Forecasting and Market Update - Trading the RBA Policy Error

Tue, 04 Apr 2017  |  

I’ve watched RBA policy actions for close to 30 years and for the first time, I am finding it very hard to read the RBA thinking and actions right now.

For some odd reason, it is ignoring a crush of evidence on soft growth, low inflation and rising unemployment, yet it has and magnified a rise in house prices in Sydney and Melbourne when considering what to do with official interest rates.

This makes it difficult to pick the timing of future interest rate moves and the implications this will have for bond and currency markets, but suffice to say, I am delighted with the trades in place from February which are comfortably in the money (see https://thekouk.com/item/464-trading-for-rba-policy-error.html  ) and in fact I have added a little to each position in recent times.

The key point is that the RBA will, in my estimation and assessment, cut interest rates at least once, probably twice and possibly more over the next 3 to 12 months. Yields will fall sharply from current levels if this happens and it is likely the AUD will be crunched lower as a result.

Which brings me to the call: the RBA will cut interest rates around July and November, when it’s clear inflation is contained, the unemployment rate is high and housing is cooling.

A 1.0 per cent cash rate would see Australian yields well below those of the US and in that case, the AUD will rapidly go to hell in a handbasket – 0.7000 and lower beckons.

These views have been well telegraphed to my clients.

For this blog, please note that the above material is NOT investment advise – seek professional guidance and trade at your own risk.

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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.