Blog

Thu, 17 Nov 2016  |  

This article first appeared on the Yahoo 7 website at this link: https://au.finance.yahoo.com/news/is-the-aussie-economy-in-trouble-022757219.html 

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Is the Aussie economy in trouble?

It has not been a good week for data on the labour market.

Since the election in July 2016, employment has fallen by 25,600 people despite the working age population increasing by more than 70,000; the workforce participation rate has dropped by an alarming 0.5 percentage points; and annual wages growth has plummeted to just 1.9 per cent, a level not seen in many decades – possibly even half a century.

In trend terms, full-time employment has been falling to 10 straight months which means that the take home pay for many of those with a job is being undermined as workers work fewer hours, on average, than they would like. This crimps consumer spending and so the cycle of weak growth in consumer spending and employment continues.

You don’t have to be an economist to realise these are not good indictors.

Wed, 16 Nov 2016  |  

This article first appeared on The Guardian website at think link: https://www.theguardian.com/business/2016/nov/16/what-bill-shorten-and-labor-can-learn-from-the-election-of-donald-trump#comments 

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What Bill Shorten and Labor can learn from the election of Donald Trump

In the years since the global financial crisis, proposals from Nobel laureates and professors of economics for fiscal policy stimulus to boost growth have been met with widespread derision. This was mainly from the proponents of fiscal austerity, who can only see cuts to government spending as a solution to all economic ills, despite the moribund state of the global economy.

But such economic quackery is being called out by someone who, oddly, appears to the master of quackery, the US president-elect, Donald Trump.

What a turn-up for the books. But the Trump win and his economic agenda has exposed a critical problem for the progressive side of politics in Australia and around the world.

When a bombastic businessman, with a void of economic understanding, accidentally becomes president of the United States and indicates that he will oversee a fiscal stimulus based on an infrastructure and defence spending spree, there is a surging stock market, forecasts of stronger economic growth and all-of-a-sudden analysis that such policy stimulus is overdue.

Fri, 11 Nov 2016  |  

This article first appeared on The Guardian website at this link: https://www.theguardian.com/commentisfree/2016/nov/09/donald-trump-as-us-president-financial-markets-tell-the-world-what-they-think-of-that 

Note: in the 48 hours since this article was written, stocks have risen approximately 4 per cent and government bond yields have crashed, with the 10 year yield in the US, for example, up around 40 basis points. Tjis reverses the knee-jerk rection where bonds rallied and stocks fell.

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Financial markets tell the world what they think of Trump as president

Financial markets have told the world what they think of the election of Donald Trump as US president – and it is not good.

Global stocks, both the futures and in the physical market, started to weaken when the votes started hinting that Trump might get close. They tanked when it was clear Trump would probably win.
There was extreme market volatility as the updated tally of votes were posted minute by minute but with an average fall of around 4% (at the time of writing), the value of global stocks has already dropped around US$3tn in value. US stock futures fell around 4.5%, throughout Europe and the UK stocks are down around 4% to 5%, while Japan is down over 5%. These numbers are fluid, but the verdict and direction are clear.

This market reaction reflects the fear and uncertainty surrounding how president Trump will run the economy, frame the budget and operate on the international stage. As has been well analysed, there are irreconcilable differences in the economic policy aims of Trump – lower taxes and a smaller deficit do not go together, as an example.

“Make America Great Again”, the slogan from the Trump campaign, involves the US raising barriers to international trade in an effort to protect US industry. If Trump follows through and works to restrict trade, especially with China where the US runs a huge trade deficit, there is a genuine threat that the global economy will stall, perhaps falling back into recession. The decades of productivity and income benefits from strong global trade risk coming to an end. Periods of weak global trade are inevitably associated with sluggish growth, stalled productivity and falling living standards.

Tue, 08 Nov 2016  |  

With just two months to go to assess the absurd forecast from RBS analyst Andrew Roberts at the start of the year to “sell everything”, it gives me little pleasure to note that his forecast continues to be humiliatingly wrong. 

If Roberts has any clients left, they would be reeling if they had taken his advise on a range of asset classes he said were a "sell" when in fact most have been rallying strongly.

As a reminder of the issue at hand, when Roberts made his outlandish, headline grabbing forecast, I offered him a chance to have some skin in the game. I was overly generous in my offering noting that he would need to get just 6 of 11 variables to win a $A10,000 bet - not ‘everything’ had to fall for him to be right. The bet I offered Roberts is here https://thekouk.com/blog/sell-everything-my-challenge-to-andrew-roberts-of-rbs.html 

Some ten months since the bet and the scorecard reads:

The Kouk  10
Roberts      1

As has been the case for the bulk of the year, the only market where Roberts is ahead is the Nikkei which is down a piddling 0.2 per cent.

Including that fall, the average rise in the 11 items that Roberts suggested should be sold, the gain so far is a marvelous 22.1 per cent. In the current era of low inflation and low interest rates, that’s about 6 years return in just 10 months.

Fri, 04 Nov 2016  |  

This article first appeared on the Yahoo7 Finance website at this link: https://au.finance.yahoo.com/news/is-the-aussie-economy-back-on-track-for-growth-233144753.html 

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Is the Aussie economy back on track for growth?

The interest rate cutting cycle appears to be over. This is not because inflation is accelerating – on the contrary, inflation remains low and looks like staying low for some time. Rather, interest rates are on hold is because the RBA is looking at a range of indicators that are suggesting the economy will be stronger over the next year and that, in time, inflation will eventually lift and return to the target band.

In other words, in not cutting interest rates now, the RBA is speculating that the economy will be strong enough to drive inflation higher during 2017 and beyond.

The growth pick up scenario has some strong points behind it. Importantly, commodity prices are moving higher which, if sustained, will give a substantial income boost to the Australian economy over the next few years. The unrelenting strength in house prices, particularly in Sydney and Melbourne, is not cooling to any significant extent, which is boosting wealth and posing a threat to financial stability. The RBA would prefer to see house price growth weaken and an interest rate cut does not fit with that wish. It does not want yet lower rates to underpin further house price growth.

Sun, 30 Oct 2016  |  

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 

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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.

Thu, 27 Oct 2016  |  

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 

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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.

Mon, 24 Oct 2016  |  

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/ 

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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.

Fri, 21 Oct 2016  |  

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 

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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.

Mon, 10 Oct 2016  |  

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 

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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.

THE LATEST FROM THE KOUK

Inflation is low and remains low

Thu, 27 Apr 2017

This article first appeared on the Yahoo7 Finance website at this link: https://au.finance.yahoo.com/news/inflation-020818312.html 

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Inflation is low and remains low

Inflation edged up a little in the March quarter – from an annual rate of 1.5 per cent at the end of 2016, the headline rate rose to 2.1 per cent. The underlying rate of inflation, which the RBA trends to place more weight on when it comes to assessments of interest rate policy, was even more muted, lifting from 1.5 per cent to 1.8 per cent.

And recall, the RBA target range for inflation is between 2 and 3 per cent.

Annual underlying inflation has been at or below 2 per cent since late 2015, and has been below 2.5 per cent, the midpoint of the inflation target, since the end of 2014. That is a long time.

The data today confirm that inflation is low and remains low and in isolation, continues to give the RBA plenty of scope to further reduce interest rates. When the recent data on unemployment, building approvals, private sector business investment and wages growth are added to the mix, the case for an interest rate cut is strong.

The Australian budget is likely to confirm this is a big-spending, big-taxing government

Thu, 20 Apr 2017

This article first appeared on The Guardian website at this link: https://www.theguardian.com/australia-news/2017/apr/19/the-australian-budget-is-likely-to-confirm-this-is-a-big-spending-big-taxing-government 

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The Australian budget is likely to confirm this is a big-spending, big-taxing government

While much of the focus of the upcoming federal budget will, quite rightly, be policy issues associated with housing affordability, areas of changes to spending and revenue, there will also be an opportunity to analyse the underlying values of the government.

This will be the fourth budget of the current Coalition government and will show us the ‘big picture’ of government policies and priorities. There will be data on aggregate government spending, taxation receipts, gross and net government debt and the budget deficit.

The most accurate way to analyse the trends in the key budget figures will be to assess them as a ratio of GDP. Government spending, for example, totalled $48.8bn in 1982-83 and this rose to $423.3bn in 2015-16, which is, at face value, an enormous increase. But spending actually fell from 25.8% of GDP in 1982-83 to 25.6% of GDP in 2015-16. It is a similar issue with government debt, the budget deficit and other benchmarks.

Based on the performance of the economy since the last fiscal update in December 2016, the budget is likely to confirm that this is a big-spending, big-taxing government with a strategy for continuing budget deficits and rising debt as it funds some of its pet projects.

It is all but certain that government debt will remain above 25% of GDP in 2017-18 and the forward estimates, meaning the government will be the first in the last 50 years to have spending at more than a quarter of GDP for eight straight years.