Blog

Mon, 17 Sep 2018  |  

My open letter and offer to DFA’s Martin North – Skin in the game on house prices

I have sent this to Martin North, founding Principal, Digital Financial Analytics.

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Dear Martin

Congratulations on your cameo on the TV program 60 Minutes. It was gripping viewing and a quite fantastic story.

I note with a huge amount of interest your forecast for property prices to fall by “40 to 45 per cent”.

It is a big call and certainly grabbed the attention of many in the public.

I note also that on your blog, you suggest the quote which included that forecast was not given the context you attached to it, namely, you rated it “only a 20 per cent chance” and that the 40 to 45 per cent price fall would be “over 3 years or so”.

That context is important.

Over the many years I have been making forecasts for the economy and markets and seeing others do the same, I find that forecasts without any skin in the game are often compromised. It is easy to construct a headline grabbing forecast for a significant move in markets, including house prices for example, but when they fade into oblivion, there are no implications for the forecaster. Forecasts really only has validity if the forecaster has an interest in the forecast being correct.

In other words, would the forecaster really make that forecast if they put their money where their mouth is?

Wed, 29 Aug 2018  |  

This article first appeared on The Wire website, for FIIG, at this link: https://thewire.fiig.com.au/article/commentary/opinion/2018/08/21/three-downside-risks-to-the-aud 

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Three downside risks to the AUD

A certain calm in currency markets, including for the Australian dollar, was briefly punctured in early August when the Turkish lira collapse spread to other emerging markets and sparked a jump in the US dollar.

Since early 2015, the AUD has traded over 90% of the time in a 71-78 cent range against the US dollar. The moves outside this range have been marginal and short lived.  It was and still is rare for the AUD to be so steady, for so long. A bevy of factors that normally impact its value have had minimal lasting impact or have been offset by news elsewhere. Even the Turkey and emerging markets disruptions appear short lived with the Aussie dollar bouncing back in recent days.

That said, for reasons other than the global turmoil, we are probably starting to see the early stages of a realignment of the AUD which will have important implications for other markets and investors. In recent months, the AUD has been trading in an even narrower range around 72 to 76 cents, with the data flow and run of events having little lasting impact.

Any upbeat news is offset by downbeat news, meaning the net effect is inconsequential.  Think of the following events: US interest rate hikes, commodity price falls, clear weakness unfolding in the Chinese economy, the emerging markets ructions and the changing outlook for Australian interest rates are all big news, but have not been enough to see the AUD break out of its range.

Wed, 29 Aug 2018  |  

This article first appeared on the Yahoo 7 Finance web page at this link: https://au.finance.yahoo.com/news/political-fallout-new-morrison-government-232153917.html 

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The political fallout of a new Morrison government

The revamping of the government’s leadership team and the elevation of Scott Morrison to Prime Minister and Josh Frydenberg to Treasurer opens the door for some much needed revamping of the economic policy agenda. Ironically, Morrison has left Frydenberg a number of awkward policy issues that will need to be addressed.

One that is clearly having a political effect and hurting the government is the health, or lack thereof, of the labour market. Wages growth is hovering around a record low, barely keeping up with inflation. This weakness in wages is a major constraint on consumer spending, which is also being impact by a sharp fall in the growth of savings and record household debt.

The fact that the unemployment rate has been entrenched well above 5 per cent right through the Abbott/Turnbull/Morrison period of government is a policy failure. The economy is simply not strong enough to generate the number of jobs needed to deliver a material lowering in unemployment and with that, a lift in wages.

If Frydenberg can deliver policies that help engineer a stronger economy and a lowering in the unemployment rate, he will have done something Treasurers Hockey and Morrison could not. This is where some meaningful fiscal policy changes and reforms to labour laws (industrial relations) would be welcome.

Wed, 15 Aug 2018  |  

This article first appeared on the Yahoo 7 Finance web site at this link: https://au.finance.yahoo.com/news/heres-need-get-ready-early-2019-budget-010743625.html 

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Get ready for a February budget

 An early budget is the likely scenario given the Federal election is set to be held in May 2019. The budget, which in modern times is usually delivered by the government on the second Tuesday in May, cannot be handed down during the election campaign which will be running hot if Prime Minister Turnbull sticks to his word and holds the election in May.

To allow the government to deliver its budget before the election is called, the most likely time for it will be in the period from mid-February through to early March.

With the constraint of the election timing, this timeframe for the budget would allow the government to ramp up its economic rhetoric and no doubt engage in a bit of a voter friendly strategy in an effort to gain some political momentum into the election campaign. This timing also means that soon after voters return to work and the real world after the summer holidays, they will be bombarded with budget news which, if the government is smart, will be portrayed as ‘good news’ and ‘vote for us’ as it struggles to remain competitive with the Labor Party.

Mon, 06 Aug 2018  |  

This article first appeared on the Yahoo 7 website at this link: https://au.finance.yahoo.com/news/way-pay-stuff-fixing-budget-024912997.html 

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How the way you pay for stuff is fixing the budget

 Over the past few weeks, I have tried a little experiment with a few on my favourite small business retailers who, for what will be obvious reasons, will remain nameless.

For a range of smallish transactions of say $10 to $20, I deliberately made a bit of a fuss about paying with cash, rather than tapping with my card. Almost without exception, the proprietor, with a wink and nod, appreciated the use of cash, and passed a quick comment to the effect that “unfortunately, cash is rare these days”. I also noticed on a number of occasions the transaction was not rung up on the cash register, with the notes tucked into the cash drawer with no one other than me and the shop keeper aware of the transaction.

This got me thinking about an issue which has had me a little puzzled – the sharp improvement in the government’s budget position on the back of unexpectedly strong tax receipts. This extra tax revenue for the government appears to be an odd development given the sluggishness in the economy and consumer spending, and the ongoing weakness in inflation and wages, which over many decades have proven to be the driver of tax collections.

Rather than an unexpected pick-up in economic activity driving the revenue surge, it appears that technology, the decline in the use of cash and the greater use of cards accounts for the extra tax take.

Thu, 02 Aug 2018  |  

Tonightly with Tom Ballard 

I was delighted to be a guest on the Tonightly program, discussing, dare I say it, baby boomers and millennials. With a shirt like that, I am surprised Tom was so critical.

Here is the clip of the show:

https://www.youtube.com/watch?v=i25fJwPlTsw&feature=youtu.be 

The avocado house at the end was a bit of fun.

 

 

Wed, 01 Aug 2018  |  

This article first appeared on the FIIG website at this link: https://thewire.fiig.com.au/article/commentary/opinion/2018/07/31/we-have-an-inflation-problem 

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We have an inflation problem

 Australia continues to have an inflation problem, with the official consumer price index for the June quarter confirming annual underlying inflation at 1.9%.

This means that underlying inflation has effectively been outside the Reserve Bank’s 2 to 3% target for three years and based on recent quarterly results, seems unlikely to pop back into the target range for quite some time. Any hope of inflation getting into the middle or top half of the target band seems fanciful with current policy settings.

Even the RBA know this despite its forecasts which are based on the increasingly unrealistic premise of accelerating wages growth and two more years of 3% or more GDP growth. Put another way, if there is any downside to the RBA view for the economy, inflation will be even lower over the next two years. Which begs the question, why is the inflation targeting RBA so reluctant to trim interest rates to help drive economic growth? It makes little sense when higher economic growth, and lower unemployment would help to ensure a lift in wages growth and inflation.

Is low inflation a bad thing?

The short answer is usually “yes” and it is particularly so now when the low inflation result is driven by sustained sluggishness in the economy. With the unemployment rate being too high and wages growth weak, inflation will not pick up. It is important to note, the RBA acknowledge this.

Tue, 31 Jul 2018  |  

This article first appeared on the Yahoo 7 Finance web site at this link: https://au.finance.yahoo.com/news/election-results-mean-economy-013232186.html 

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It’s inequality, stupid

 The super-Saturday by-election results over the weekend presented a clear preference from Australian voters – they don’t like policies that increase inequality in society and tax cuts to business are unfair and expensive, draining scares cash from education, heath and other vital services.

In a variance of Bill Clinton’s successful phrase and strategy “it’s the economy, stupid” in winning the 1992 US Presidential election, Labor’s “it’s inequality, stupid” approach to policy is winning it support in the electorate. Or just as accurately, it is the Coalition Government’s policy strategy that increase inequality in society that voters are shying away from.

Credit to the “it’s inequality, stupid” analysis goes to Stephen Moriarty who tweeted that phrase in the aftermath of the by-election results. It summed up the results very well.

It has been obvious with the last year of polling and then the by-election results that voters are not happy with the Liberal Party sales pitch which is framed around a story of a growing economy and the promise of income and company tax cuts. This is because economic growth is not all that impressive, despite the government’s rhetoric, and what growth is being registered is skewed heavily towards rising company profits and away from the wage share. Future company tax cuts will only add to that inequality.

Recent cuts to education and the miserable level of the Newstart allowance are the sorts of policies that are compounding unfairness.

Tue, 17 Jul 2018  |  

This article first appeared on the Yahoo 7 website at this link: https://au.finance.yahoo.com/news/will-falling-house-prices-trigger-next-aussie-recession-000039851.html

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 Will falling house prices trigger the next Aussie recession?

House prices are falling, auction clearance rates continue to drop and there is a such sharp lift in the number of properties for sale that, for the moment, no one is willing to buy at the given asking price.

Potential house buyers who have held off taking the plunge in the hope of falling prices seem to be staying away, perhaps hoping for further price falls. But also influential factors forcing buyers away is the extra difficulty getting loans approved as banks tighten credit standards, then there are concerns about job security and associated awareness of probable cash flow difficulties given the weakness in wages growth. It is remarkably obvious that house prices will continue to fall and this poses a range of risks to the economy.

Research from a range of analysts, including at the Reserve Bank of Australia, show a direct link between changes in housing wealth and consumer spending. This means that when wealth is increasing on the back of rising house prices, consumer spending is stronger.

This was evident in Sydney and Melbourne, in particular, when house prices in those two cities were booming in the two or three years up to the middle to latter part of 2017. Retail spending was also strong. Looking at the downside, in Perth where house prices have fallen by more than 10 per cent since early 2015, consumer spending has been particularly weak.

Mon, 16 Jul 2018  |  

 

If the flow of punter’s money is any guide, Labor are in for a very rough time on Sublime-Saturday on 28 July when there are five by-elections around Australia.

In the three seats where the results are not a forgone conclusion, the flow of money on Liberal candidates over the last few days has been very strong.

The Liberal Party are now favourites to win Braddon and Longman and in Mayo, Liberal candidate Georgina Downer has firmed from $4.20 into $2.75.

If the punters are right, Sublime-Saturday would see Labor lose Braddon and Longman and could see Liberal’s sneak back in Mayo.

If so, it would be odds on that Prime Minister Turnbull would go to the polls as soon as possible, not only to take advantage of the by-election fallout, but, from a different angle, go before the housing market and the economy really hit the wall, probably in late 2018 or 2019.

BRADDON

Liberals $1.70 (was $2.25)
Labor $2.05 (was $1.65)

MAYO

Liberals $2.75 (was $4.20)
Centre Alliance $1.35 (was $1.15)

LONGMAN

Liberals $1.50 (was $2.00)
Labor $2.50 (was $1.85)

 

 

THE LATEST FROM THE KOUK

Don’t fall for the spin - Scott Morrison’s budget surplus is no certainty

Thu, 06 Dec 2018

This article first appeared on the Yahoo Finance web site at this link: https://au.finance.yahoo.com/news/dont-fall-spin-scott-morrisons-budget-surplus-no-certainty-224422761.html 

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Don’t fall for the spin - Scott Morrison’s budget surplus is no certainty

Prime Minister Scott Morrison could yet be guilty of prematurely declaring that his government will deliver a budget surplus in 2018-19.

Sure, tax revenue is growing at a rapid pace and the government is underspending on a range of government services, but there are still seven long months to go between now and the end of the financial year that might yet blow up the surplus commitment.

PM Morrison’s ‘return to surplus’ boast is based, it appears, on hard data for the first four months of the 2018-19 financial year on revenue and spending information from the Department of Finance. These numbers do look strong, at least in terms of the budget numbers and if the trends on revenue and spending continue, the budget will probably be in surplus. Treasury will be factoring in ongoing economic growth, no increase in the unemployment rate and buoyant iron ore and coal prices over the remainder of the financial year. These forecasts and hence the budget bottom line are subject to a good deal of uncertainty, as they are every year.

If, as is distinctly possible, the economy stalls in the March and June quarters 2019, commodity prices continue to weaken and if there are some unexpected increases in government spending, the current erroneous forecasts for revenue and spending could leave the budget in deficit.

Change of view on monetary policy

Wed, 05 Dec 2018

In the wake of the September quarter national accounts, and with accumulating information on house prices, dwelling investment, the global economy and spare capacity in the labour market, I have revised my outlook for official interest rates.

For some time, I have been expecting the RBA to cut the official cash rate to 1.0 per cent, a forecast that has been wrong (clearly) given its decision to leave rates steady right through 2018.

That said, it has been a highly profitable call with the market pricing interest rate hikes when the call was made which has yielded a decent return as time has passed.

My updated profile for RBA rates is:

May 2019 – 25bp cut to 1.25%
August 2019 – 25bp cut to 1.00%
November 2019 – 25bp cut to 0.75%

The risk is for rates to 0.5% in very late 2019 or in 2020

It will be driven by:

  • Underlying inflation remaining below 2%
  • GDP growth around 0.25 to 0.5% per quarter in 2019
  • Annual wages growth stuck at 2.5% or less
  • Global growth slowing towards 3%
  • Labour market under-utilisation around 13 to 13.5%

There are likely to be other influences, but these are the main ones.

AUD, as a result, looks set to drop to 0.6000 – 0.6500 range.