see a cut, I’m not ruling that out. Just say we get another six months of data where GDP is still at sort of 2.5%, unemployment’s still at 5.5%, the inflation number’s come in at 1.75% in annual terms and we get evidence that housing’s cooled off, that some of the Trump dislocation on tariffs causes the markets to sort of have a rethink about the strength that they’ve had over the last couple of years then, it’s not impossible to think of a scenario where later this year the RBA does a bit of an about-face and trims rates. But the safest bet I think is on hold and on hold for many a long day.
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I’m joined now by Steve Sammartino, technology futurist extraordinaire, and he’s going to talk to us about home assistance. Steve, I keep seeing ads on TV now about Google Home, so it’s all happening. Where are we heading to with this?
SS: I think it’s the start of ambient computing. Now that we’ve got this fulcrum device that’s entering the home through Google Home and Amazon Alexa and Apple will be launching their HomePod and even Facebook are touted to be launching one. It’s, I think, finally the start of the smart home. What that means is that talking to the walls is no longer reserved for crazy people, it means that people like us can start commanding our computers via our voice. Natural language processing is getting very, very good now.
I saw a funny story this morning about, Amazon’s working to try and fix its Alexa speakers because they’re laughing randomly. [Laughs]
SS: [Laughs] You can always trick it and its not quite there yet with human sort of semantic language, but in terms of command language, like instructions and asking questions, they tend to be pretty good. They’re just about as good as what you might type into a search engine. Anything that would get a reasonable response within a search engine where you type in and ask a question, the results within the verbal response that you get back would be pretty good. But there is one massive fundamental difference.
There’s no longer a first page on Google or a first page on Amazon when you search these things with your voice. What happens is you now get a single recommendation. That, for a lot of businesses, is going to change the way they’ve gone to market and marketed their businesses locally with search engine optimisation.
Are there going to be strategies to enable businesses to become the key recommendation, the main recommendation?
SS: Yeah, absolutely, and one of the things that we’ll probably find that it does better now is it’s going to be more geographic-centric than it has been in the past because usually you get a set of options that are based on what’s best and not necessarily what’s closest. If you ask Alexa to order you a pizza or Google what’s the closest pizza or what’s the best pizza, it’s going to give one that’s close by. I think that there’s going to be a bit of a learning curve because we don’t know how the algorithm works yet with voice engine optimisation. There’s going to be a whole new industry almost pop up so that you can be the first verbal recommendation.
Another strategy is, brand also becomes more important again. In some ways search engine optimisation reduce the importance of brand because you just wanted to appear first. Now what we want as an organisation no matter what we do, we want to be asked for by brand. If someone asks for a generic pizza shop, say, “What’s a close pizza shop?” it’ll give you the one that’s either the most profitable to Google or Alexa, but if you ask for it by brand or the product by brand, then that becomes more important again.
Do you think you’ll be able to have a conversation with Alexa or Google Home? I mean, in the sense of, when you look up Google for something you can actually click on several of the links to compare them yourself and decide which of them you want to choose. Will you be able to interrogate the home assistant to sort of say, “Well, tell us what the pizza’s got on it?” or, “Is this pizza any good?”, “What are the reviews on this pizza?” and sort of have a conversation along those lines to narrow the choice down?
SS: In many ways, what we’ll need to do is we’ll need to train the Alexa or the Google Home because each one will have an algorithm where it learns our behaviours based on our log in and our sign in. You almost train it like a dog where we’ll have to give certain recommendations and then ask sub-recommendations and say, well now tell me the reviews and now do this. There’s going to be a bit of a learning curve, not just for us on how to interact with it, like we learn to interact with the internet and screens we’re going to have to learn how to interact with the computers in a voice manner.
But also what we’re going to do is we’ll see that the machine learning will exponentially improve as we have more interactions with it, because the way machine learning works is that it takes all of the interactions and it reinterprets that data and what the possible responses should be based on us asking questions again and again, it will get better and refine as time goes by.
Do you think that this is the next big consumer product boom in the way that smartphones were in the sense that eventually everyone will have one so that there are millions and millions to be sold?
SS: Yeah, I really do. I really think that because the home will be a connected home, this is the start of the ambient computing era where we start to speak to the computers. Given that eventually we’ll see these connected to the doors that open up within our house, the fridge will be connected to the internet – I remember LG launched one many years ago, an internet fridge and everyone was like, “Why would you want to surf the internet on your fridge?” Well, it’s because that will become an ordering device, our TVs will become smart and they’ll all be integrated much in the way that electricity has been put into the walls and we need to remember that it wasn’t always the way.
This is going to be, I think, one of the next booms. We’re going to see quite a few. We’ll see automated transport will be a big boom, blockchain technology will be another big boom. But I think the smart device and the smart home, it arrives in 2018 because we’ve got this one device which can actually tie the other ones together. At the moment they’re all little fragmented pieces.
Because it seems to me that the home device, these home assistants that you talk to, don’t really need your home to be a connected home. People are just buying them. Google’s advertising them on TV now for people to just go and buy them at JB Hi-Fi and stick them in the home, right? People haven’t got their fridges and TVs and doors all connected, they’re just buying these home assistants…
SS: Not yet, but this is the start.
But you can have one of these things in your house and just start ordering pizzas on it, can’t you?
SS: Yeah, exactly, you can have it just as a – the way you surf the net but you’ll surf it with your voice and it becomes a music device. The point that you make there is it’s actually got a really low barrier to entry because it has some utility as soon as you put it in the home. You can be getting ready for breakfast, ask it to read you the news headlines, tell you what the traffic’s like on the way to work because it knows where your work address is and organise some things, tell it to read out your meetings and your appointments if you’re all clicked in.
One thing it does do though, it’s going to become, I think, a real battle ground where Google and Facebook and Amazon and everyone who launches one of these home devices wants to get in the home because once you get in the home it’s like Apple versus android, you get into the ecosystem or the walled garden of that company. You will see people pushing it trying to get them in the home. I think that the household penetration of these will be massive in a year or so.
Do you think one of them will win in the end?
SS: I would be backing either Alexa or Google. I think that the Apple HomePod won’t be as good and it’s a big failing from the one that’s been launched by Apple, it’s quite bad. Their natural language processing isn’t as good and that’s because Apple isn’t really used as a search mechanism, so they don’t have the breadth of how the machine learning can learn the interaction. Siri’s actually fallen quite a way behind Alexa and Amazon. If I was to predict a winner, I would predict Google.
And the reason I would predict Google over Amazon is because Google has the best artificial intelligence engine, which is their search engine, so I would predict them as the winner because I think they’ve got more pieces of the puzzle that help the interaction with the humans. Not so much the warehousing and the servicing, but the fact that their search engine is by far moving the quickest in terms of the way it can interpret language.
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Happy Birthday Neneh Cherry who turns 54 tomorrow, and here’s her duet with Youssou N’Dour, ‘7 Seconds’. Don’t know what it’s about but it’s a pretty good song anyway.
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That’s it for talking finance, please share your thoughts by emailing us at hello@theconstantinvestor.com. I’m Alan Kohler, have a great and Constant week.
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