Stephen Koukoulas

Stephen Koukoulas

This article first appeared on the Yahoo Finance website at this link: https://au.finance.yahoo.com/news/australia-needs-fiscal-stimulus-but-what-does-that-actually-mean-203000918.html 

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Australia needs ‘fiscal stimulus', but what does that actually mean?

With the economy down in the dumps and the per capita recession now extending to nine months, there is a frenzied call for the government to implement some spending and tax policies to stem the bleeding.

The calls are coming from economists, journalists, the RBA Governor and a bevy of commentators who are demanding a fiscal policy boost from the government to support economic growth. This is all fine and there is a strong case for policy makers to work together to do something to lift the pace of economic expansion.

But there is a problem with the generic “fiscal policy stimulus” demand given that none of the calls have been accompanied by even vague details of what the stimulus means and the areas of spending that should be ramped up or what taxes should be changed.

Sure, there is a suggestion of more spending on ‘infrastructure’ but that is never defined or specified.

This article first appeared on The Guardian website at this link: https://www.theguardian.com/commentisfree/2019/jul/02/the-rba-cuts-interest-rates-again-how-low-will-they-go 

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The RBA cuts interest rates again. How low will they go?

 It’s better late than never.

The Reserve Bank of Australia has cut interest rates for the 14th time in this elongated monetary policy easing cycle that began way back in November 2011.

The official cash rate is at a fresh record low of 1.0%, and there is a better than even chance rates will go even lower in the months ahead. The economy is negotiating an increasingly entrenched period of moribund growth. This is seeing interlinked problems of chronically low inflation and subdued wages growth, both of which are unlikely to materially improve until the annual rate of GDP growth picks up to at least 3% for a couple of years.

The latest annual GDP growth rate is just 1.8%, which is a long way from where it needs to be.

With the latest interest rate cut, the RBA governor, Philip Lowe, mentioned a few positive points for the economy, which suggests it will likely pause for a few months before seriously considering further interest rate moves.
In particular, Lowe noted “the outlook for the global economy remains reasonable”, which is shorthand for a broadly neutral influence from overseas to Australia in the near term. This looks a fair assessment. Lowe also pointed out that infrastructure spending is increasing and that investment in the resources sector is picking up in line with strength in exports. Again, these positive factors are evident in the recent national accounts.

This article first appeared on the Yahoo Finance website at this link: https://au.finance.yahoo.com/news/its-time-end-strong-economy-propaganda-230414837.html 

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It’s time to end the “strong economy” propaganda

For the last year or so, it has been obvious to anyone with an open mind that the economy is in trouble. Unfortunately, the government and the Reserve Bank not only ignored this growth slump, but they ran a propaganda campaign saying the economy was “strong”, that unemployment would keep falling and wages growth was poised to pick up.

It might have been politics that lead the RBA and Treasury to this view with the recent election swinging on the economic credentials of both major parties. Ahead of the election, the RBA and Treasury were loathe to undermine the government with an honest assessment of the rapidly spreading economic problems.

It is possible that the forecasts were a simple error, which sometimes happens when an external shock hits the economy.

Either way, things are so bad in the economy right now that forecasters are rushing to out-do each other on how low interest rates will go in this cycle. Some are canvassing negative interest rates, printing money or the need for a fiscal policy boost if the economy remains in its economic funk.

Time will tell.

The range of forecasts that where regularly produced by the government (Treasury) and the RBA up until very recently were unambiguously optimistic. The forecasts ignored all hard data on the economy, which suggests it may have been a political strategy to remain upbeat, rather than it being a clumsy forecasting error.

This article first appeared on the Yahoo Finance website at this link: https://au.finance.yahoo.com/news/house-prices-are-still-dropping-but-bottom-sight-210000929.html 

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An update on my house price bet with Tony Locantro

It is difficult to think of a bigger issue that gets Australians fired up than house prices.Regular readers will know that back in September 2018, I made a bet on house prices with Tony Locantro, a fired-up Investment Manager with Alto Capital in Perth.

Tony wont mind me saying this, but he is what is called an ‘uber bear’ on house prices – he reckons prices are grossly inflated and are overdue to collapse. On the other hand, I reckon there is a cycle and that after the surge up to 2017, house price falls were inevitable, but that the decline would last only a couple of years and would not be too severe.

The bet was framed around a peak-to-trough fall in prices of 35.0 per cent in either Sydney, Melbourne or the 8 capital cities measure used by the Australian Bureau of Statistics. If prices fell by more than 35 per cent at any stage from the peak until the end of 2021, Tony would win, if the fall was less than 35 per cent, I would win.

Simple.

That background is important because the ABS just released the official dwelling price data for the March quarter 2019.

In the quarter, dwelling prices fell 3.0 per cent in the 8 capital cities and dropped 3.9 per cent in Sydney and 3.8 per cent in Melbourne.

Wednesday, 29 May 2019 09:17

Here's why you need to buy a house NOW

This four part series on housing first appeared on the Yahoo website during March 2019 at these thinks:

Part 1: https://au.finance.yahoo.com/news/heres-need-buy-house-now-003308014.html 

Part 2: https://au.finance.yahoo.com/news/buy-house-live-late-043710857.html 

Part 3: https://au.finance.yahoo.com/news/many-australians-regret-buying-house-none-234007432.html 

Part 4: https://au.finance.yahoo.com/news/buy-house-hold-10-years-203418110.html 

 It outlines the case why it is a good time to buy a house. Any comments and feedback welcome!

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Part 1. Here's why you need to buy a house NOW

It would be a great shame if the current weakness in house prices does not see those groups previously frozen out of the housing market step up and buy a house to live in.

Whether it is in Sydney, Melbourne, Perth, Darwin, Canberra, Brisbane, Adelaide or regional Australia, housing affordability is improving rapidly with prices generally lower, mortgage interest rates remarkably low and competitive, and wages growth edging up in a steady if not spectacular way. Sure, saving that deposit for a house is still hard and the banks and other financial institutions are making it a bit more difficult to get the loan you need to buy your house.

But for many reasons, getting into the housing market now or in the next 12 months to buy your house to live in will set you on course for a life of fulfilment and financial security.

I want to set the scene with a few definitions – when I say “houses” and “house prices”, I am referring to all dwellings – that is free standing houses, units, townhouses and apartments. It is a generic term. And to make it clear, I am suggesting buying a house for you to live in, not to invest in, which is an entirely different kettle of fish.

Friday, 24 May 2019 11:40

Change of view on interest rates

Having been the only economist to correctly anticipate an interest rate cut from the RBA when close to 50bps of interest rate hikes were priced in to the market last year (See Bloomberg 17 August 2018), I have agonised over the exact months the cuts would be delivered and then how many rate cuts would be needed to reflate the economy.

Recently, I was of the view that the RBA would need to cut 100bps from now, to a level of 0.5%, but I did so with relatively low confidence. This is why I recommended all clients to close their long interest rate positions on 17 April 2019 (when the implied yields were 1.10% for the mid 2020 OIS; 1.35% on 3 year yields and the Aussie dollar was just over 0.7000 at the time).

Like in most good trades that were massively in the money, I left a little money on the table while I reassessed the outlook.

Since calling for interest rate cuts from the RBA, a lot of water has passed under the bridge, especially in the last few weeks.

Events mean I am changing my view on interest rates and have been placing / will be looking to implement new trades.

This article first appeared on the Yahoo Finance website at this link: https://au.finance.yahoo.com/news/watch-out-australia-theres-a-flood-of-dismal-economic-news-on-the-horizon-211110783.html

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Watch out Australia: There's a flood of dismal economic news on the horizon

The Australian economy is in trouble and Scott Morrison and the Liberal Party government need to come clean and acknowledge this and outline a framework how this period of economic funk is to be addressed if they win the 18 May election.

The Liberal Party is campaigning in the election on a “strong economy” and being “good economic managers”, bold claims that fly in the face of the latest score card for the economy.

That scorecard shows a flood of what is, frankly, disappointing or even dismal economic news. Australia is going through a very rare recession in per capita GDP terms and last week saw data showing zero inflation in the March quarter. Contribution to these indictors of economic funk is the fact that well over half a trillion dollars of householder wealth has been destroyed as house prices have tumbled.

Add to that the fact reported by the Australian Office of Financial management last week that gross government debt is $543 billion, almost double the level that the Coalition government inherited in September 2013, and the scorecard is looking very ratty indeed.

As the ad man used to say, “but wait, there’s more”.

This article first appeared on the Yahoo Finance web page at this link: https://au.finance.yahoo.com/news/another-hit-and-miss-the-rba-has-an-inflation-problem-235451380.html 

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Another hit and miss: The RBA has an inflation problem

This is getting embarrassing for the RBA.

It has yet again missed its target for inflation. The March quarter consumer price index confirmed annual headline inflation at 1.3 per cent, while the underlying inflation measure saw inflation running at an equal record low of just 1.4 per cent. Recall, the RBA has as an explicit goal “to keep consumer price inflation between 2 and 3 per cent, on average, over time. The 2 to 3 per cent medium-term goal provides a clearly identifiable performance benchmark over time.”

This target and the approach to setting interest rates has served the Australian economy very well in the 25 years it has been operating. It is probably no coincidence that since the RBA adopted this inflation targeting approach to setting interest rates, Australia has avoided recession.

Alas for the RBA, inflation is falling from a level that is already too low.

This article first appeared on the Yahoo Finance web page at this link: https://au.finance.yahoo.com/news/aussie-property-crash-looking-even-unlikely-heres-021138614.html 

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My house price bet – I’m very happy and getting ready to collect

I recently made a bet with Tony Locantro, Investment Manager with Alto Capital in Perth on the extent to which house prices would fall over the next three years.

Just to reiterate, the bet centred on Locantro’s view that prices would drop 35 per cent or more by the end of 2021 from the peak levels in 2017, a forecast that looked absurdly pessimistic given the raft of factors that influence house prices over the course of years.

For Mr Locantro to win the bet, house prices measured by the Australian Bureau of Statistics on a quarterly basis in either Sydney, Melbourne or for the average of the eight capital cities would need to fall by 35 per cent or more from the peak levels by the time the December quarter 2021 data are released. The ABS released the latest residential property price data last week which presents an opportunity to see how the bet is unfolding, admittedly with three years to go until it is settled.

As everyone knows, house prices are falling in most cities, reversing part of the boom over several decades.

Monday, 25 March 2019 17:22

Get ready for a cash rate cut in April

This article first appeared on the Yahoo Finance website at this link: https://au.finance.yahoo.com/news/get-ready-cash-rate-cut-april-193244245.html

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Get ready for a cash rate cut in April

The data is in and it is compelling.

The Australian economy is faltering and the risk is that it will weaken further if nothing is done to address this decline.Not only has there been recent confirmation of a per capita GDP recession – that is, on a per person basis the economy has been shrinking for two straight quarters – but inflation is embedded below 2 per cent, wages growth is floundering just above 2 per cent, house prices are dropping at 1 per cent per month and dwelling construction is in free fall.

Add to this cocktail of economic woe an unambiguous slide in global economic conditions, general pessimism for both consumers and business alike and a worrying slide in the number of job advertisements all of which spells economic trouble.Blind Freddie can see that there is an urgent need for some policy action. And the sooner the better.For the Reserve Bank of Australia, there is no need to wait for yet more information on the economy.

It has been hopelessly wrong in its judgment about the economy over the past year, always expecting a growth pick up “soon”. Instead, GDP has all but stalled meaning that inflation, which is already well below the RBA’s target, is likely to fall further.In short, no. It is not like a 25 basis point interest rate cut on 2 April and another 25 in, say, May or June will reignite inflation and pump air into a house price bubble.

Such a claim would be laughable if there are any commentators left suggesting this.

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.