Stephen Koukoulas

Stephen Koukoulas

Thursday, 01 November 2018 14:52

The absurd issue of electricity prices

This article first appeared on the Yahoo7 Finance website at this link: https://au.finance.yahoo.com/news/important-energy-prices-big-picture-225353697.html 

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How important are energy prices in the big picture?

What does it say about the Australian economy when energy prices, or more particularly the price of electricity, is a dominant issue for the Prime Minister, his ministers and the government more generally.

Think about it – electricity prices!

Not unemployment, care for older Australians, low wages growth, climate change, housing affordability or even education and training. These are things that should be much higher up the list of things for a government to do than worrying about the price of running your fridge, lights and heater.

For consumers, about 2.3 per cent of household expenditure is on electricity, which equates to an average of about $35 a week. It is not a trivial amount but in context, it is not a huge impost.

Consumers spend about 50 per cent more on restaurant meals, some 300 per cent more on holidays and 40 per cent more on tobacco. They also spend about 60 per cent more on beer and wine than they do each week on electricity.
To be sure, the price of electricity has surged over the past decade or so which has been important for some, mainly low income, household budgets. And for some who spend more than the average amount of electricity, higher prices can have a slightly higher impact.

Since the start of 2009, retail electricity prices have risen 99 per cent. This is a big rise. This is well above the 28 per cent rise in wages over the same time.

But let’s look at price changes in a range of other items over that time.

The September quarter CPI confirmed annual underlying inflation easing back to 1.7 per cent, well away from the mid-point of the 2 to 3 per cent target range.

The result locked in fours years where inflation has been below the mid point of the range and two years where it has come in below the bottom of the target band.

For the RBA, this is a fail.

A fail not because of a temporary miss. The odd miss on inflation is inevitable and is fine. Shocks sometimes come along and there are periods where inflation spikes or drop temporarily.

But this is no temporary miss.

Doing nothing about two years of missing the target and then having a forecast profile that suggests there will be another couple of years where inflation remains below the mid-point of the target is a policy elitism that damages growth, employment and wages.

This article is from 29 August 2018 and first appeared on the Business Insider website at this link: https://www.businessinsider.com.au/making-the-rba-relevant-again-2018-8 

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The new Treasurer has a real shot at making the RBA relevant again - and it starts with cutting interest rates

 It is not clear what new Treasurer Josh Frydenberg discussed with Reserve Bank Governor Phillip Lowe during their recent conversation, but one thing that should have been top of the agenda is a reworking of the Statement on the Conduct of Monetary Policy.

The appointment of a new Treasurer opens the door for this vitally important policy document on how the RBA undertakes its policy task to be updated and revamped. 

In September 2016, when former Treasurer Scott Morrison and newly appointed Governor Lowe updated the framework in which the RBA would operate monetary policy, “financial stability” was included as an objective for policy. It is not clear why this would have been added to the RBA’s agenda when the existing 2 to 3 per cent inflation target had been working so well.  Whatever the reason, the inclusion of “financial stability” has meant the RBA has downplayed, if not effectively abandoned its inflation target and this explains the ongoing sluggishness in the rate of growth, the still high level of labour market underutilsation and the associated record low wages growth which has been seen in the past year.

One of the first things Mr Frydenberg should do as Treasurer is revamp the Government’s conduct of monetary policy and exclude financial stability, which was never defined, and return the focus to the inflation target. Under the current arrangements, the RBA has missed its inflation target for the past three years and with its most recent forecasts, the mid point of the inflation target will not be hit until at least 2021.

This article first appeared on the Yahoo 7 Finance web site at this link: https://au.finance.yahoo.com/news/comes-house-prices-seems-cant-win-210644370.html?soc_src=social-sh&soc_trk=tw 

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When it comes to house prices, it seems you can’t win

Australians just love to complain about house prices, whether they are going up or down. 

Some of those expressing concern about rising house prices a year ago are the same ones concerned about them falling now.

When it comes to house prices, it seems you can’t win.

Up until a year ago, there were regular complaints about high house prices. Those high prices were freezing potential first home buyers out of the market, it was claimed, there was vitriolic abuse directed to “baby boomers” who bought their houses decades ago and were sitting on huge price gains and there were notions, admittedly peddled by snake-oil salespeople, that a crash in prices would drag the economy into recession. These comments generally ignored the fact that, according to analysis from the Reserve Bank, affordability and the ability to service a standard mortgage was no harder in 2017 than in the average of the prior 25 years.

This article first appeared on the Yahoo 7 website at this link: https://au.finance.yahoo.com/news/3665708-004156966.html 

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Why Australians have lost $300 Billion this year

The total wealth of Australians has dropped by close to $300 billion since the start of 2018.

How much of that is yours?

The fall in house prices and now the slump in the stock market is undermining the wealth of Australian householders.

This is an important trend given the solid link between the change in wealth and household spending. Numerous studies show that when wealth increases, growth in household spending is faster than it would otherwise be. It appears that householders view their extra wealth in a manner that sees them lower their other savings or use that wealth as collateral for additional borrowing fund extra consumption. They may even ‘cash in’ their extra wealth and use those gains to fund additional spending.

When they observe falling wealth, experience weak wages growth and realise their savings rates are perilously low, they will adjust their spending – down.

Monday, 22 October 2018 09:21

Labor almost home, not quite hosed

The extraordinary vote in the Wentworth by election, with the 18 or 19 per cent swing against the Liberal Party, presents further evidence that the Morrison government is set to lose the next general election.

There is nothing particularly new in this with the major nation-wide polls showing the Liberal Party a hefty 6 to 10 points behind Labor.

The election is unlikely to be held before May 2019, which is a long 7 months away. A lot can happen in that time but for the Liberal Party to get competitive, but for this to happen there needs to be a run of extraordinary developments.

In the aftermath of the Wentworth by election, the betting markets saw Labor’s odds shorten.

While the odds vary from betting agency to betting agency, the best available odds at the time of writing was $1.25 for Labor and $4.00 for the Coalition.

If, as most now seem to suggest, Labor is ‘across the line’, $1.25 is a great 25 per cent, tax free return for 7 months ‘investment’. Yet, punters are not quite so sure and seem to be holding off the big bets just in case something out of the ordinary happens.

While some segments of the economy look quite good, at least on face value – note the unemployment rate and GDP – others that probably matter more to voters – husong, share prices, wages and other high-frewquency cost of living issues are all looking rather parlous. And none of these are likely to change soon.

There is an old saying for punters – odds on, look on. But $1.25 for Labor seem great value.

This article first appeared on the Business Insider website at this link: https://www.businessinsider.com.au/rba-policy-failure-stephen-koukoulas-2018-10 

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The RBA is failing on the most basic measures and it’s time it was held to account

How’s this for an economic plan?

The RBA cuts the official cash rate to 0.5 per cent and on the back of that, the unemployment rate drops to 4.75 per cent on a sustained basis, underlying inflation hits the mid-point of the 2 to 3 per cent target range and annual wages growth lifts to 3.25 per cent.

This is what a range of credible economic models suggest would happen with such a simple and transparent monetary policy move from the RBA. And what’s more, it is free to implement!It would be, on all measures, a good economic outcome.

So why is the RBA not going to do it?

What kind of monetarist poltergeist has possessed them it is now a bad idea to try and hit their inflation target, put tens of thousands more Australians into work, and stoke a much-needed rise in wages growth? 

Why is the RBA the only central bank on the world seemingly obsessed with peripheral issues when the inflation target has been missed so comprehensively for so long?

This article first appeared on the Yahoo 7 Finance website at this link: https://au.finance.yahoo.com/news/bond-market-crashing-itll-affect-232320713.html 

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The bond market is crashing - and it'll affect you

There are two very important trends unfolding in financial markets.

One is the surge in government bond yields, the other is the free-fall of the Australian dollar.

To the bond market first.

In the US, bond yields – or interest rates – have jumped sharply since Donald Trump was elected President and he took the decision to lock in trillions of dollars of government borrowings to fund a range of tax cuts. When Trump was elected, the 10 year bond yield in the US was around 1.9 per cent, with the 2 year yield around 1.0 per cent. Now, with the US budget being trashed and inflation pressures building, those yields have jumped to around 3.2 and 2.9 per cent, respectively.

Part of this surge in yields is linked to the US Federal Reserve hiking interest rates in reaction to the extreme sugar hit to the economy from the extraordinary fiscal policy easing. It is also engaging in quantitative tightening, which is unwinding the money printing that was instigated in the wake of the banking crisis.

The other part of the jump in US yields is linked to expectations of an inflation surge as the economy is flooded with borrowed government money.

Thursday, 27 September 2018 07:41

Government debt is at a record high

This article first appeared on the Yahoo 7 Finance web site at this link: https://au.finance.yahoo.com/news/government-debt-record-high-heres-good-news-013049695.html 

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Government debt is at a record high

In May 2014, then Treasurer Joe Hockey announced that the budget deficit for 2017-18 would narrow to just $2.8 billion. The projections in that budget indicated a return to surplus in 2018-19.

Fast forward a little over four years and Treasurer Josh Frydenberg and Finance Minster Mathias Cormann confirmed that the budget deficit for 2017-18 came in at $10.1 billion, nearly four times the estimate presented in the first Coalition government budget. Progress on repairing the budget has clearly been slow and marginal under the Abbott-Turnbull-Morrison governments, despite some of the strongest global economic conditions in a decade.
Policy actions of the Coalition over the five years it has been in office have actually damaged the budget balance with a raft of extra spending, and the quest for a return to surplus has been driven by a strong global economy, not local policy changes.

While the budget deficit was the smallest in a decade, the narrower deficit was based on unexpected riches flowing from surprisingly buoyant prices for iron ore and coal which have seen tax collection rise to levels also not seen in a decade.

This is not to sniff at the good fortune of the current government. It is always great news when the prices of our main commodity exports are strong. It adds to Australia’s national income, adds to government tax revenue and should always been welcome.

But it is important to realise it is simple luck rather than good economic management.

While Martin North from DFA rejected my generous offer to have a wager based on his call for a 40 to 45 per cent fall in house prices, Tony Locantro, an Investment Manager with Alto Capital in Perth has decided to take up the offer on the same terms that I offered Mr North.

Specifically, we are wagering $15,000 to $2,500 that Sydney or Melbourne or national wide house prices will or will not fall by more than 35 per cent from their peak at any stage before and up to the December quarter 2021.

The measure will be based on the Australian Bureau of Statistics Residential Property Price Indexes, Eight Capital Cities, Catalogue No. 6416.0.

This means that if, at any stage 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 or the eight capital cities, Tony has to give me $2,500.

Who knows, it might be the start of a wonderful friendship. We have added a nice informal touch – when the cash is handed over, the winner will buy a dinner with a nice bottle of red to console the loser.

I will be providing regular updates as the numbers roll out.

THE LATEST FROM THE KOUK

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

Thu, 20 Jun 2019

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.

An update on my house price bet with Tony Locantro

Thu, 20 Jun 2019

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.