This article first appeared on the Yahoo 7 Finance website at this link: https://au.finance.yahoo.com/news/is-the-aussie-economy-about-to-get-a-surprise-boost-from-commodities-234122379.html
Is the Aussie economy about to get a surprise boost from commodities?
The commodity price cycle is turning into a major upside risk to the Australian economy into 2017. Since the low point at the start of the 2016, in US dollar terms, the iron ore price has risen 60 per cent, coking coal is up over 100 per cent, thermal coal up 45 per cent and even copper up 35 per cent and natural gas is up 10 per cent.
It is s boost that translates straight through to the bottom line profit of the mining companies, given that the Australian dollar is broadly unchanged in a broad 72 cents to 78 cents for the bulk of the year. This is despite the commodity price surge.
While most commodity prices remain well below the crazy peak levels around 2010 to 2012, the rise, if sustained or even built upon, the income flow and inflation effects will be strong.
Not only will the slump in national income be quickly reversed, but the government will be basking in ‘upside surprises’ to its revenue and will be rapidly moving to budget surplus, without lifting a policy finger to trim spending or adjust tax scales.
For mining companies and their share prices, the effect could be strong. During the last few years of dreadfully low commodity prices, many miners have trimmed or slashed their cost base. Their unit cost of production has fallen into what is now a climate of rising prices. A win-win as they say.
It is still early in this cycle, to be sure. Markets are fickle and China, the main source of demand of global commodities, is still negotiating its way through its economic problems.
There is, nonetheless a strong possibility that capital expenditure will find a floor and some previously postponed mining projects will all of a sudden be viable again. If this were to occur, it would be unlikely to show up in the next year – it is too soon.
This article first appeared on The Guardian website at this link: https://www.theguardian.com/australia-news/2016/oct/27/economics-101-house-prices-are-surging-because-of-low-supply?CMP=share_btn_tw
House prices are surging because of low supply – it's Economics 101
As housing affordability becomes a live political issue there is a consensus from the government and opposition that housing supply can address the problem.
They are correct.
Tax rules on capital gains and negative gearing – which became central issues in the federal election campaign – distort the housing market, as do interest rates. But there is a basic economic principle that dominates these distortions over the longer run, and that is the interplay of housing supply and demand.
Until very recently, Australia’s strong population growth fuelled unrelenting growth in underlying demand for dwellings at a time when new building was not adding sufficiently to supply. This housing shortage, mixed with aggressive interest rate cuts and tax rules, underpinned strong house price gains.
Economics 101 suggests that for a given level of growth in demand (population growth and household formation rates) a larger increase in supply will lower prices, regardless of tax rules. Why would a potential investor in housing, for example, buy a property when house prices and rents are flat or falling?
New housing supply relative to a given level of demand will lower house prices and address housing affordability and issues such as negative gearing and capital gains tax will be largely immaterial. One only has to look at the recent trend in house prices in Perth (down 10% from the peak), Darwin (down 7%) and Karratha (down 65%) to show how a drop in demand relative to supply affects prices and therefore affordability. Anecdotally, there are very few investors lining up in those cities.
This article first appeared on The Adelaide Review website at this link: https://adelaidereview.com.au/opinion/business-finance/peter-costello-and-the-future-fund-fiddle/
Peter Costello and the Future Fund Fiddle
The latest portfolio update from the Future Fund confirmed that the average annual return on its investments has been 7.7 percent since it was established in May 2006.
Former Treasurer Peter Costello, who is the Chair of the Future Fund Board of Guardians, judged this return to be good to the point where he claimed that it was successful in “exceeding the return objective”.
That is an expansive claim.
In the media release – that included details of the fund return up to June 30, 2016 – there was a table that showed the 7.7 percent annual return that Costello referred to. It also noted that the ‘target return’ or objective for the Future Fund since inception was 6.9 per cent, which no doubt leads Costello to his conclusion that the 7.7 percent was larger and had exceeded the objective.
Alas, that target return for the Future Fund in its own media release is misleading. According to the Future Fund Act 2006, the investment objective or target return is at “least the rate of inflation (measured by the change in the CPI) plus 4.5 to 5.5 percent”.
This return was designed to be achieved “over the long term” which is prudent and sensible given the inherent short-term volatility and variability in many market values.
This article first appeared on the Yahoo 7 website at this link: https://au.finance.yahoo.com/news/the-real-reason-young-aussies-are-struggling-to-get-on-the-property-ladder-230332254.html
The real reason young Aussies are struggling to get on the property ladder
I thought kids stopped screaming and being blindingly selfish when they turned 3 or maybe 4. I was wrong. It could be that 30 is the new 3.
Having witnessed, first hand, some of the froth and bubble surrounding the issue of consumption patterns of millennials, that they prefer spending money on lattes and smashed avocado on toast rather than a dwelling, there is an irrational, self centered discussion that blames anyone and everyone for their inability to get into the housing market.
If Twitter and some of media articles are anything to go by, a bevvy of millennials have explicitly expressed their overwhelming desire to spend their money on avocado, ubers, the latest phones and travel rather than saving to buy a house. I have noted, ad nauseam, that this is fair enough – it’s their money, spending it whichever way floats your boat is a fundamental tenet of economics. It is all part of that basic choice we all have about where we wish to spend our money.
Rather than leaving it there, the millennial group then unrelentingly complain about their perceived in ability to tap into the housing market. This is incongruous given they have just said they are no longer looking to buy a house. Why would anyone care about the price of a Brett Whitely painting, for example, when you aren’t looking to buy one? But the millennials are vocal about their insistence of unapologetically wanting to spend their money on lattes, pulled pork and a mascarpone pancake stack whilst still moaning about their inability to buy a house.
It’s this juxtaposition that leaves me wondering what the fuss is about.
This article first appeared on the Yahoo7 website at this link: https://au.finance.yahoo.com/news/why-poor-aussie-financial-literacy-is-to-blame-for-banks-overselling-their-financial-products-222825364.html
Why poor Aussie financial literacy is to blame for banks overselling their financial products
Watching the parliamentary appearances of the Big Four Bank CEO’s this week revealed many things, but one that was most striking was the implied weakness in financial literacy of the general population who it seems often sign up to expensive services they don’t understand, didn’t ask for and don’t need.
It is all very well to criticise the banks for urging their staff to be overly aggressive when cross-selling different products to their customers, but it is another for the customer to succumb to this pressure and sign up for the new products. Rather the customers offered new products should give a friendly “thanks, but no thanks” reply when the sales pitch from the bank teller comes along.
This article first appeared on The Guardian web site at this address: https://www.theguardian.com/business/2016/oct/03/credit-downgrade-assured-if-coalition-keeps-hiding-from-its-debt-and-deficit-disaster
Credit downgrade assured if Coalition keeps hiding from its debt and deficit disaster
The treasurer, Scott Morrison, and the finance minister, Mathias Cormann, “took out the garbage” last Friday afternoon, dumping the final budget outcome for 2015-16 on the Treasury website under the cover of the football grand finals, a long weekend and the start of school holidays around much of the country.
Morrison and Cormann came close to breaching the Charter of Budget Honesty, which requires the release of each budget outcome for the prior financial year by 30 September each year. They made it with a few hours to spare.
They also released it without a press conference or detailed media release, making sure there was miniscule coverage of something that would normally be a key area of economic and fiscal management. This is especially the case with “budget repair”, the “return to surplus”, “paying off debt” and dealing with the “budget emergency” being the basis that saw the Coalition elected to power in both September 2013 and July 2016.
Looking at the budget outcome document, it is clear why it was released in the shadows of the Friday night without any fanfare.
This article first appeared on the Yahoo7 Finance website at this link: https://au.finance.yahoo.com/news/the-recessionary-horror-of-the-western-australian-economy-002509793.html
The recessionary horror of the Western Australian economy
Western Australia is in a deep and increasingly nasty recession. There are no signs that the economy is near a bottom which is disconcerting. The plunge in mining investment and the slump in commodity prices have hit WA hard and the economic scorecard is, quite simply, miserable.
During 2008, the unemployment rate in WA fell to a stunning low of 2.3 per cent. After a temporary rise with the GFC, the unemployment rate was 3.5 per cent during 2012. This was the lowest in Australia by a large margin. Most recently, unemployment spiked to 6.3 per cent which is now third highest in Australia, behind only South Australia and Tasmania. Since the middle of 2015, there has been no increase in employment levels.
State final demand, which is effectively GDP excluding net exports, peaked in September 2012 and since then, has been trending lower. From that peak, State final demand has slumped 13.2 per cent. While exports of iron ore and other commodities are strong and adding to activity in WA, from the perspective of private and public sector spending and investment, the economy is going backwards.
This article first appears on The Guardian website at this address: https://www.theguardian.com/business/2016/sep/22/why-the-turnbull-governments-plan-to-issue-30-year-bonds-is-an-unnecessary-risk
Why the Turnbull government's plan to issue 30-year bonds is an unnecessary risk
The Turnbull government has indicated that it will start issuing 30-year government bonds.
In layperson’s terms, this means the government will be borrowing money for a 30-year fixed term, paying interest every six months over those 30 years to the holder of those bonds. This locks in interest payments as a part of the budget bottom line right through to 2046 and probably beyond. The government will use the revenue from those borrowings to fund the budget deficit and maturities of existing bonds. The deficit continues to hold at levels well above the levels the Coalition government inherited from the Labor party when it won the 2013 election.
The decision by the government to borrow money for such an extended duration – via the Australian Office of Financial Management (AOFM) – sits oddly with the rhetoric from Malcolm Turnbull and Scott Morrison about their core objective of “budget repair” and the goals of returning to surplus. If these objectives were genuinely part of the government’s economic strategy, there would be no need to borrow money for 30 years. The current 25-year bonds are more than sufficient to cover the government’s deficit requirements, especially if the projections for a return to surplus in about three years are still relevant.
This article first appeared on the Yahoo 7 website at this link: https://au.finance.yahoo.com/news/has-the-gloss-finally-worn-off-the-aussie-economy-000224376.html
Has the gloss finally worn off the Aussie economy?
Having rubbed shoulders with global leaders at the G20 meeting in China, Prime Minister Malcolm Turnbull said "Our economic performance is the envy of most of those countries around the G20 table. There are very few developed nations that have economic performance as strong as Australia's”.
Mr Turnbull is wrong.
There is no doubt that for the bulk of the past couple of decades, Australia has been a star performer with continuous economic growth, sound budget settings and rising incomes. Australia was one of very few countries to avoid recession during the global financial crisis in the period from 2008 to 2010.
More recently, the gloss has warn off the Australian economy. This is most notably showing up in the unemployment rate which remains higher today than during the GFC. In most other G20 countries, the unemployment rate has fallen as economic recovery has gained traction.
Year 12 students are flat out - preparing for final exams and life after school. Some are planning to go straight to university, others are looking to take a 'gap year' before going uni.
Below is a short extract from my book, Myth Busting Economics, about the cost of taking a gap year. Read it and think.
And if you want a copy of my book, it is available here: https://www.booktopia.com.au/myth-busting-economics-stephen-koukoulas/prod9780730321958.html
A gap year? Don't do it!
A common notion for some students when they finish Year 12 is to have a so-called gap year. That is, they take a year off to do something different and postpone the decision to start university by a year. That is all fine and again, it is your choice, but it is worth thinking about the cost of doing so. Let’s look at a stylised example of the cost of a gap year.
There are two people, they have just finished Year 12, have equal abilities, achieved the same university entry score, aim to do the same three year degree and when they finish their degrees, they will get a job where the starting salary is around the average for university graduates in 2013 at $52,500 a year. One goes straight to university, the other takes a gap year, traveling around Europe and generally bumming around home.
Let’s fast forward four years.