Why consumers are gloomy + what to look out for next week

Happy Friday everyone,

I say ‘happy Friday’, but it seems most of us are very glum at the moment. That’s according to the latest Westpac-Melbourne Institute Consumer Sentiment Index which fell another 0.4 per cent to 81 points in August.

Our sentiment (the way we’re feeling) it at near record lows… if the Consumer Sentiment Index is below 100 we’re gloomy, above that level we’re positive. We’re at 81.

That gloominess means any business dependent on consumer spending, particularly discretionary spending (non-essential) better be wary because their customers look to be going into the bunker.

It is easy to see why: Rising interest rates; the fixed rate mortgage cliff; high inflation; and big business starting to lay off staff.

The silver lining is that this downbeat consumer is exactly what the Reserve Bank has been wanting. Consumers going into the bunker means they don’t spend as much which, hopefully, then deflates inflation.

Bosses, on the other hand, believe business conditions will stay poor for a while longer, but seem a little more confident that things will improve soon. This was seen in the NAB Monthly Business Survey, which showed business conditions were a little lower and confidence was a touch higher. The cost and price component of the survey revealed a sharp rise in labour costs and prices, likely impacted by the increase to the award and minimum wage that came into effect from 1 July.

The mortgage cliff is at its steepest right now

Anyone newly coming off an old fixed rate home loan into this new interest rate environment has every right to be gloomy. Their repayments have soared.

We’ve talked about the so-called “mortgage cliff” for some time but July, August and September are the most severe with the most mortgages reverting to a higher rate.

But it seems like those affected by higher repayments are slashing spending rather than falling behind in their repayments. Australians have always been dependable home loan borrowers.

While variable-rate mortgage holders have been feeling the pinch of rate rises and high cost of living pressures, official data suggests arrears remain in check. They are still below pre-pandemic levels and rising home values since February have likely only further reduced the incidence of loans in negative equity.

The latest quarterly publication from APRA shows housing credit in arrears is extremely low at 1.2 per cent of outstanding debt, where ‘arrears’ means payments are late. Non-performing credit, which is late payments of 90 days or more, made up 0.7 per cent of all mortgages in the March quarter of this year, while payments just starting to be late - between 30 and 89 days – were even less at 0.5 per cent.

This is why renters are gloomy

Just as all Australians have endured the fastest, highest interest rate rises in a generation, renters have endured the same thing.

Look at this: 35 consecutive months of rent increases. The longest, sharpest rise in recent history.

But farmers are making hay while the sun shines

I cover the residential property market pretty regularly here in both the capital cities and regional areas, but there hasn’t been much focus on farmland.

According to Ray White Group chief economist, Nerida Conisbee, we’ve never had such good farming conditions as we did in 2022. While particularly good Australian weather conditions were the major driver, so too were poorer conditions elsewhere around the world.

We were producing a lot, while others were producing far less. As we came out of the pandemic, people began spending more. The Ukraine conflict further complicated wheat markets. These factors resulted in total agricultural production exceeding $90 million and land values almost doubling in the past three years. Unfortunately, the outlook is more uncertain.

Australia’s two main agricultural products are wheat and beef, and these accounted for a third of all production by value last year. Wool, historically important for Australia, now doesn’t even make it into the top 10 commodities by value. Nursery cut flowers and turf became a higher value commodity, with $3.4 billion of production in 2022, compared to $3.2 billion for wool.

However, the top performer for growth in 2022 was wheat. The total value of wheat production increased by $3.3 billion in 2022, hitting an all-time high of $13.1 billion. Canola and cotton lint also saw large increases, more than doubling. This strong performance in wheat had a strong flow-on impact to farming communities and farm values. It also resulted in record house price rises in many wheat farming regions.

While last year was a record year, according to Nerida’s report, this upcoming year is set to be far less stellar. The Australian Bureau of Agriculture, Fisheries and Forestry (ABARE) has forecast that the value of agricultural production will fall by 14 per cent next year. Dryer conditions across Australia are the main driver, however better production overseas is expected to impact values.

Although wheat production is set to fall in Australia as weather conditions deteriorate, wheat prices are expected to rise. Putin has abandoned the Ukrainian wheat deal which ensures safe passage of wheat from that country. A subsequent drone attack on a wheat storage silo in a Ukrainian port city led to global wheat prices rising to their highest level since February.

Rice prices are also expected to rise rapidly with the Indian government banning all exports of non-basmati rice to deal with domestic shortages. India produces around a quarter of all rice in the world and is the world’s biggest exporter. This announcement is expected to result in the biggest global rice shortage in 20 years.

While it is now our highest value commodity item, cattle prices have halved from where they were in February 2022. Meat and Livestock Australia forecast that prices will continue to fall marginally over the rest of the year. More positively for the total value of beef, the national herd continues to grow and is set to be at its highest level in more than a decade.

The US is wallowing in debt

Last week I talked about how global credit rating agency Fitch had downgraded the US credit rating from Triple A to AA+ — only the second time ever that the US has been downgraded.

The reason was its huge level of Government debt and skyrocketing budget deficit. I gave some topline figures to show how bad America’s finances are.

This week a financial newsletter I follow in the US, The Kobeissi Letter, went into more detail on the state of the US Government and American household debt. It is mindboggling as to why this isn’t being tackled by US politicians.

US debt is now on track to rise $US5.2 BILLION per DAY for the next 10 years.

By 2033, US debt is projected to hit a record $US50 trillion.

Over 20 per cent of government revenue will go toward interest expense ALONE.

So, that’s the debt situation. Naturally you solve debt by making budget surpluses to pay down debt. Pretty simple really. But it isn’t happening.

The US is now spending 44 per cent of GDP (the value of its economy) per year, the same levels as when it was on a war footing back during World War II.

In 2020, the US spent a record breaking 54 per cent of GDP in one year.

This is what Fitch meant by “fiscal deterioration” when they downgraded the US credit rating.

Current government spending is unsustainable. They are now spending a higher percentage of GDP than what was seen in the Global Financial Crisis in 2008.

But it’s not just the US Government with high levels of debt. US households now have:

1. Record $17.1 trillion in household debt

2. Record $12.0 trillion in mortgages

3. Record $1.6 trillion in auto loans

4. Record $1.6 trillion in student loans

5. Record $1.0 trillion in credit card debt

Total mortgage debt is now more than double the 2006 peak.

Meanwhile, 36 per cent of Americans have more credit card debt than savings, while student loan payments are set to resume for the first time since 2020.

This is all while mortgage rates just hit 7.1 per cent and credit card debt rates hit a record 25 per cent.

Americans are "fighting" inflation with debt.

3 signs you’re living on the edge of a financial cliff

When it comes to money, simple mistakes can have serious consequences.

Some people seem to prefer to fail first before changing their approach, but that can be an expensive way to learn. Over time any financial mistakes can really compound.

Here are three financial cliff edges I see people living on all the time. If they hit a bit close to home, maybe it’s time to make a change in your life.

 #1: Not having a budget

Whether you earn 30k a year or 300k, it’s crucial to have a clear understanding of how much money is coming in and going out. Then know exactly what’s left over to save, invest or pay off debt.

If you don’t have a budget, start one today. And while you’re at it, set some financial goals for the next few months. Or if you seriously want to move away from this particular financial cliff, set goals for the next few years or even decades.

It won’t take very long to put a budget and goals together and you’ll soon be making smarter, more informed decisions about your money.

#2: Living beyond your means

It’s easy to get carried away wanting everything at once. Credit cards are readily available and there are so many temptations in our busy day-to-day lives.

But the fact is, sooner or later living the high life will catch up with you. You need to stop spending money you don’t own.

If you’re racking up debt you can’t pay back, it’s time to have a serious think about things to compromise on to get back into the black. Cut back hard on your expenses and even look to earn extra money to help you out.

There are different strategies that can help you pay back your existing debts to move away from this financial cliff. Try the debt snowballing approach, but be sure to consolidate as much of your debt as you can first.

#3: Treating investing like gambling

As with the casino, people hoping to make a fast buck by speculating on the sharemarket will be sadly mistaken.

Common traps include borrowing too much to invest, putting all your money on ‘the next big thing’, or having a short-term outlook.

Investing isn’t a matter of choosing red or black. It involves taking long-term positions in assets you understand and enlisting professional help to guide your decisions.

What to watch out for next week

On the economic front:

• Tuesday the RBA releases the minutes of the last board meeting which kept official interest rates on hold. The minutes will tell how convincing the decision was.

• Wednesday is the latest wage data… a 0.9 per cent rise in wages for the quarter would see the annual rise remain steady at 3.7 per cent and not upset the RBA. Anything above that level would put upward pressure on interest rates.

• Thursday is the July unemployment figures. Forecasts are for an extra 20,000 jobs to be created and for the unemployment rate to rise from 3.5 to 3.6 per cent.

• Thursday also has overseas arrivals and departures figures highlighting tourism and migration flows.

On the sharemarket front, profit reporting season continues with the daily highlights being:

• Monday: JB Hi-Fi

• Tuesday: CSL, Cochlear, NAB, Treasury Wine Estates

• Wednesday: Bapcor, Endeavour Group, Transurban, Mirvac

• Thursday: Amcor, ASX, Goodman Group, Origin Energy, Telstra, Westpac

• Friday: Magellan