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Thu, 06 Apr 2017  |  

This article first appeared on the Yahoo 7 website at this link: https://au.finance.yahoo.com/news/sound-economy-hitting-brick-wall-013818115.html 

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Was that the sound of the economy hitting a brick wall?

Thump!

Was that the sound of the economy hitting a brick wall?

It looks like economic conditions have deteriorated in the early months of 2017 which means the government’s efforts to ramp up its preparations for the budget on 9 May are being undermined. As Treasury works through the latest numbers on government revenue and spending, it is having to put in weak numbers into its forecasting spreadsheet that will constrain its efforts to get the budget back into surplus within the next few years.

The economic news is starting to be of such concern that perhaps the budget deficit is dropping down the order of policy concerns, particularly if, as seems likely, the looming housing slump acts as a trigger to undermine consumer spending and the economy more generally.

Of most concern has been the stalling in employment growth and rise in the unemployment rate to just below 6 per cent. Linked to that is the rise, to a record high, for the underemployment rate. Just under 2 million people are currently unemployed or underemployed which is not only a social problem, but a macroeconomic one. Not working at all or not enough hours means there is a significant part of the workforce being underutilized, not earning – and spending – their wage and in doing so, getting the perpetual motion of economic growth entrenched.

Wed, 05 Apr 2017  |  

A great speech from RBA Governor Philip Lowe last night articulated the issues that are impacting house prices. It covered all bases and was such an important and comprehensive speech that I have chosen to reproduce all aspects of his, in the order he mentioned them and I had added emphasis to highlight each factor at play.

Many media outlets covering the speech have cherry-picked their favourite causes of the house price problem, which is a pity for their readers, given the complexity of factors that have lead to the price boom.

The end point from Lowe is that "in the end addressing the supply side of the housing market is likely to prove a more durable way of dealing with the concerns that people have about debt and housing prices than detailed supervisory guidance."

Here, in order, is what RBA Governor Lowe said- my emphasis: I have added a few comments where appropriate in square brackets.

Tue, 04 Apr 2017  |  

I’ve watched RBA policy actions for close to 30 years and for the first time, I am finding it very hard to read the RBA thinking and actions right now.

For some odd reason, it is ignoring a crush of evidence on soft growth, low inflation and rising unemployment, yet it has and magnified a rise in house prices in Sydney and Melbourne when considering what to do with official interest rates.

This makes it difficult to pick the timing of future interest rate moves and the implications this will have for bond and currency markets, but suffice to say, I am delighted with the trades in place from February which are comfortably in the money (see https://thekouk.com/item/464-trading-for-rba-policy-error.html  ) and in fact I have added a little to each position in recent times.

Mon, 03 Apr 2017  |  

This article first appeared on the Dynamic Syndications website at this link: https://www.dynamicsyndications.com/news/CAT--DOG-or-RACEHORSE--Comparing-costs-may-surprise-you- 

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Cat, dog or a racehorse? Comparing costs may surprise you

When I tell family and friends that I own a share in a couple of race horses, they are often aghast – “how much does that cost?” and “You must have heaps of spare cash” or words to that effect.

Being an economist, I know pretty much exactly how much it will cost me each month to have a high quality racehorse spelled, trained, vetted, raced and looked after as it goes through the racing cycle. And I note at the outset that the costs include the horses being trained by the wonderfully marvelous Gai Waterhouse, the Hall of Fame Champion trainer who has more accolades than I have had hot dinners – and that’s a lot!

The funny thing is that most of my friends own a cat or two, a dog or two or both cats and dogs and an array of other pets. Funny because it costs about as much to look after a cat or dog as it does owning a 5% share in a racehorse. My family own two cats and I know how much they cost to look after.

I must note and emphasise that the references below refer to the maintenance costs of horses, cats and dogs after they have been purchased. Most horses are undeniably expensive to buy into (commonly $5,000 to $10,000 or even a little more for a 5% share) which is clearly a lot more than a furry pet that sits on your lap or you take for a walk.

But read on and you’ll see what I am getting at.

Fri, 31 Mar 2017  |  

This article first appeared on the Yahoo 7 Finance web site at this link: https://au.finance.yahoo.com/news/to-cut-company-tax-or-not-that-is-the-question-002352751.html 

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To cut (company) tax or not - that is the question

In the furious debate about the cost and benefits of the government’s proposed cuts to company tax, the discussion is more about ideology and not much about facts.

In an ideal world, that is one where the budget can afford it and other social and economic issues have been addressed, cuts to tax rates on personal income and companies are probably beneficial to the economy. That said, data from around the world shows that there is effectively zero correlation between the level of a country’s company tax rate and the level of unemployment.

That’s right. There is no evidence to suggest that a low company tax rate is associated with a low unemployment rate and vice versa. Some countries with low company tax rates have high unemployment, while some with a high company tax rate have low unemployment.

Thu, 30 Mar 2017  |  

This article first appeared on The Adelaide Review website at his link: https://adelaidereview.com.au/opinion/business-finance/behind-australias-sheer-dumb-luck/ 

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What’s Behind Australia’s Sheer Dumb Luck?

 

As the mining investment slump continues and the housing boom is at an extreme risk of turning nasty, the Australian economy is getting another dose of good luck.

In the last year or so there has been a significant rise in commodity prices, and this is adding to national income and corporate profits, presenting upward momentum to the economy for the first time in four years. Over the past year, the economy has otherwise muddled along with GDP growth not sufficient to boost employment growth, wages growth or inflation, the latter two hovering at record lows. The market is so convinced about this change of luck that it is betting that the sharp rise in commodity prices will force a policy tightening within a year.

The money market futures are now pricing in two 25 basis point interest rate increases by the end of 2018, such is the optimism and change in sentiment. There is roughly a 50 per cent chance that the RBA will hike rates before the end of 2017. Just a few months ago, an interest rate cut was anticipated by the market.

Regardless of what might happen to interest rates, the commodity price rise has occurred at a time of record production of iron ore and coal, and even though natural gas prices have lagged the strength in other commodities, gas output and exports are set to surge in the next few years. Not only are the amount of commodities we are exporting rising strongly, but the price received is sharply higher.

Mon, 27 Mar 2017  |  

This article first appeared on the Yahoo7 Finance website at this link: https://au.finance.yahoo.com/news/why-an-interest-rate-cut-is-needed-220755657.html 

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Why an interest rate cut is needed

It has been more than 8 months since the last interest rate cut from the RBA and based on the recent rhetoric from senior officials, it is unlikely to deliver another one in the near term. Over the medium term, the RBA is likely to change its view on the economy and it is likely to cut interest rates as it strives to boost growth, inflation and employment.

In forming this controversial view of monetary policy, the RBA is paying lip service to the bulk of the hard data on the economy, which would normally demand an immediate interest rate cut or two. Instead, the RBA is relying on what are very optimistic forecasts for the economy and is making a proverbial mountain out of a mole hill about house prices pressures in Sydney and Melbourne in deciding not to cut.

Interest rates are only a part of the house price problem in those cities. Simply note weak housing in Perth, Darwin and much of regional Australia to see why the current level of interest rates are not the main factor in the house price equation.

Since the August 2016 interest rate cut, the hard data paint a disconcerting picture on the economy. The unemployment rate has risen from 5.7 per cent to 5.9 per cent; the annual increase in the underlying inflation rate has dropped from 1.6 per cent to 1.5 per cent; annual wages growth has slowed from 2.1 per cent to 1.9 per cent and annual growth in real growth in GDP has dropped from 3.1 per cent to 2.4 per cent. Retail sales and new building approvals have also been very weak since the second half of 2016.

Tue, 21 Mar 2017  |  

This article first appeared on The Guardian website at this link: https://www.theguardian.com/australia-news/2017/mar/16/why-are-bill-shorten-and-labor-scared-to-run-on-the-economy 

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Why are Bill Shorten and Labor scared to run on the economy?

The dust is settling from the Western Australian election and there are some implications for the way the federal Labor party should conduct itself from now until the next election if it is to enhance its chances of winning.

For the Liberal party, the lessons are clear. It might sound trite to mention it but its electoral success will depend almost exclusively on its ability to deliver materially better economic conditions between now and election day.

For Labor, the task is easier. It needs to take the initiative on the economy, economic policy, the budget deficit and government debt and highlight how poor the Coalition has been in most aspects of economic managements since the 2013 election.

In those three-and-a-half years of the Coalition being in charge of the economy and budget, growth has been sluggish despite favourable conditions in Australia’s major trading partners. The Australian economy should be stronger because of the welcome news of the Australian dollar falling sharply in recent years, which has provided a boost to domestic economic conditions. What’s more, interest rates have been cut to record lows, yet the economy has been struggling to register annual GDP growth near 2.5%, the unemployment rate is the same as when the Coalition won the 2013 election, wages growth has plummeted to a record low, and the government debt has grown significantly faster than during the previous Labor government, which of course included the fiscal stimulus measures that kept Australia out of recession.

Ever since the mid-1990s, the Labor party has been reluctant to run hard on issues to do with the economy. For some reason, it is riddled with self-doubt that stems, it appears, from the high interest rates of the late 1980s and early 1990s, and its proactive use of budget debts and moderate debt accumulation during the global crisis to ensure Australia kept growing and to protect an estimated 200,000 jobs.

Sat, 18 Mar 2017  |  

Prime Minister Malcolm Turnbull reckons his Snowy Hydro $2 billion investment is a “nation building project”.

Yes, that is what he said. Really. Turnbull think a one-off $2 billion government infrastructure project is “nation building”.

Let’s look at $2 billion in the context of the Australian economy.

In the December quarter 2016, Australia’s GDP was $435,445 billion dollars (seasonally adjusted). This works out at $4,769 billion a day which makes the $2 billion snow job about 10 hours GDP.

Useful? Sure!

Nation building? Ha!

By 2020, Australia’s GDP will be around $510,000 billion a quarter and $2 billion will be akin to about 8 hours GDP.

Here’s what elese $2 billion is now days.

Sat, 18 Mar 2017  |  

This article first appeared in the Yahoo 7 website at this link: https://au.finance.yahoo.com/news/labour-market-why-beauty-is-in-the-eye-of-the-beholder-011836039.html?soc_src=social-sh&soc_trk=tw 

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Aussie labour market: Why beauty is in the eye of the beholder

Economic facts do not always give an accurate reading on the health of the economy. Or rather, they are open to interpretation and, as in most things, the beauty is in the eye of the beholder.

Think of today’s labour force data.

The unemployment rate in seasonally adjusted terms in February was 5.9 per cent. Whether that is a ‘good’ or a ‘bad’ number is open to interpretation. Compared with January, the unemployment rate was 0.2 percentage points higher; compared with middle of 2015 ago, it was 0.4 percentage points lower; compared with the recent low point in the unemployment rate just prior to the global financial crisis, it was almost 2 percentage points higher.

See the difficulty in determining whether it’s a good or bad result?

THE LATEST FROM THE KOUK

The Australian stock market is a global dog.

Sat, 24 Jun 2017

This article first appeared on the Yahoo7 web page at this link: https://au.finance.yahoo.com/news/1381246-234254873.html 

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The Australian stock market is a global dog.

At a time when stock markets in the big, industrialised countries are zooming to record high after record high, the ASX200 index is going no where. So poor has the performance been that the ASX is around 20 per cent below the level prevailing in 2008.

It is a picture most evident in the last few years. Since the middle of 2013, the ASX 200 has risen by just 10 per cent. The US stock market, by contrast, has risen by 50 per cent, in Germany the rise has been 55 per cent, in Canada the rise has been 20 per cent, in Japan the rise has been 45 per cent while in the UK, with all its troubles, the rise has been 15 per cent.

So what has gone wrong?

Tony Abbott and debt

Fri, 16 Jun 2017

With Tony Abbott and governemnt debt hot news topics at the moment, I thought I would repost this artricle which I wrote in April 2013:

Enjoy, SK

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Here’s a true story. It’s about a man called Tony.

Tony is a hard working Aussie, doing his best to provide for his family. He has a good job, but such is the nature of his work that his income is subject to unpredictable, sharp and sudden changes.

Tony’s much loved and wonderful children go to a private school and wow, those fees that he choses to pay are high. He used to have a moderate mortgage, especially given he was doing well with an income well over $200,000 per annum.

Then things on the income side turned sour.

Tony had a change in work status that resulted in his annual income dropping by around $90,000 – a big loss in anyone’s language.

How did Tony respond to this 40 per cent drop in income?

Well, rather than selling the house and moving into smaller, more affordable premises, or taking his children out of the private school system and saving tens of thousands of after tax dollars, Tony called up his friendly mortgage provider and refinanced his mortgage.

In other words, Tony took on a huge chunk of extra debt so that he could maintain his family’s lifestyle. No belt tightening, no attempt to live within his means, just more debt.