The RBA has an obsession with house prices in Sydney and Melbourne and is prepared to hold all other sectors, and the rest of the country, to ransom as it wishes and hopes for those housing markets to weaken and some how for the other parts of the economy to pick up.
In my view, the RBA is (and has been) keeping monetary policy too tight for too long. In my view it is making a mistake not cutting rates in the wake of ongoing below trend GDP growth, record low wages, sustained low inflation and a horrid climate for business investment.
History shows that when central banks make a policy error, there are wonderful treading opportunities.
This article first appeared on the Yahoo 7 Finance website at this link: https://au.finance.yahoo.com/news/a-jump-in-demand-to-do-something-about-the-supply-of-houses-034305361.html
House prices: Karratha and Sydney - why the divergence
The thousands of students heading off to university this month to start their economics degrees can do so knowing that the basic laws of the discipline still hold. “Yay” – they might say as they sit down to their first Economics 1001 lecture.
Supply and demand is king.
Shortages, gluts, price booms and crashes reflect the supply and demand dynamics. These are the most basic concepts in the study of economics and they apply to the real world.
These basic economic laws apply to the Australian housing market which is going through extraordinary turmoil with prices booming in some areas and crashing in others.
It is not just housing where economy theory turns into reality. In looking at the market for bananas, widgets, fine art or concert tickets, the interaction of supply and demand will always determine the price of those items. But let’s look at housing and think of the following issues and questions.
Based on detailed data from SQM Research, why is it that since 2012, house prices in Karratha Western Australia have fallen by around 65 per cent, while in the lower North Shore of Sydney, house prices have risen by around 120 per cent?
This article first appeared on the Guardian website sat this link: https://www.theguardian.com/commentisfree/2017/feb/16/balanced-budget-needs-higher-tax-take-but-which-taxes-should-be-hiked-stephen-koukoulas
Balanced budget needs higher tax take, but which taxes should be hiked?
The treasurer, Scott Morrison, appears to be having something of a Gough Whitlam moment. Not in terms of far-reaching social and economic reform, but rather a realisation that the size of government needs to increase. The electorate is demanding a certain base level of healthcare, education, disability care, roads, defence, infrastructure and all manner of goods and services.
Morrison is talking about the need to raise taxes to ensure these government services are provided while simultaneously moving the budget towards surplus, which is an essential element to avoiding the credit rating downgrade that appears to be just around the corner.
He is explicitly acknowledging that, to keep voters happy with decent services, spending must remain above 25% of GDP and perhaps needs to rise further, towards record highs.
Prior to the Whitlam government in the early 1970s, government spending and revenue was generally at, or a little below, 20% of GDP. With the Whitlam reforms, this rose to about 25%, and apart from the swings in line with the business cycle and policy changes over the past 40 years, it has remained around 25%. It has not reverted to pre-Whitlam levels. Not gone close.
This article first appeared on The Constant Investor website at this link: It is behind a paywall for subscribers only https://theconstantinvestor.com/stephen-koukoulas-overview-170114/#Whydosofewpeoplenegativegearstocks
Why do so few people negative gear stocks?
In recent times, a lot of the focus of public policy has been on negative gearing and how the associated tax rules encourage ‘excessive’ investment in the housing market. This in turn, it is argued, pushes up house prices and freezes first home buyers out of the market. There is something in that argument which will no doubt carry on in 2017 and probably beyond.
What is often overlooked in the debate is the fact that negative gearing investment strategies also apply for shares, in the form of margin lending and related products. So why is it that the overwhelming focus of investors when they negative gear is dwellings and not shares?
Over the past decade or so, as property investment borrowing has boomed, margin lending for stocks has slumped.
According to data from the RBA, outstanding credit for investor housing stood at $562 billion in November 2016. This was up a staggering 319% from the level in December 2007 when it stood at $134 billion.
This article first appeared on the Yahoo 7 Finance website at this link: https://au.finance.yahoo.com/news/aussie-dollar-where-art-thou-035132180.html
Why the Aussie dollar is flying high
The Australian dollar has been rising strongly over the past six months and not just against the US dollar where this morning it is hovering just under 78 cents.
The Aussie dollar is also buying over 0.72 euros, the highest level it has been since early 2015 and is up some 10 per cent since May last year. It is also strong against the British pound, Japanese yen and Canadian dollar. In simple terms, the Aussie dollar is flying.
The reasons for the strength are clear.
Importantly, Australia has some of the highest interest rates in the industrialised world which means global investors are keen to pick up a positive yield with their Australian holdings versus those in other countries. With the RBA signaling that is has no plans to cut interest rates and rates in Europe, Japan and Canada unlikely to be hiked any time soon, the Australian dollar is likely to remain attractive for some time.
This Thursday sees the release of the January labour force data. We will see the update on a wide range of labour force measures including for unemployment.
In December, the unemployment rate stood at 5.82 per cent, which was the highest unemployment rate since January 2016. It was a poor result and reflects the ongoing sluggishness in the economy. The RBA, curiously and without much attention to the hard data, concluded in its regular Statement on Monetary Policy that the labour market was poised to improve. Who knows, it might turn out to be accurate. If so, terrific! The improvement must start now for the RBA to validate is upbeat stance and recent reluctance to cut interest rates.
If not and say the unemployment rate stays at 5.8 per cent or worse, rises, there will need to be a serious rethink about the current policy settings, including Australia having some of the highest interest rates in the industrialised world with an unemployment rate that is also above most non-European countries.
This article first appeared on the Yahoo7 Finance website at this link: https://au.finance.yahoo.com/news/why-a-piece-of-bread-half-an-avocado-and-a-few-crumbs-of-feta-costs-16-045746860.html
Why a piece of bread, half an avocado and crumbs of feta costs $16
Have millennials trimmed their spending on smashed avocado brunches and other food indulgences and started saving for a house?
No one can be sure, but there might some tentative evidence that the smashed avocado debate of last year had some influence on consumption patterns and not just away from smashed avocadoes, but overall spending in restaurants and on takeaway food.
The retail sales data shows that spending in cafes, restaurants and take-away food shops has dropped in recent months. In October last year, when the smashed avocado debate reached its pinnacle, spending in cafes, restaurant and on takeaway reached a record high $3.6383 billion.
In November, spending was $36.6 million lower than this peak, while December spending was still down $30.7 million from the October high. Something was happening in this segment of retail trade.
I wrote the article below in 2011 when there was a discussion about the role of an economist and what makes a good economic forecast.
It is possible, if not likely, good economists can be wrong with a spot forecast, but for investments based on that forecast to be highly profitable.
Being correct and successfully forecasting something that is fully priced into the market (ie, the RBA will not adjust interest rates at its February meeting) is a largely useless forecast versus a forecast for, say, the AUD to hit 0.8000 at the end of the year (from a spot price of 0.7200) and it gets to that level in June and then eases back in the second half of the year. Or forecasting rate cuts for, say, 6 months time and none are priced in and the cut is delivered in 3 months. That forecast is wrong but investments based on that forecast would make a lot of money.
I have highlighted in bold the key point of the old article.
Economists and Traders - Like Chalk and Cheese
Christopher Joye’s particularly interesting and well-reasoned article here did a good job shedding some light on the similarities and differences between money market traders and market economists. His conclusions were largely based on an assumption that market economists and traders were trying to do a similar thing, that is, working out where markets were going. The difference was that traders take a shorter run perspective and economists or strategists look at the longer run and are required to produce "point" forecasts (e.g., the cash rate will be 3.25% in December 2012).
The Mid Year Economic and Fiscal Outlook released by Treasurer Scott Morrison in December 2016 gave us an update of the budget numbers for the current financial year and the forecasts or estimates for the next few years.
They are always interesting to analyse to judge the size of government, the accumulation of government debt, change in tax and spending and other issues associated with managing a $1.75 trillion economy that will be a $2 trillion economy in 2020.
I was looking through the numbers, in a welcome distraction from issues relating to Donald Trump, and found the following facts.
This article first appeared on the Yahoo7 web site at this link: https://au.finance.yahoo.com/news/the-link-between-education-and-incomes-unwapped-052209833.html
Education delivers high incomes and low unemployment
It’s back to school week for thousands of children around Australia.
Let’s celebrate the fact that at the end of this year of learning for all children, from kindergarten to year 12, students will be better placed in life because of that education and learning. It will also be good for the economy as the link between educational attainment, unemployment and income is irrefutable.
This year of learning does not mean that all of our children are on a path to become rocket scientists, medical researchers or actuaries. A good education system will ensure that every student reaches their full capacity and opportunity, including knowing how to read, write and add up, and having a mind set that allows them to be flexible within the ever-changing work place environment.
The recent Melbourne University Household Income and Labour Dynamics survey dug into the Australian experience of education and incomes. Its findings were stunning.
For women, for example, a diploma or higher educational attainment saw a 10 percentage point increase in the probability of full time employment compared with maximum educational attainment of Year 11 and below.