US and Australian sharemarkets both fear the same danger — wages are breaking out and this will be reflected in prices and inflation.
Accordingly, interest rate reductions move off the immediate agenda and the sulphur fumes of potential interest rate rises can be detected. This is a major threat to property and infrastructure values.
Over the last week, I spent time with smaller enterprises trying to get a feel for what is happening behind the statistics, and I suspect what I found is also happening in the US.
This week, US markets were greeted with the news their employment cost index — a measure of wages and benefits — added 1.2 per cent in the first quarter, above the 1 per cent consensus estimate, indicating wages were rising at close to five per cent annually.
Naturally, treasury bond yields jumped, with the two-year yield topping five per cent.
The Federal Reserve will make its next interest rate decision later this week. Interest rate reductions will not be on the immediate agenda.
In Australia, we are in a dangerous position because our interest rates are much lower than the US, and unless our inflation falls our currency will come increasingly under pressure.
Any US interest rate rises will almost certainly need to be reflected in Australia, because if we don’t follow the US the currency will be smashed, boosting the cost of imports which are currently restraining Australian inflation.
And to underline this risk, the US employment cost data sent the Australian dollar below the benchmark US65c level.
The Australian stock market understands the link between our country and the US, but neither the general community nor the government does.
What I learned with these small enterprises is in Australia there is a powder keg of smaller enterprise cost rises which have not been passed on over the last six months.
This reluctance to test the market with higher prices for consumers is squeezing margins and, along with the lower prices of goods imported from China, has kept a lid on Australian inflation.
As a result, the ACTU is now urging Fair Work Australia to continue to substantially increase wages as part of a cost-of-living catch-up program. The ACTU argue the last big wage rises did not stop falling inflation — so we should do it again and not fear more inflation.
If I was in charge of the ACTU that’s what I would argue. The problem is my research shows the 4-5 per cent wage rises are now being canvassed can’t be absorbed by large sectors of the small enterprise community, so most of a wage rise will flow into prices. Non-wage cost rises have been relentless.
In the past 12 months, insurance premiums have gone through the roof as insurance companies look more closely at potential risks. At the same time, small enterprises are finding it difficult to find lower cost insurance.
Government mismanagement is boosting energy costs, and in Victoria there is a government in place which thinks business can pay the cost of bad government.
But, there is an additional national frustration we have not seen before — the industrial relations legislation has left a feeling of foreboding about the future. Smaller enterprises don’t have large human resources departments to handle the extra complexities.
One enterprise I spoke to is typical of similar operations around the country. The family employs around 30 to 40 people and is impacted by all the above forces. There are no unions and the family knows all the employees and their circumstances.
Now, one or two of them will be seen to the union for training in CFMEU style guerrilla activities. Possibly incorrectly, the families see this as akin to a terror attack.
They look at large enterprises, where management can’t make decisions without consulting the union, and fear the same thing will happen to them.
The family business is their life, but the squeeze on margins and the possibility of losing control of their business creates a frustration which means they will probably test the market with higher prices.
On the other side, enterprises which have developed markets among the more affluent segments of the community believe they can manage the situation, and many are investing, particularly in states not named Victoria.
And, just as is happening in the US, governments are embracing agendas which involve higher spending, with this spending creating markets where prices are not as closely monitored as the competitive parts of the economy.
In the US, there is no doubt big government spending is a major factor in the rising wage levels, and exactly the same thing is likely to happen in Australia.
And the government bureaucracies have so far been unable to change their ways to stimulate the building of dwellings and, with high migration, rents keep rising.
Eventually, governments will work out how you boost housing production, but the capacity in the building industry has been rundown substantially.
So far stock markets have taken an optimistic view of the future, but from time to time optimism will be tested.
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