The RBA is like a rabbit in headlights

Sat, 10 Jun 2017  |  

This article first appeared on the Yahoo7 Finance website at this link: https://au.finance.yahoo.com/news/rba-like-rabbit-headlights-050200564.html 

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The RBA is like a rabbit in headlights

Horrible.

There is no other way to describe the March quarter GDP result which showed annual growth of just 1.7 per cent, which is one of the weakest results in the last 25 years.

Little wonder consumers are feeling under the pump, with real wages falling, savings being run down to fund their meager spending growth and unemployment / underemployment adding to insecurity.

The genuinely odd thing about the current economic malaise is the policy complacency that prevails. Neither the government or the Reserve Bank seem to be in the least bit concerned about the disinflationary funk being felt in Australia.

A month ago, the government delivered a budget that took away any extra spending in the economy via tax hikes on banks and a rise in the Medicare levy. Not an iota of policy stimulus was unveiled to deal with the chronic sluggishness in the economy.

To be fair, the government did – rightly – have an eye of the budget bottom line and an eventual return to surplus, but at a time of problematic economic circumstances, some fiscal stimulus is undeniably helpful.

Perhaps more worrying is the reaction of the RBA which again left interest rates unchanged this week, at one of the highest levels in the industrialised world.

The RBA has a very rosy outlook for the economy and is like a rabbit in the spot light, unable to move, because of the glow from the house price boom in Sydney and Melbourne. While unlikely, the upbeat view of the RBA may come to pass, but it is absurd to think that a cash rate of 1.0 per cent or even 0.5 per cent (from the current 1.5 per cent) would spark a lift in underlying inflation to the top end of the 2 to 3 per cent target band.

Rather a dose of meaningful monetary policy stimulus would free up cash flow for the business world as borrowing costs declined and the threshold for new investment decisions is lowered, which would inevitably spark upside risks to the otherwise dull outlook for business investment.

Alas for the rest of the economy, this east-coast housing obsession of the RBA is hurting the rest of the economy with monetary policy tighter than it need be. It was enlightening and economically frightening to see the Australian dollar movements this week, largely on the back of the RBA decision to keep rates on hold.

The Aussie dollar rose sharply, hitting 75.5 US cents as global investors took advantage of the globally high interest rates that seem likely to remain at these elevated levels for some time.

For exporters and those domestic firms competing with importers, the rising Aussie dollar is another impediment to extra sales, profits and employment.

Ahead, the fragile household sector will get a jolt to their finances from what appears set to be a massive hike of the order of 20 per cent in their power bills. Not only will these bills be confidence sapping, they mean aggregate spending elsewhere in the economy will be undermined.

If neither the government or the RBA see fit to deliver some pro-growth policies in the near term, it is likely that GDP growth will remain mired around 2 per cent, with underlying inflation and wages growth around the same pace. The unemployment rate is likely to reach 6 per cent just when the housing boom is starting to reverse. Late 2017 and 2018 could be tough times indeed for consumers specifically and the economy more generally.

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The Australian stock market is a global dog.

Sat, 24 Jun 2017

This article first appeared on the Yahoo7 web page at this link: https://au.finance.yahoo.com/news/1381246-234254873.html 

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The Australian stock market is a global dog.

At a time when stock markets in the big, industrialised countries are zooming to record high after record high, the ASX200 index is going no where. So poor has the performance been that the ASX is around 20 per cent below the level prevailing in 2008.

It is a picture most evident in the last few years. Since the middle of 2013, the ASX 200 has risen by just 10 per cent. The US stock market, by contrast, has risen by 50 per cent, in Germany the rise has been 55 per cent, in Canada the rise has been 20 per cent, in Japan the rise has been 45 per cent while in the UK, with all its troubles, the rise has been 15 per cent.

So what has gone wrong?

Tony Abbott and debt

Fri, 16 Jun 2017

With Tony Abbott and governemnt debt hot news topics at the moment, I thought I would repost this artricle which I wrote in April 2013:

Enjoy, SK

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Here’s a true story. It’s about a man called Tony.

Tony is a hard working Aussie, doing his best to provide for his family. He has a good job, but such is the nature of his work that his income is subject to unpredictable, sharp and sudden changes.

Tony’s much loved and wonderful children go to a private school and wow, those fees that he choses to pay are high. He used to have a moderate mortgage, especially given he was doing well with an income well over $200,000 per annum.

Then things on the income side turned sour.

Tony had a change in work status that resulted in his annual income dropping by around $90,000 – a big loss in anyone’s language.

How did Tony respond to this 40 per cent drop in income?

Well, rather than selling the house and moving into smaller, more affordable premises, or taking his children out of the private school system and saving tens of thousands of after tax dollars, Tony called up his friendly mortgage provider and refinanced his mortgage.

In other words, Tony took on a huge chunk of extra debt so that he could maintain his family’s lifestyle. No belt tightening, no attempt to live within his means, just more debt.