Stephen Koukoulas

Stephen Koukoulas

Tuesday, 14 November 2017 16:16

Why the RBA is wrong, wrong, wrong

This article first appeared on the Yahoo 7 Finance website at this link: https://au.finance.yahoo.com/news/2024247-032933611.html 

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Why the RBA is wrong, wrong, wrong

The latest Statement on Monetary Policy has confirmed the failure of the Reserve Bank of Australia to implement monetary policy settings that are consistent with its inflation target and objective of full employment.

It used to be the case that the RBA could never have a medium term forecast for inflation other than 2.5 per cent – the middle of its target range. The thinking was that if the RBA had a forecast an inflation rate of say, 1.5 or 3.5 per cent, that was based on current policy settings, it would adjust interest rates to ensure inflation would not reach those levels, and instead would return to the middle of the target.

The middle of the target range is an important goal for policy because it means the risks to the forecast are symmetrical. A forecast of, say 2 per cent, means that a 0.5 percentage point error could see inflation fall to a troublesome 1.5 per cent as much as it could rise to a perfectly acceptable 2.5 per cent, while a forecast of 2.5 per cent that turns out to be wrong by 0.5 per cent would still mean the RBA meets its target.

And even if the 2.5 per cent forecast turns out to be wrong as economic events unfold in ways not fully anticipated, it would adjust policy again to keep the focus on the 2.5 per cent. The RBA did this well until the global crisis came along and changed the growth, wage, inflation dynamics.

Which is where the recent RBA policy settings have been so wrong.

It has been well over a year since the last interest rate cut.

Thursday, 09 November 2017 17:32

Getting out of property and into stocks?

Getting out of property and into stocks

That seems to be a theme developing in the Australian market at the moment, with further evidence of a cooling in the housing market and a coincident lift in the value of the ASX hinting that those with money to invest are avoiding the ultra-expensive, low yielding housing market and instead are looking to the stock market for opportunities.

The Australia stock market is moving higher to the point where the ASX200 index is poised to break above 6,000 points for the first time since 2008. The past decade has been a rocky one for the Australian stock market. There has been the GFC, a commodity price boom and bust, speculators have jumped into and out of bank stocks based on extreme calls on the housing market and many local firms have been dealing with an unrelenting threat from foreign competition.

Some of these issues remain, but a combination of factors appear to be at play in the new found interest in the share market.

Sunday, 05 November 2017 15:27

The political and economic form guide

The spring carnival is in full swing and it’s time to turn on the lights and examine the political and economic form guide.

My tip is Uncertainty, which seems to have the best track record in politics and economics. So here we go.

Turnbull: Looked promising early in career but only fell across the line last start. Lost all form and hard to have.

Shorten: Difficult to fault recent form, although task made easier in recent starts with inferior opposition. The testing material.

Government Debt: A stayer which is going from strength to strength. Being helped by a lack of tax reform and will be thereabouts.

Reserve Bank: Has done nothing in over a year despite the urgings of the 1.8 million people either unemployed or under employed. Needs to improve.

I am reluctant to bag and slag the employment data, because it is all we have when looking at the health of the labour market. But there are a few quirky bits and bobs in the news of the wonderful run of job creation over the past year.

Employment rose by a remarkably strong 3.1 per cent in the year to September, a fabulous result.

But, and it is a big but, the results are at odds with just about every other indicator in the economy. EIther they are misleading or the employment data are misleading.

One way to check it to have a look at the economy the last time annual growth in employment was above 3 per cent. This takes us to the period around 2007 and into early 2008.

In 2007, annual real GDP growth was generally around 4 to 5 per cent, as you would expect with such jobs growth. The economy was on fire!  In 2008, the CPI surged by over 4 per cent which is again as you would expect given the boom in employment. The RBA was hiking rates at an agressive pace, with the official cash rate hitting a stonking 7.25 per cent in 2008. Wow! 

This article first appeared on the Yahoo 7 Finance website at this link: https://au.finance.yahoo.com/news/1897318-045821149.html 

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What bubble? The financial sector is fighting fit

Australia’s banking sector is in peak health and the household sector is having few if any problems managing its debt.

This is the good news from the Reserve Bank of Australia Financial Stability Report which effectively put the kybosh on the fear-mongers who continue to forecast a crisis in household debt, a crash in house prices and turmoil in the financial system and more specifically, the banks.

The key conclusion from the RBA was that “the financial system is in a strong position and its resilience to adverse shocks has increased over recent years.”

These are strong and direct words from the normally cautious RBA.

It also noted that the bank’s non-performing loans (bad debts in other words) “remain low” and bank profitability “is high”, which are the key indicators of financial stability and strength. The RBA went as far to say that “the banks also have ample access to a range of funding sources at a lower cost than a decade ago” which is fundamental to the functioning of the financial system. Nothing was presented that indicated current problems in the financial sector.

The RBA assessment can be tested from the markets, specifically bank share prices. Most evidently, bank share prices remain strong as the investment community continues to place its money where its mouth is when determining actual performance and even risks when allocating investment funds.

Wednesday, 11 October 2017 11:10

The truth about our debt

This article first appeared on the Yahoo7 Finance website at this link: https://au.finance.yahoo.com/news/1870680-024951753.html 

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The truth about our debt

Much is being made of the record level of household debt in Australia. The media is full of stories screaming about the risks of debt for the economy.

Household debt has risen from levels equivalent to around 75 per cent of annual household disposable income in the mid 1990s to close to 200 per cent today and it is an issue that sparks fears of a crash, the next recession or something equally frightening. Debt is high, for sure, but for anyone who undertakes sober and factual analysis of the household debt issue and judges the overall financial position of the household sector and not just debt, there is little to be worried about.

It is vitally important to realise that households do not take on that debt and throw the cash away. On the contrary.

Debt is used to buy assets which includes things like housing, commercial property and shares. For the bulk of the population with little or no debt, they are coincidently squirrelling away their savings and are accumulating wealth.

Tuesday, 03 October 2017 12:58

Retailers face a tough Christmas

The latest Dun & Bradstreet survey is available at this link: https://dnb.com.au/article-bex-q4-2017-final-report.html#.WdLuVDOB24k  The key points of the report are below. 

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Retailers face tough Christmas

Business sentiment remains flat moving into the final quarter of 2017, despite an uptick in mid-year trading. In Dun & Bradstreet’s September Business Expectations Survey companies are predicting weaker sales, lower employment and a decline in selling prices; however, profits and capital investment are tipped to rise in the last months of the year. The upcoming Christmas period has done little to lift spirits in the troubled Retail sector, with expectations uncharacteristically low for the December quarter.

"As 2017 draws to a close, business expectations remain broadly steady, which points to ongoing moderate economic growth. Actual business activity ticked higher in the June quarter, but it remains in a range that points to the economy neither being strong nor weak, but rather something in between."  Stephen Koukoulas, Dun & Bradstreet Economic Adviser

Retailers, Manufacturers downbeat
Sentiments within the Retail sector remain subdued: while expectations have ticked upward for the fourth quarter compared to the third quarter, the current result is substantially lower than prior corresponding quarters.

Retailers are the least upbeat about business growth across all sectors: 55.4 percent of retail firms said they were more optimistic about business growth in the year ahead compared to the previous year, while 35.7 percent are less optimistic. Wholesalers are the most upbeat, with 69.8 percent feeling more optimistic compared to 20.8 percent feeling less optimistic.

This article first appeared on the Yahoo7 website at this link: https://au.finance.yahoo.com/news/religious-marriages-slump-record-low-054148504.html 

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Marriage equality – what’s God got to do with it

The debate surrounding the survey on marriage equality is throwing up a range of issues that sit oddly with over 100 years of historical marriage patterns of heterosexual Australians.

Social media feeds, on line news, the radio, newspapers and television are heavy with people discussing the issue of marriage equality whose only real claim to be heard is their religious belief and their status within their church, synagogue, temple or other religious lobby group.

There are few, if any, declared atheists or marriage celebrants on these news and chat shows outlining their views on same sex marriage. This is despite there being more people of no religion than any other faith.

For some unknown reason, the overwhelming bias towards those with a religious affiliation promotes them to a point where they have a special status to pontificate as to whether people should vote yes or no to the marriage equality survey. Their views are getting a disproportionate coverage, including relative to how Australians are now choosing to get married.

For over 100 years, Australians getting married have been shying away from church based ceremonies and instead are opting for a marriage celebrant to allow them to legally tie the knot.

This alone should put the status of religious organisations and their spokespeople as authorities on the issue of marriage on very thin ice.

This article first appeared on The Crikey web site at this link: https://www.crikey.com.au/2017/09/20/koukoulas-penny-pinching-on-education-leaves-the-nation-lagging/

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Penny-pinching on education leaves the nation lagging

Educational attainment is a proven path to higher incomes, not only for the individual concerned, but also for the nation as a whole.

The latest research from the Organisation for Economic Co-operation and Development, Education at a Glance 2017, shows that in each of the 38 countries in the survey, adults with below upper secondary education were paid an average 25% less than someone with upper secondary education. There was an even more extreme difference with a 56% average pay advantage for those attaining a tertiary education against upper secondary schooling.

Put together, this means that someone with a tertiary education will, on average, get roughly double the income of those with below upper secondary education.

The public policy implications of these findings should be obvious.

The first step should be to ensure that all children get fundamental reading, writing and arithmetic skills, without which completion of upper second education is impossible, let alone the step to tertiary education.
Targeted, sufficient and productive public investment in human capital (education) via skilled teachers and high level, up to date resources for students are a bare minimum. Any shortfall in this infrastructure to provide a good start to education will show up in a short fall in educational attainment in later life with negative implications for the economy.

Monday, 18 September 2017 17:14

An update on government debt

It’s time for a quick government debt update.

Just the facts.

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NET GOVERNMENT DEBT

At May 2017: $323 billion Source: https://finance.gov.au/publications/commonwealth-monthly-financial-statements/2017/mfs-may/ 

At September 2013: $175 billion Source: https://www.finance.gov.au/sites/default/files/mfs-september-2013.pdf 

Increase in net government debt under current Coalition government: $148 billion or $3.36 billion a month.

GROSS GOVERNMENT DEBT

Friday 15 September 2017: Value of government securities on issue (Gross government debt) was $503 billion. Source: aofm.gov.au 

Friday 6 September 2013: Value of government securities on issue was $273 billion Source aofm.org.au plus calculations from Market Economics, available on request. Call AOFM 0262631111 or email This email address is being protected from spambots. You need JavaScript enabled to view it.

Increase in gross government debt under current Coalition government: $230 billion or $5.23 billion a month.

WHAT ABOUT LABOR 2007 TO 2013?

When the Coalition lost the 2007 election and Labor won it, net government debt was negative - ie, it had financial assets of $28 billion (as at 31 October 2007) Source: https://www.finance.gov.au/sites/default/files/mfs_oct2007.pdf  

Under Labor (2007 - 2013), net debt rose by $203 billion or $2.86 billion a month, even during the GFC and with associated fiscal stimulus policies, some $500 million a month less than current Coalition government.

When the Coalition lost the 2007 election, gross government debt (government securities on issue at June 2008) was $59 billion. Source: https://archive.treasury.gov.au/documents/1321/HTML/docshell.asp?URL=06_appendix_b.htm  

Under Labor (2007 – 2013), gross debt rose by $214 billion or $3.01 billion a month, which is more than $2.2 billion a month below the monthly run rate of the current government.

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.