This article first appeared on The Adelaide Review website at this link: https://adelaidereview.com.au/opinion/business-finance/countdown-economic-trumpageddon/
Countdown to Economic Trumpageddon
United States President Donald Trump is a proverbial ticking time bomb for US and global economic conditions and financial markets.
While US stocks have generally been strong since Trump’s shock election win in November, the optimism has been based on a yet-to-be-tested policy approach, which is focused on high infrastructure spending, cuts to company tax, and policies aimed at supporting domestic manufacturing.
These may prove to be positive for the US economy, but what is being understated by the markets is his approach to trade and old-fashioned protectionism. These policies by themselves have the potential to dislocate trade flows and unwind decades of successful specialisation, which has resulted in a rapid productivity growth, sustained low inflation and falling prices for many goods and services. This in turn has been pivotal in reducing global poverty and increasing the wellbeing of the bulk of the world’s population.
Trump has already bullied a number of US car manufacturers to abandon their plans for investment in efficient, low-cost producing countries such as Mexico. Those cars will now be produced in the US, clearly at a higher price to consumers and a loss of jobs and investment in Mexico.
I am going to sell both Dow futures (hopefully around 20,080) and S&P500 futures (at around 2,293). This new trade to be instigated at or near open on Monday 30 January and is based on my view and is not investment advise in any way. Please contact your financial advisor before investing.
[UPDATE: 10.10am Monday 30 January: Entry level a little less favourable than hoped: Dow 20,045: S&P500 2,288]
The reason for the trade is simple. Trump is smashing and trashing the US economy and soon, the US stock market will follow.
His extremist approach to policy settings, both on economic and social issues, has generated a huge discontent in the US that runs the risk of derailing the momentum in economic growth over the past year. Business and consumer sentiment, and with it investment and spending, does not usually react well to political upheaval and divisive policies. There is a very real risk that the likely fall in sentiment will upset the economy and market sentiment.
In 2015-16, Australia’s imports of goods from Mexico outpaced exports to Mexico by 4 to 1. That is, there were $2.4 billion of imports into Australia from Mexico and just $600 million of exports to Mexico from Australia.
I am waiting for One Nation or some crazy galoot to suggest that Australia should put a tariff on those nasty Mexican exporters to pay for, I don’t know, politicians travel? A fence around Parliament House? An anti-halal campaign?
To be fair, any one in Australia who suggested a tariff on Mexican imports would be laughed out of the room; treated with contempt; ridiculed for the absurdity of such a suggestion. So One Nation just might propose it? Ha - surely not, it wont happen.
Meanwhile, in the US, President Trump is promising to impose a tariff of 20 per cent on Mexican imports into the US to fund a similarly ludicrous issue, building the wall between the US and Mexico. Amid the justified ridicule there are, amazingly, some people supporting the idea. And no, they are not all the inmates from the Cuckoo’s Nest.
This article first appeared on The Guardian website at this link: https://www.theguardian.com/commentisfree/2017/jan/25/australias-housing-affordability-is-much-more-complex-than-the-headlines
Australia's housing affordability is much more complex than the headlines
Demographia has again hit the headlines in Australia with its seemingly comprehensive report on International Housing Affordability “Sydney affordability nightmare laid bare” and the Australian housing market “severely unaffordable” scream the headlines as reporters cut and paste segments of the Demographia report into their news items. The clicks on these stories must be running high. It even inspired a photo gallery on this site.
There is no doubt that house prices in Sydney and other parts of Australia are high. Housing affordability is an important issue for policy makers including the recently elected premier of New South Wales, Gladys Berejiklian, who said it would be the “biggest issue” for her to deal with in her new role.
Affordability also featured heavily in the 2016 federal election campaign with Labor promising to restrict negative gearing concessions to cover only new dwellings meaning that investors would not be competing with other buyers in the established housing market. “Improved housing affordability” was a central element of this policy.
Unfortunately, the Demographia report doesn’t disclose the specific sources for key data and instead relies on vague and untestable assumptions for the numbers that form the basis of their calculations.
This article first appeared on the Yahoo 7 Finance website at this link: https://au.finance.yahoo.com/news/the-dirt-on-govt-debt-015604567.html
Labor versus Liberal on Government debt
In the six years of the Rudd / Gillard Labor government from 2007 to 2013, gross government debt increased by $225 billion, from just under $50 billion to just over $273 billion. These figures are from the government agency that borrows money on behalf of the government, the Australian Office of Financial Management.
The escalation in government debt during the Labor years was due to the budget deficits which were driven by lower revenue as the global financial crisis hit tax payments to the government and were also the result of deliberate stimulus measures as the government implemented a range of one-off, big spending, policies to avoid a recession.
It was a policy response that in 2011 meant Australia attained the coveted triple-A credit rating from all three major credit ratings for the first time in its history.
In simple terms, government debt rose by an average of $38 billion a year under Labor and its policies.
This article first appeared on The Guardian website at this link: https://www.theguardian.com/commentisfree/2017/jan/23/australia-economy-reserve-bank-interest-rates-inflation-unemployment
Australia's economic malaise comes down to dreadful decisions
It’s time to be blunt about economic management in Australia.
The proof is that economic growth is floundering despite strong global conditions, unemployment has gone from among the lowest in the industrialised world to one of the highest, and inflation is below the bottom of the Reserve Bank target yet interest rates are still high compared with similar economies.
What is going on?
One vital issue has been the collapse in mining investment which has undermined overall economic growth. But this was and is no surprise. The priority for policy makers should have been to ensure the non-mining parts of the economy were growing even faster, locking in real GDP growth at 3% or a little more and striving for an unemployment rate at 5% – or less.
One major failure on this score was the RBA. It has failed to handle monetary policy in the post-global crisis era with much acknowledgment of the crisis legacy of entrenched low inflation.
The Mid Year Economic and Fiscal Outlook documents, released by Treasurer Scott Morrison in December, provided an interesting array of data on government finances. Here is the link https://budget.gov.au/2016-17/content/myefo/html/index.htm
One particularly interesting issue in the MYEFO documents is the ratio of tax to GDP. As this ratio rises, the government makes a large footprint in the economy by taking money from the private sector, through taxes, as part of its budget management.
The following table presents the 10 highest taxing governments since 1970-71 and includes the outlook in the forward estimates to 2019-20. It is an interesting collection.
This article first appeared on the Yahoo 7 website at this address: https://au.finance.yahoo.com/news/will-a-fat-tax-work--005825693.html
Lower Smoking rates – a win for the nanny state
Smoking in Australia is in free-fall. Just 13 per cent of adults smoke daily, which is down from 28 per cent in 1989-90 and over 40 per cent in the 1960s.
There are many reasons why this is a good thing. The population will be healthier for a start, which means they will be more productive and less likely to take sick leave. It also means that the government’s health expenditure costs will be lower with fewer people presenting to the doctor and hospital for the litany of smoking related illnesses. It also means that those who do not smoke can either save or spend their cigarette money elsewhere in the economy.
There are many reasons for this quite massive change in smoking rates. I will not attempt to quantify the impact of each factor, but there is no doubt that societal awareness of the health risks from smoking is dominant.
In a triumph for the role of government in successfully managing change and a blow to those who often castigate the ‘nanny state’, government policies that have banned cigarette advertising, delivered anti-smoking campaigns, the massive hike in excise taxes, banning displays of tobacco in retail outlets, graphic health images on packets and plain packaging, have no doubt all played a part.
After a brief lull, the Turnbull government has resumed its borrowing binge. The government’s borrowing authority, the Australian Office of Financial Management, borrowed a further $1.6 billion this week, which means that government debt today reached a new record of $466.4 billion. See aofm.gov.au
When the Coalition won the 2013 election of a platform of paying off debt, the level of debt was just $273.1 billion. This means that in just over 3 years, it has added a thumping $193.3 billion to government debt or close to $5 billion a month.
A friend send through this chart which shows Steve Keen's professional judgment about the house price bubble in Australia. Steve is Professor of Economics at Kingston University in London. Kingston is ranked the 109th best univeristy in the UK - https://www.thecompleteuniversityguide.co.uk/league-tables/rankings?r=london.
The chart shows the ABS index of house prices from 2004 to the latest data for the September quarter 2016. Prices have been strong for many years, even with the odd period when prices flat-lined or dipped marginally in 2008-09 and then 2011-12.