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Mon, 07 Jan 2019  |  

The article first appeared on The Guardian website at this link: https://www.theguardian.com/business/2019/jan/03/falling-dollar-reflects-global-concern-all-is-not-well-in-the-australian-economy 

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Falling dollar reflects global concern all is not well in the Australian economy

The Australian dollar was hit hard overnight, Australian time, slumping below 70 US cents before a sharp and more extreme move saw it temporarily crash to a low of 67.40 US cents. It subsequently recovered marginally, but remains weak at around 69.40 US cents.

Rather than focus on the micro aspects of minute-by-minute or hour-by-hour moves in the dollar, which can be more noise than substance, the trend for the dollar over the past year has been down.

In January 2018, the Australian dollar was trading at 81.50 US cents.

There is increasing concern from global investors that all is not well with the Australian economy. Policy is in a do-nothing phase. Entrenched low wages growth is hampering growth in household spending. This is being complemented, in a negative way, by a sharp fall in wealth as house prices drop and the share market weakens, both of which will be a negative for the economy during 2019. This is because householders are simply not getting the income growth nor wealth accumulation needed to allow them to keep spending at a rate that will see the economy expand at a pace that will generate upside wage and inflation momentum. Strategies aimed at reducing debt and paring back new borrowings mean, by definition, weaker economic growth over the near term.

Tue, 01 Jan 2019  |  

A well-established and immutable rule of market and economic forecasting is never to gloat when you happen to get a forecast right. There are many reasons for this, not least the certainty that other forecasts over many years have been wide of the mark, a fact that brings a balance to the forecasting debate.

That’s said, it is always useful to review the big forecasts and learn why your forecasts were right or wrong and to use this experience and knowledge to refine and develop future forecasts.

I do this every year - whether good or bad - and here we go with an assessment of the forecasts I made at the start of 2018 for the year ahead.

It’s actually a little embarrassing to do my annual assessment, because they were fantastically good. Anyone following those forecasts would have made some good money, which, frankly, is what these forecasts are all about. I would be delighted to see if anyone out there can find someone with a better track record for the year, so please let me know.

Mon, 31 Dec 2018  |  

Ok, it’s time to put my neck on the chopping block and make some forecasts for the economy and financial markets for 2019.

While I agree with my good friend Con Michalakis, market guru and CIO of State Super, that point forecasts on a calendar year basis are largely an artefact of the calendar and do not meet the demand of serious investment strategy, I do find it a useful discipline to make such forecasts each year. These forecasts capture where my analysis and judgment reveal which fundamentals are at greater risk of moving a particular way and most importantly, what this might mean for markets.

2019

For me, the broadest themes for Australia in 2019 are on going sub-trend economic growth, while wages and inflation will remain disappointingly low. The RBA will finally succumb to facts on the economy and will cut interest rates to below 1 per cent in the latter part of the year and the Australian stock market, which has been a dog in recent times, will surge, rising perhaps 20 per cent by the end of the year. Bond yields are likely to fall further in the first part of the year, although a lot of the rally I was looking in 2018 for has already occurred.

There might be another moderate yield reduction the mid to longer end of the curve, but once the RBA finally gives a bit of monetary policy stimulus, the yield curve will steepen in the latter part of 2019.

Now some details.

Wed, 19 Dec 2018  |  

This article first appeared on the Yahoo Finance website at this link: https://au.finance.yahoo.com/news/smoking-levels-continue-plummet-210432040.html 

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Smoking levels continue to plummet

Some good news on health – Australians are smoking less with the amount of tobacco consumed dropping to a record low in the September quarter 2018, and this includes data back to 1959 when Australia’s population was about 60 per cent below the level of today.

The peak consumption of tobacco came in the mid-1970s. Since then, there has been an unrelenting fall, with the timing of the downturn broadly coincided with the increasing prominence given to the link between smoking and early death and a range of government regulations aimed at reducing smoking rates.

Most recently, the introduction of plain packaging laws, together with hefty increases in excises – taxes in other words – has continued to drive the consumption of tobacco lower. The decline in the volume of tobacco consumed in Australia has crashed a staggering 24.4 per cent since the plain packaging laws were introduced at the end of 2012. This is despite population growth of around 8.5 per cent over that time.

Factors other than the introduction of plain packaging laws were also driving smoking levels lower – as noted, the sharp rise in excise taxes, many years of health awareness, tobacco advertising bans, restricting smoking in public places and even the fact many smokers have died and therefore are not buying tobacco products are all driving smoking to record lows.

Wed, 19 Dec 2018  |  

This article first appeared on the Yahoo Finance website at this link: https://au.finance.yahoo.com/news/35-house-price-crash-unlikely-201301480.html 

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Why a 35% house price crash is 'very unlikely'

Australian house prices dropped again in the September quarter to be 2.8 per cent below the December quarter 2017 peak, based on the Australian Bureau of Statistics dwelling price series. In many respects, the data is old news – the comprehensive Corelogic house price series for November has already been released and they show further price falls in the last two months.

House price bet

Why the ABS dwelling price series matters, to me at least, it that it forms the basis of the bet on house prices I made in September with Tony Locantro, Investment Manager with Alto Capital in Perth.

Tony and I had a bet that at any stage between now and the time the December quarter 2021 dwelling price data are published by the Australian Bureau of Statistics, the price index for any of Sydney, Melbourne or the aggregate eight capital cities prices is down 35.0 per cent or more, I will give Tony $15,000 cash. Conversely, if by the time the December quarter 2021 data are published and the peak to trough decline is 34.9 per cent or less in Sydney, Melbourne and the eight capital cities, Tony has to give me $2,500.

These generous odds and benchmark for the 35.0 per cent price fall that I offered Tony reflected the absurd nature of a forecast from DFA’s Martin North to the effect that his forecast was for house prices to “drop 40 to 45 per cent over the next three years or so”.

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.

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.

Wed, 05 Dec 2018  |  

This article first appeared on the Yahoo Finance website at this link: https://au.finance.yahoo.com/news/business-investment-recession-two-quarters-decline-195204034.html 

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Business investment in recession with two quarters of decline

Businesses are under pressure and the economy remains in a problematic state with the latest news on private sector business investment painting a mixed picture. Business investment is the area the Reserve Bank and Treasury have pinned their hopes on for a strong economy into 2019 and 2020.

According to the latest ABS data, business investment fell 0.5 per cent in the September quarter after sliding 0.9 per cent in the June quarter and it was below the level of a year ago.
This is not good, which ever way you cut the data.

Business investment is the bedrock of any economy. When businesses are building factories, shopping centres, office blocks, hotels and the like or are buying new machinery, equipment and vehicles, the productive capacity of the economy is being nourished. This nourishment allows the economy to grow at a faster pace and create job opportunities for workers and good profit growth for the businesses doing the investment. The spin off for the rest of the economy is substantial from the cycle in business investment.

The reasons for the poor investment climate at the moment are linked to a protracted slump in the mining sector where there is a substantial amount of excess capacity that will take some time to absorb. Even with commodity prices being buoyant, the mining sector will continue to scaling back investment spending.

Thu, 22 Nov 2018  |  

This article first appeared on the Yahoo 7 Finance website at this link: https://au.finance.yahoo.com/news/heres-global-economic-slowdown-will-affect-australia-204836678.html 

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Here's how the global economic slowdown will affect Australia

There are a few worrying trends unfolding in the global economy, ones that threaten to have a negative impact on Australia into 2019. The question now is how significant the slowdown in global economic growth will be, and how will it show up in the Australian economy.

Some facts first.

In the September quarter, GDP fell in Japan and Germany and it has weakened in all other major countries, including China. The leading indicators on business sentiment and housing, which pre-empt economic conditions, point to the December quarter also being weak across the world. It is a scenario that has financial markets repricing stock markets, commodity prices and expectations for interest rates.

The reasons for the global slowdown are varied.

Wed, 21 Nov 2018  |  

This article first appeared on The Wire, the web page for FIIG, at this link: https://thewire.fiig.com.au/article/commentary/opinion/2018/11/19/rba-ignores-property-at-its-peril 

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RBA ignores property at its peril

The RBA rolls the dice on house prices

The usually careful and well considered Reserve Bank of Australia is taking a huge gamble on the Australian economy into 2019 and 2020.

The RBA is betting that the current slump in house prices and dwelling approvals are orderly and will not have any material or lasting consequences for the economy. In fact, RBA Governor Philip Lowe believes the fall in Australian house prices “is good news”, “manageable” and “a welcome development”. Further, in its November Statement on Monetary Policy, the RBA suggested that house prices “have continued to ease gradually”, which is a remarkably bland assessment given that close to $400bn has been wiped off the value of Australian houses since the price peak in September 2017.

Governor Lowe and the RBA’s open indifference to what is a major shift in the $7trn valuation of residential property is bold.

Wealth and household spending – The link

While some cooling in house prices was always inevitable following the price boom in the four years to 2017, the price falls are getting close to a point where the loss of household wealth will impact household spending. The RBA itself and a bevy of global academic research show a link between changes in household wealth and growth in household spending.

THE LATEST FROM THE KOUK

The misplaced objective of the government of delivering a surplus, come hell or high water, has gone up in smoke

Tue, 07 Jan 2020

This article first appeared on the Yahoo Finance web site at this link: https://au.finance.yahoo.com/news/the-governments-test-in-2020-220310427.html   

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The misplaced objective of the government of delivering a surplus, come hell or high water, has gone up in smoke

For many people, the cost of the fires is immeasurable. 

Or irrelevant. 

They have lost loved ones, precious possessions, businesses and dreams and for these people, what lies ahead is bleak.

Life has changed forever.

As the fires continue to ravage through huge tracts of land, destroying yet more houses, more property, incinerating livestock herds, hundreds of millions of wildlife, birds and burning millions of hectares of forests, it is important to think about the plans for what lies ahead.

The rebuilding task will be huge.

Several thousands of houses, commercial buildings and infrastructure will require billions of dollars and thousands of workers to rebuild. Then there are the furniture and fittings for these buildings – carpets, fridges, washing machines, clothes, lounges, dining tables, TVs and the like will be purchased to restock.

Then there are the thousands of cars and other machinery and equipment that will need to be replaced. 

What's ahead for the Australian economy and markets in 2020

Thu, 02 Jan 2020

What's ahead for the Australian economy and markets in 2020

Happy New Year!

2020 will be a year where Australia’s annual GDP will exceed $2 trillion, our population will get very close to 26 million people and we will clock up 29 years with no recession.

It is also a year where the economy will be a dominant issue for policy makers, will drive what happens to interest rates, will help drive investment returns and will feed into the well-being of the Australian community. 

2020 kicks off with relatively good news in terms of economic growth, even though the labour market is likely to remain weak, with wages growth struggling to lift and inflation remaining below the RBA’s 2 to 3 per cent target. The Reserve Bank may have one more interest rate cut in its kit bag, but by year end, the market is likely to price in interest rate increases, albeit modestly.

The ASX, which had a great 2019 is set to be flatten out, in part driven by the change in the interest rate outlook, but it should get a boost from better news on housing and household spending.

In terms of the specifics, I have broken down the 2020 outlook into a range of categories and given a broad explanation on the issues underpinning the themes outlined.

GDP Growth

It’s a positive outlook. A pick-up in GDP growth from the current 1.7 per cent annual rate is unfolding, with the only real issue is the extent of the acceleration.