May 21, 2020 by Dymphna

Market Warning: Black October coming?

The stars are lining up for a blood-bath

In economics, things tend to move very slowly, then all at once.

And I think a lot of people are getting lulled into a false sense of confidence right now. The Covid crisis has been with us for a long time (though it’s actually an incredibly short time on an economic time-frame). So far, so good right?

The economy is still ticking. There’s bread on the super-market shelves. The unemployment data was pleasantly surprising (albeit wildly misleading).

Maybe the economy is fine..? Right?

It’s not fine. An economy that sends 500,000 people into unemployment in a single month is not ‘fine’.

The Australian economy, like every economy on earth right now, is hooked up to life support and a ventilator. The hope, and it’s largely a hope, is that it will be back up on its feet as soon as possible.

Fingers crossed.

But right now, we are in the “going slowly” phase. The pressures are building. But we haven’t reached our trigger moment yet. We haven’t reached that tipping point where the growing pressures go atomic and things start happening ‘all at once.’

And when do we hit our trigger moment?

October. (Probably)

That’s my guess. That’s my stab at when the four horsemen of the economic apocalypse come trotting down the Queen Street mall.

Let me introduce you to them:

Horsemen #1 – The end of JobKeeper

JobKeeper, despite being put together in the middle of a crisis, is actually great policy. It injects money into the economy, it keeps people on the books, and it paves the way for things bouncing back quicker than they otherwise would.

Credit where credit is due.

However, the take up of the JobKeeper wage subsidy has been bigger and quicker than expected. Already 6.3 million Australians (which is half of the flipping workforce!) and 900,000 companies are on the government’s books.

This bigger-than-expected take-up means that we’re probably going to blow through the already-gargantuan $130 million budgeted to it.

And it’s slated to wind-up on Sunday September 27th.

… if it lasts that long.

And what happens when those 6 million odd Aussies lose that wage subsidy…?

You do the maths.

Horseman #2 – End of the JobSeeker Supplement

Part of the crisis response was to increase unemployment benefits, from the usual $550 a fortnight, up to $1115.70 a fortnight.

That’s a substantial increase.

However, there are murmurs in the government already that they payment is too generous, and it’s also due to be unwound on September 24th.

That’s a lot of cash due to be pulled out of the economy, in a single blow.

Horseman #3 – End of mortgage holidays

To their credit, the banks have offered distressed borrowers debt deferrals or ‘mortgage holidays’.

So far, a hefty 430,000 mortgagees have sought a deferral – about 7% of the market.

That’s a big share of the market to be on life-support.

And it’s increasing week by week.

The deferrals give people a three month reprieve, with the possibility of another three months after a review.

That means that these debt holidays are likely to be winding up through the month of September, raising the spectre of mass defaults and bankruptcies in October.

Trot, trot, trot.

Horseman #4 – Credit Crunch

As these debt holidays end and household incomes begin to bust, the banks are going to get very scared.

Already we’re seeing the banks trying to pretty-up their mortgage books – they only want quality borrowers on their books, and we’re already seeing much stricter measures of credit worthiness being applied.

For the moment, that’s not a crisis. The banks are still lending.

But when it really hits the fan – probably in October – the banks will run for the hills.

You won’t be able to get a mortgage for love or money, and the housing market will totally freeze up.

Welcome to the apocalypse

At that point – as I said, probably in October – the market will potentially go into free-fall.

The dead wood will be shaken from the tree, and a massive sell-off will drive a gut-wrenching collapse in prices.

Investors who aren’t ready for it will be slaughtered.

But that’s not going to be you, is it?

In fact, you’re going to be ready for the rebound, right? You’re going to be ready for the most insane market moon shot since the 1990s recession, right?