Martin North Talks Aussie Housing Bubble, Economic Instability, And SMEs – RCS Ep. 61

Martin North reveals expert insights in this interview. We discuss the Australian situation, climate change, the banking system, polarized politics, the funding system for SMEs, and much more! Click play to watch now.

Martin North is a macro expert, banking sector analyst and business consultant specialized in the financial services industry.

He is currently the principal of Digital Finance Analytics (DFA) where he has advised more than 100 organizations in their strategy, business transformation, digital business, and IT strategies.

In this interview, we talk about the shocking Australian housing bubble, the economic instability that the big banks are generating, the funding model for SMEs, and why the big governments are creating a fragile system.

If you're interested in hearing a research expert on the future of the economy, here's your shot.


Why We Need To Have The Climate Change Discussion 

George: All right guys, it gives me a great deal of pleasure to welcome someone back to The Rebel Capitalist Show that I really enjoy talking to.

He's one of my favorite Aussies, and that is saying a lot.

His name is Martin North and he is with DFA Analytics.

Martin, welcome back to The Rebel Capitalist Show.

Martin North: George, great to see you again.

George: All right, there is a lot going on right now.

We've got protests in the United States, rioting, and looting.

I guess some of this has filtered down into Australia as well.

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I really want to talk to you about the Aussie housing market, but before I do…

What are your overall macro thoughts that you've been mulling over, over the last few days?

Martin North: Well, I guess, I've got three.

  1.  The first is, what on earth is the market doing? The markets, the 500 is back now the way it was before all of this thing happened.

George: The NADAQ's at all-time highs.

Martin North: Yeah, it's all over. To my mind, I can't see how it is all over because all of the economic data that I'm looking at says this is going to be a long, slow grind. So it's not a V, maybe a U, maybe a W. 

What letter should we throw at it? 

2. The second is, what are some of the social consequences of the riots? Because I think this is more than just Black Lives Matter, critical though that is.

I think this is a broader signal about people's frustration with how politicians run things or don't run things.

3. Thirdly, if we think that the coronavirus is the worst thing that could happen to us… To my mind, this is a signal that we should be listening to. In the context of the climate change adjustments that we're going to have to make, like it or not.

Otherwise, the whole planet's going to basically burn in the next 50, 100 years. In a way, we almost seem to be fiddling while Rome burns, but the big questions just aren't being addressed.

George:

What are those big questions, in your mind?

Martin North:

Well, the big question to my mind is if we are really going to want to have a planet that's habitable, then we've got to think differently about our economic drivers.

We saw when the lockdowns were enforced, what a difference there was to the climate. Less smog, less pollution, those sorts of things.

If we really want to have a planet that's habitable 100 years from today, we're going to have an industry basis driven differently from where it is today. We're going to have an innovation platform that's different from the ones we're running with today. 

Those big political questions will require international cooperation, a completely different economic model than the one we've got today. Yet, we seem to be muffing it, we just can't get there.

It's almost like you can a glimpse of what the future might look like, good and bad, but no, we're just going to focus on the immediate short-term and think about the next election, and those things.

There's a longer context for all the stuff that's going on at the moment that I think we're missing.

George: There's a lot to unpack there.

If someone can say, “All right, Martin. Well, yes, the air quality has dramatically improved with everyone staying at home, but it's at the cost of the economy just being crippled.”

I think someone that was very pro-oil, and we don't really need to dive into that on this video, but someone would say…

“Listen, Martin, if we just get off of oil right now, that's what's going to happen to the economy because oil has such a higher level of energy density.”

How do we get from oil to cleaner energy without suffering this massive economic decline that the Coronavirus has proven will be a result of lower economic output, I guess?

Martin North: That's the critical question, I don't have all the answers. We had the bushfires here in Australia over the summer, the worst bushfires in probably 100 years. 

We had nearly three-quarters of the population exposed to bushfire smoke, not just for the odd day, but for weeks, and weeks, and weeks. That was a bit of a signal that things will not be able to continue the way we are. 

Yeah, I agree, oil is absolutely a foundational component in the way the economy works at the moment, but we have to be thinking about transitioning.

It's going to take a long time to be able to make those transitions. It's going to take a lot of innovation and a lot of creativity to be able to build an economy on a different basis. 

Just saying, “Ah, it's going to damage the economy too much,” is not an option because otherwise, eventually, the planet's not going to be habitable. 

Whilst the expedition to Mars might actually offer an exit for a number of people, this is the one planet that we've got.

I keep saying to people, we're using about two and a half times worth of the assets, and we've only got one planet, so that ain't gonna work.

George:

Where do you think nuclear fits in there?

Martin North: Well, I'm actually of the view that there is a place for it. 

I know that there's been a lot of issues with regard to pollution and the disasters and things, but the new generation of small nuclear looks quite interesting to me. 

Not having these massive single units, but actually a different model. There are issues with it, but there are issues with all energy sources. 

Well, I can say in Australia is with our sunlight, and with our massive continent, we should be right at the front thinking about using sunlight and other sustainable sources of energy, and wind and things. 

Now, I know there are issues with it because it's not always there, and you have to be able to actually have a sustainable supply, all those things. This is what the technology conversation should be.

 Is it nuclear? What we've come up, in Australia is, “no, no, the answer's going to be gas. “

George:

Natural gas?

Martin North: Yeah. Basically, we're going to use gas as a sort of an interim measure, but of course, gas still makes emissions. It's not quite so emissions-intensive as coal. 

There are people in Australia who still want to build more coal mines and basically export more coal. 

There's a market for it still because there are countries around the world still building coal power stations.

I understand why, because it's probably the cheapest, most accessible form of energy. 

Of course, with oil prices really low, then another reason for cheap energy.

All I'm saying is, I think there's a vision question here about taking a longer-term view and trying to begin to lay a path for the future.

We got a glimpse of the way that the economy works and the way that the environment works, and it was a bit of a wake-up call for me certainly.

George: Yeah. Then what makes it even more complex is each country is in its own state of development, not that it's easy anywhere.

It's easier for an Australia or the United States to make some efforts to transition than it would be for Ecuador or Colombia, or someplace that's much more developing. 

It's definitely a challenging question but I think if people can come to the table and actually talk about it without getting emotional, it would be a lot better for all of us in the long-run. 

It goes back to what Thomas Sowell, my favorite economist, always says:

“There are no solutions, there are only alternatives.”

Martin North: Absolutely. I think that's a really good point. There is no silver bullet here.

Denying that this is going on and this is an issue that needs to be thought about and talked about is probably the biggest mistake that we could make as a species.

Because it could be, actually, our species killing it, ultimately.

George: Yeah, and the problem is it's just like the political environment right now in the United States.

You just can't talk about it without people getting emotional. Then you just throw facts and data, it just all goes out the window because it's become so politicized. 

Do you know what I mean? People get so tribal, especially right now in the United States, either you're for Trump or you're against Trump.

If you're for Trump, “You have to have this belief system, and if you don't, I'm not even going to talk to you.” If you're against him, “You have to have this belief system,” and there's absolutely no critical thought whatsoever.

Martin North: I agree. Look, I'm a philosopher by actual background, and so I try to ask the question, behind the question, behind the question. Right?

Essentially, what I see all the time is people just taking that first question, but not actually really unpacking it and understanding what the real issue is, and so you become polarized. 

You're, “I'm for climate change.” “I'm against.” It becomes a religion, actually, more than anything else.

In the process, rational thought, argument, and strategic thinking about the future just goes out the window.

Then, of course, you get the political cycle, so everybody's worried about the three years, or the five years, or whatever the political time is.

People are only interested in getting to that next election and winning the next election rather than actually taking a more strategic view of where we need to go as a species. I just think, sometimes, we need wake up calls, and we need things to actually cause us to stop and think.

Like I said, I think COVID potentially could be a trigger for just asking the harder question.

But unfortunately at the moment, the whole climate change discussion, how to adapt and evolve and change are off the agenda. Nobody wants to talk about it.


The Australian Construction Sector And Its Problems

George: I've spent a lot of time in Ecuador, and I've got some people that work for me right now from Venezuela, so I've obviously tried to pick their brains, “What is it really like there?”

 Trying to understand how an economy can work well, and how it can not work well.

One of the things they did in Ecuador that they did in Venezuela, which I think was one of the big catalysts to the problems they've had there is they subsidized the cost of fuel.

I can't remember the exact numbers because I haven't been back to Ecuador for a while, but as an example, let's say a gallon of gas, they subsidize it, so it's 25 cents a gallon.

The government is losing a massive amount of money just by getting it out of the ground and giving it to the people in society.

Now, of course, the argument is, “Well, that's great for growth because it's all about fuel, and transportation, and energy costs, and keep that low.”

Then, my counterargument is, okay, well, you're building an entire economy around something that is totally unsustainable.

We found out in Venezuela that when you put all your eggs in one basket and those eggs go bad, you got big problems.

Martin North: Yeah. Well, there are three quick data points to support this part of the conversation.

  1. The first is, we have more than one million spare properties across Australia now.

George: Put that in perspective. What's the population?

Martin North: 25 million. Okay, one million. 

2. Secondly, migration, which was around 300, 350,000 at the peak has come right back because of COVID, so we don't have foreign demand.

We have one million of our working population… Let's say, I don't know, the working population's about 10 million, something like that. I don't know.

Give or take, maybe slightly more than that. One million of those works in the construction sector. 

3. Then the last data point is 65% of all bank lending is for property.

George: In other words, the money supply, the creation of money.

Martin North: Correct. Basically, we have a situation where the politicians know this, the construction sector is essentially the cornerstone of the economy.

It's been like that for a long, long time, because we've got a very narrow-based economy. We dig a few minerals out of the ground and ship them overseas, we sell some food, internationally. Then, we basically build houses.

Now, my argument is, the construction sector's really, really important for the economy, but we should be actually thinking about where we should be building for the longer-term, rather than just more rabbit hutches.

Because, effectively, the quality of the construction is pretty low at the moment. 

Now, basically, the latest announcements from both the federal and the state is more subsidies to allow people to be able to go and make extensions on their properties, or to buy new properties.

Or first-time buyers to come into the market, as you say, pulling forward demand.

Of course, this has a significant impact in terms of the price of housing relative to income, as we discussed last time. 

It's way off the scale, and most people can't afford it. Interestingly, since COVID, the regulators have dialed back the lending standards, so the banks now can offer interest-only loans to people with existing loans. 

You can convert your loan from a principal and interest loan to interest rate and, “Let them just keep borrowing some more.

By the way, if you want to roll that on, that's fine. We'll give you a six-month interest and principal repayment.”

George:

Do they do that with cashout refinance, to where you can take the equity out of the house, or is that just to buy the house?

Martin North: It looks to me, at the moment, although it's a bit shady, I suppose, what's gone on here.

Most people are getting on existing loans, but there is now starting to be some refinancing. 

A lot of the banks are trying to fight each other for the business that is there, and they're offering really cheap rates to get people across.

Some of those, when they are refinancing, are still pulling equity out of the property.

The magic money machine, as I call it, is house prices go up, you have a mortgage, you sit on that for a little while, you create some equity, then you pull that out, and then you buy another property, or a car, or whatever. 

The circus goes around, now, here's the really interesting thing, up until quite recently, house prices were looking quite bullish. They'd gone down, then up again. 

Now, house prices are beginning to go the other way and so people are beginning to get a bit cautious.

CBA, one of our big lenders, said there is a chance that we could see a 32% price fall over the next couple of years. 

They're still lending like there's no tomorrow, they've shaded back they're loan-to-value ratio standards a little, they're still very happy to lend.


The Aussie Housing Market Bubble

Martin North: Think about this. We've got the politicians thinking about, “I need to make sure that I try to get jobs, the easiest way to get jobs is to support the jobs market, support the construction sector, we have a million people, a lot of people need jobs.”

So you build more houses, and then you get the banks to basically lend to be able to fund the house purchase, so households get into more debt.

We see that the dial, moving toward higher and higher debt in the system, this thing goes on, and on, and on.

I keep saying, at some point, the music's going to have to stop, but the truth is that the politicians are very keen to keep the music going.

In my scenario, now I say, there is a scenario where house prices will continue to go higher, because they're all doing unnatural acts, as I call them.

They're throwing more money at the system but it's not helping. 

Housing affordability is adverse as it's been for a long time. There's been very little real income growth for a long, long time. 

That means that although interest rates have come down and therefore, people's ability to service a bigger mortgage is higher than it was, we've come almost to that lower bounds now in terms of interest rates.

They can't continue to cut rates. Mortgages, I can't see how they'd go negative, despite negative interest rates, which, interesting to talk about.

The fact is, everybody in the political class is essentially backing the construction sector, and the construction is housing. I'm just saying, come on, we need a different plan, we have to find a different way from this point. Because we are not investing in the things that will actually create long-term, longevity for our economy, that will create more momentum.

Because in a way, if you think about it, when you lift the loans and you lift the property values, what you're doing is just inflating.

You're not actually creating new value.

Even the prospect of wealth, so people suddenly think, “Oh, my house is worth this, so therefore I'm worth this.” No, all you're doing is just lifting both sides of the equation, and so it's illusionary.

This whole thing is illusionary, and yet it is the fundamental pretext on which the whole of the Australian economy is now based.

George: Yeah, and it's just such a massive misallocation of resources and you’ve got it all funneled into this one thing where they're just being wasted.

You just said there's a million homes unoccupied in Australia think of all the commodities, the lumber, the labor.

Think of all the construction workers that aren't going to be doctors, or a something else, anything else that would be productive in society, because they're going into construction because it might be easier or a higher paying job.

Then you're consolidating the revenue steam, for lack of a better word, for the entire economy, and then when that comes crashing down, you have no diversification whatsoever.

It's like a business just having one customer, and just relying on that one customer. 

As a smart business person, you'd say, “Wait a minute, if that customer goes out of business, I'm screwed, so maybe I better look for other customers and try to build a more stable platform for my income,” but they just keep doubling down.

Martin North: I did an interview a couple of weeks ago with a Senator, a liberal Senator, so on the conservative side of the House here, who actually on camera, on my show, said, “This is nuts.”

There are people in the political environment who understand that this is really a silly thing that we're doing, but they are actually not in a position to be able to influence the people who are making the decisions.

What I find fascinating here is that if you talk quietly to politicians, they know this. They've known for a long time that this is a one-way street to nowhere and yet, politically, they can't do anything about it.

They express helplessness, they express frustration about we're not investing in businesses for the future. We're not investing in innovation. We're not enabling small businesses to grow and develop.

In fact, small businesses are being crushed, left, right and center at the moment.

Because this juggernaut, which is effectively the finance, housing, politic complex, those things together are just ruling the roost.

Again, from a philosophical perspective, it's one of the most interesting things that you can look at because you can see how the source of power, money, influence, and the outcomes are all being aligned.

But it's not actually for the good of Australians, in my view. I think we're actually digging a really deep hole for ourselves, because this is going to actually run out of runway at some point.


The Aussie Banking Model: Biased Against Innovation 

Martin North:

You're absolutely right about, we're missing the opportunity.

If only we'd invested over there rather than over here, we could actually have had a completely different shape to our economy, a much more sustainable, a much more broad economy.

There are some really interesting businesses here in Australia. I interviewed some the other week who's actually got LED-powered street lights. They specialize in installing them. 

They've got really interesting business models, but they've had terrible trouble getting the authority to understand that this actually a much cheaper and more effective way of lighting.

Because it's not actually within the sort of the standard ambit of what people are thinking about.

I hear this all the time from individual businesses, “We just cannot get this off the ground.” I get cross.

George: I'm assuming they can't get the financing they need either. 

They can't get the small business loan because the banks are saying, “Why on earth would I take a little bit of risk with this business when I can just pile this, create additional loans in real estate and know that I've got a put, for lack of a better word, from the governments, and I can create more loans. I make more money with less risk.”

Martin North: Well, that's exactly right. Even the borrower risk ratings.

So basically, if you lend for housing, the amount of capital you have to hold is much lower relative to if you were lending to small businesses. Right?

At the very heart of the way the international banking risk models work, it's actually biased against innovation, against businesses, and towards finance for housing. 

It's a fundamental philosophical problem that we have again that essentially the whole system is orientated in the wrong direction. 

That's why banks make rational decisions because they can use much more capital and get much more leverage. Of course, banking is a leveraged business.


Big Banks And Their Lost Proximity To Community

George: 

Do you guys have reserve requirements there?

Martin North: Yeah, we do, there are capital ratios we have to do.

We don't have to hold money at the Central Bank like some other places, but there are mechanisms that the Central Bank has in terms of maintaining liquidity and those sorts of things. It's a slightly different model.

George:

  • What do you think about Richard Werner?

I don't know if you've studied any of his work. If you have…

  • What do you think of his concept of moving to a model that's much more based around the community and smaller community banks?

Instead of these juggernauts that really only want to pay attention to the big players.

And because it's going to take them just as much human resources to do a $3 billion loan as maybe a $3 million loan to the guy that you interviewed that had the LED street lights.

  • What do you think of his idea of doing that?

  • Do you think that's beneficial? If so, why?

Martin North: The old argument used to be that you need big banks because the scale of the technology that was required to run a bank was you need mainframes. 

30, 40, 50 years ago, that may have been true. They also argued that basically you could get more capital efficient for being big. 

Those arguments, I think, are now blown out of the water because the technology's completely changed you can run a bank on a server very easily. What you've missed is the close proximity to the community.

My father was a bank manager. Along with the Vicar, he was actually one of the pillars of the local community when he was a bank manager and years ago.

He was horrified when he saw these banks getting bigger and bigger and more distanced from the local community. He couldn't make decisions, towards the end of his career, to support local businesses. 

He had to go upstairs to be able to actually seek permission to make the loan. He could see this whole thing becoming a marketing, centralized controlled thing.

In the process, he said to me, towards the end of his career, “I can't do what I used to do,” which was to help the local community, so we have to find a way back to aligning the local community to the financial needs. 

Martin North: I'm a great supporter of “from the ground-up”, community banking and those sorts of things. 

Now, there are risks you have to cope with, and you have to recognize that there are standards that need to be adopted in terms of risk management processes and things. But, fundamentally, bigger is not better in banking, in my view, these days.

Interestingly, if you think about how banking is now delivered, which is predominately through the Internet, the distancing between the decision-makers and the people who actually need the funds is getting bigger rather than actually less.

 I think we're missing a really important point, so I think Richard is onto something.

George: Yeah. I just go back to my own experience.

In 2012, I retired, and if you looked at my personal balance sheet back then, it was incredibly strong from the standpoint of a borrower. 

I was buying a lot of homes in the Midwest at that time when they were just pennies, and I was just paying cash for them, all the properties I owned, I owned outright. 

Unbelievably, it was very hard for me to go to a bank and, number one, even get a mortgage to buy a property, or to even take out the equity that I had in one of these properties that I owned outright. 

Like a 50% LTV, to buy more property or to do whatever.

It's weird that, especially when banks get this large, it seems as though they lend when they shouldn't be lending, and then they pull back lending when they actually should, when there's less risk, because the market has bottomed out

My point is, at the beginning, I just couldn't get anybody to give me a loan. Finally, I met a small community bank there, I met the Vice President of Commercial Lending. 

We went out for lunch a few times. I told him the problem that I was having of getting anyone to even pay attention to me at all.

George: I said, “Look at my balance sheet.” I was like, “Look at all these houses I own. Look at the cash. Look at how much money I've made over the past 10 years,” or whatever.

He's like, “Yeah, it's just the environment right now.” He got to know me and said “Here's the line of credit, here's whatever you want.”

I ended up not really using it to a large degree but since that time, I've gotten to know him very well.

 

Now, whenever I go back to Kansas City, we have dinner, we go to lunch, we grab a coffee, or whatever.

Now, I know darn well that if we went into another downturn, that I'd pretty much be able to borrow whatever I wanted to borrow because I've established that relationship. 

He's made a lot of money on me in the past because every once in a while, I'll use that line of credit or I'll use his bank for borrowing. My main point is I was able to build that relationship with him, so now there's that trust.

If we don't have these community banks, if everything is a Wells Fargo, or whatever the equivalent in Australia, there's never going to be those relationships. 

You're always just going to be a number, and then it's just going to go to Risk Management, or they're just going to calculate some things, check some boxes, and you either get the loan or you don't based on these boxes.

Instead of getting a loan based on a handshake and going to dinner with that person, looking them in the eye, and saying, “Hey, is this guy or gal someone that I want to take a risk on, yes or no?” based on human interaction.

Martin North: I agree, absolutely.

I survey SMEs all the time here in Australia. Half of the SMEs say to me they cannot get the support, and finance, and funding that they need, half of them. 

Basically, there is a throttle on the momentum in the small and medium enterprise sector in Australia that is actually credit led.

In fact, I made a submission to Parliament quite recently saying there has to be a different funding model to enable small businesses to do what they want to do, because the banking system doesn't support them, and it's for that reason that you said because the bank wants cookie cutters.

The bank wants to be able to say, “Tick, tick, tick, tick, tick. Yeah, it's a mortgage, go.”

They can automate that and they can reduce human interaction through the process, and basically just turn it into an automated process.

You apply online, and you get the money, and nobody even thinks about it. That's the future of banking that they want because it's efficient and the capital ratios, et cetera, control that mode of operation.

I would argue that the true future of banking is exactly what you're saying, where people actually have interactions and people get to know what's actually driving that particular business. 

There are lots of businesses in Australia with great ideas that just cannot get the funding. 

I think this is probably one of the most critical discussions to have because there are businesses today that could become massive businesses tomorrow, and yet they never get off the ground because the systems don't allow them to get off the ground.

The way that the banking system works in Australia is it's becoming more, and more a small series of juggernauts actually all competing for the same business and if you've above a certain scale, you might be able to get some loans. 

But if you're a smaller business and you've got something that actually needs some help, and often you do, you need some finance to be able to get through, particularly now. Yeah, there's a huge gap. 

Unfortunately, even the small players are getting consolidated and aggregated into larger players, and as they do that, they lose that community connection, and I think it's a real, real problem.


Without Innovation, We Are Just Chasing The Same Dollar Around The System

George: The small and mid-size enterprises are the ones that could grow and diversify the economy to where you weren't so dependent on that one pillar of real estate. 

I'll tell one more quick story that I think illustrates this well. As you know, I retired in 2012. Before then, I've hired and worked with literally thousands of employees over the span of being an entrepreneur. 

I got to the point where toward the end of my career, I'd have an employee or potential employee come in for a job opening.

They'd give their resume, it was nice and pretty on this thick paper, the font was nice, it was perfectly outlined, they went to this great school, and all these other things.

Honestly, Martin, I wouldn't literally throw it in the trash I didn't want to be disrespectful, but I wouldn't even look at it. Honestly, I would not even look at it.

I don't even care what's on your resume, because anyone can put anything on a resume that they want to.

I want to have that person sit right in front of me at my desk and the only thing I want to do is ask them questions.

To be honest with you, the questions themselves really aren't important.

I just want to open up a dialogue so I can see the person talk, because when they talk, the eye contact, how they're responding, where they're looking, just how confident they can express their opinion.

It tells me all the things I need to know as to whether or not I want to work with that person.

I don't get that from a piece of paper. I'll never get that from a piece of paper. It goes back to what you're saying with the banks.

They're making these decisions based on a resume, using that metaphor, instead of just that face-to-face contact, and reading people, hearing their passion that they have for their project. How much ambition they have, and how much they're willing to sacrifice in their personal lives to make this happen. That's what it's all about.

Martin North: Yeah. It's about passion, isn't it?

Very interestingly, I was contacted the other day by somebody very senior in a very well-known company in Australia who actually is in the technology space.

They said they'd been watching what I do on my channel and they want to work with me because I get the innovation thing.

I get the need to be able to shift the conversation to a different place.

They want to be involved in that conversation, so I'm going to get the CEO to come on down the track and we're going to actually talk about what it's like to try and actually drive a business forward, how hard it is in Australia.

Because they see and I see that we are missing the opportunity that there is, if only we could shift the thinking.

That's, again, partly a political thing, it's partly a structural thing, it's partly a financing thing, but actually this is so critical for the future of Australia.

Because if we don't have those innovators creating those businesses and making them into bigger businesses that actually can create more value, all you're doing is chasing the same dollar around the system. 

Unfortunately, eventually, that dollar goes into age care, or healthcare, or whatever else, but it's just the same dollar. We need more dollars gong around the system.


The Barriers And Complex Government Regulations For Small Businesses In Australia

George:

How do you see regulation playing into that?

Martin North: Well, I think, in Australia, we have huge amounts of regulation. We have red tape wrapped in red tape, frankly.

George: Yeah. I've actually done business in Australia. I think I mentioned I lived there, but when I was there I did business and it’s incredibly difficult.

Martin North: Yeah. There is all this lip service about cutting red tape, but in fact, they do not make it easy, frankly, to run a business.

I'm a small business myself, so I have to do returns every quarter and I have to provide this information, and that information.

It's all down about tax integrity and all those sorts of things. There's always the reasons why it's the way it is.

There's a real problem here in terms of the cultural norms that are being imposed on particularly small businesses, because those barriers really get in the way.

Every time you go to try to do something, you trip over more rules and regulations. I come from the UK, and I came out. 

In the UK, I was always somebody who said, “Well, you want a few rules, but you don't want too many rules.” I came to Australia and it was like everything's got rules.

It's an amazingly controlled environment, and yet people who have lived in Australia all their lives think, “Well, isn't that the way it always is?” No, it doesn't have to be like this.

I think there's an opportunity there to really think hard about where you need regulation and support, and where you can actually allow the market to expand and develop without too many controls.

At the moment, the hurdles in front of people to be able to actually do anything are just horrible.

George: To put this into context, a real-life story. I was trying to do something in a local mall when I was there.

I can't remember if it was in Sydney, or where, it might have been in Perth. Anyway, it doesn't matter. 

All I was trying to do is, we had rented a space in the mall, just in the middle courtyard area. 

We were just putting up a table, and we were going to do an autograph signing with a celebrity, so we just put up stanchions and maybe 10, 20 people get in line for their autograph, get their picture taken, whatever.

It's just a table, that's all it is, it's just a table and a chair, that's it. It took me days dealing with the mall, and I had to have this security, I had to have these big, huge lights and these trash cans and everything. 

I'm like, “Guys, it's just a table, and we might have 10, 15 people in line at any given time. It's only going to last two hours.” I was just completely blown away, which gives the viewer a real-life story of how insane it gets. 

You can imagine a small business that didn't have the resources, they can't deal with stuff like that, and what that does is just consolidate everything to these big players that have the economy of scale.

You combine that with the lack of funding, and it just makes it impossible for the little guy.

Martin North: I agree I've got this view, and people will accuse me of being a bit biased here.

I've got this view that the thing is that, effectively, people in Australia are being treated a bit like kids.

They're not really allowed to achieve their potential because essentially, “Thou shalt, you must.” It's like there's this power structure that is just always bearing down.

Australia is a great place, and it's got wonderful beaches, and wonderful climate, and the people are actually great, but we are overborne by this sort of massive headache of stuff that just comes down from on high. 

Structurally, if we could release that momentum and allow ourselves to grow up and effectively achieve our potential, Australia could be amazing, and yet we seem to be hobbled all the time.


The Possible Impact Of Another Covid-19 Wave In The Australian Economy

George:

How is the COVID crisis there? 

I haven't looked at the specific statistics. I see, obviously, United States, if you want to believe those stats, it's a completely separate video.

According to the stats, let's say from Johns Hopkins, the United States has the most cases right now.

  • How is it in Australia?

  • What do you think about a potential second wave and what it might do to the economy?

Martin North: We had 102 deaths so far, and we've had a few thousand cases. 

We're not quite as good as New Zealand. New Zealand actually just declared that they've got rid of it locally, and they've released all of their social distancing rules, and everything else.

George: Ah, that's great.

Martin North: So New Zealand has actually been quite a good model of how to deal with it, Australia's not been quite so good, but we're actually pretty good. 

We are releasing some of the rules and allowing the economy to slowly come back, but here is a risk of a second wave. In fact, there were big marches over the weekend, Black Lives Matter. 

There was a big debate between the people saying, “Hang on. Social distancing's going out the window. That's going to lift the risk.”

Versus, “This is a really important issue and we actually need to protest because the aboriginals here have had a really bad time for a long, long time.”

Ultimately, there was a court hearing in Sydney to try and stop it, which was overturned, so it actually went ahead. There are examples where, potentially, you might see a second wave. 

The trouble is, of course, it's delayed by two or three weeks, it takes time to work through. At the moment, it's pretty much under control.

A lot of the cases in Australia were actually imported, so there were low levels of community transmission. That was partly because the borders were probably shut a bit late.

More importantly, we had lots of foreign cruise ships coming here and dumping people, and just allowing them to come back into the community immediately.

They changed that very late, and there are inquiries about why that happened. At the moment, the levels of community transmission are pretty low, so we're probably okay. 

There is a risk of, obviously, a wave too. If you look at South Korea, they've got a wave too there, and I think Singapore the same, so it's not over until it's over.

At the moment, the economy took a huge hit. The government threw lots of money at the system to try and support people through various mechanisms. 

Now they're talking about, “Well, how do we pull that back?” In fact, yesterday they announced they'd actually take free childcare away, which is one they put in place in the middle of July, so that's now creating another issue. 

We got a cliff in September, so effectively, there's a lot of programs that stop in September.

The question is, economically, what's going to happen when the government stops subsidizing a lot of people's salaries, and when the banks stop the interest and principal repayment holidays? It could be a cliff. 

My view is the next few months are going to be quite interesting to try and see how much of the economy comes back, what happens in the September environment.

The official position is we are in a recession, that was officially admitted by the Treasurer last week. The next quarter will be a really bad quarter. 

Then, of course, what happens after that? In terms of the numbers of death and community transmission, is very low. Some cued also to the politicians to the health people here.

Martin North: They were very late, I think, in closing the borders.

If they'd closed the borders earlier, we could have actually had an even better outcome. We're a lot better than many countries, but the economic impact is huge.

Of course, because we're so trade-exposed, it's not just what happens locally. Tourism isn't happening, international students aren't coming back, that's another big hit.

Of course, whilst we can export some stuff, in fact, the export numbers were pretty good last month.

The iron ore price is now over 100 U.S. dollars because Vale in Brazil is now off again because of what's happening over there with the COVID.

The economy is firing in areas, but a lot of other areas, hospitality, tourism, entertainment, they're all pretty much turned off at the moment, so I think we're in deep doo-doo in terms of recession.

I'm of the view that it's going to take five years to get out of this. In the meantime, we'll have incurred huge amounts of debt.

George:

What do you think about September coming along and there being a lot of political pressure to continue with the payments and the mortgage holidays that will potentially increase the debt even more long-term?

Martin North: I'm almost certain that they'll have to taper rather than actually turn off in September. 

Within the ruling party here, there are people towards the right who say, “We've done too much, we've actually lent too much, this debt is unsustainable and we should be turning it off now.” 

That is a voice that's there. There's another voice that says, “No, no, no. This is a once in a generation, once in a 100-year thing. We have to actually assume that we will need to support the economy.”

The argument is, with interest rates very low, and if you invest in the right things, you can actually create more momentum and growth, and that can actually then create more value down the tracks that's worth doing. 

I guess that's a la MMT, right? That debate is going on. Unfortunately, it looks to me as though we are definitely on the same old story. 

In other words, debt is bad we have to actually get the debt down as soon as we can, so there will be a lot of pressure, politically, I think, from some of the liberals to turn it off. 

I'll be interested to see how that plays out. Obviously, the latter part is saying, “This needs to be continued.” The debt's very high. Probably higher than it's been for a generation.

By the way, previously they were declaring victory on debt, so they were basically going to break-even before COVID hit. They've now got this massive debt.

George: As far as the budget deficit? They were at a break-even?

Martin North: Correct, correct. Yeah.

George: Wow, a balanced budget. That's pretty incredible. What's the GDP there?

Martin North: It's about 38. Something like 36, 38, I think.

George: Debt to GDPs 38%?

Martin North: Yeah. It's low.

George: Yeah, that's very good, compared to the United States.

Martin North: We have headroom to compare with many other countries. I think the thought is it could go up to 40, maybe up toward 50 as we go through this cycle.

Of course, the point there is interest rates are really low so the debt burden if rates stay low, will be sustainable, but obviously, you have to pay the capital back eventually.

Again, a lot of people say, “Well, you don't have to think of the public debt the same way as a household balance sheet,” because essentially, you can do things to keep it going for a lot longer. 

Look at other countries around the world, 100% of GDP. You look at Japan with way more. It's just part of the furniture, so there's an interesting debate there.

The fact is that if you talk to real households, as I do in my surveys, we've got more households today in financial pressure than ever. We've got a lot of cashflow issues.

We've got a lot of people totally reliant on the government support mechanisms that are in place. And their jobs are going, or their jobs are not coming back the way they were.

There's a lot of pressure and a lot of talk about wage compression. There's no wage growth. We haven't had any real wage growth since about 2012, I think.

George: I was going to actually ask you that. You guys have been flat on the real wage growth since 2012, while housing prices have gone straight up. Yeah.

Martin North: Ah, yeah. Well, that's why the debt ratios are way off the scale. I think I may have told you the analogy before of the frog in the hot water. 

You're in there, the water's quite cool, you turn the flame up and slowly the water gets hotter and hotter, and people don't notice.

People don't notice that they're paying more than they used to in their house.

Of course, the argument is, “Well, no. Rates are really low so basically the serviceability hasn't changed much.” 

Actually, the serviceability is different now because the serviceability is much more on the capital rather than on the interest, which means that it's a bigger problem to get rid of. Right?

Because the fact is that, capital, you have to repay at some point. In the narrative view of the world, debt has to be repaid.

George: Yeah. All right, buddy. Well, we're going on an hour here I could keep going, and going. I sure appreciate your time. For my viewers or listeners who want to find out more about what you do, where can they go?

Martin North: Okay. I have a YouTube channel called Walk the World, and that's where put daily shows up on economics, politics, philosophy, and a few other things. My blog is at DigitalFinanceAnalytics.com.

George: All right, Martin. I appreciate it and I can't wait to do it again.

Martin North: Good to talk to you. Cheers.

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