The RBA is for turning - it might take a while but we'll get there

Mon, 12 Feb 2018  |  

The following is s series of tweets I recently posted and given the feedback, I thought there were worthy of a blog post.

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The RBA is finally coming around to the fact that the economy is not strong and there is oodles of spare capacity that will not be mopped up for possibly several years.

The RBA were shattered, almost personally, with the low CPI result for Q4 and the jump in unemployment in December. Of vital importance, it has come to the view that the good employment data are not representative of labour force health - unemployment and underemployment are they key.

Wages growth and hence inflation will not pick up while the economy muddles along and the slack in the labour market remains.

Indeed, some basic modelling suggest inflation is more likely to fall below 1% than reach 3% in the next 2 years, even if GDP only marginally undershoots the RBA's very upbeat outlook.

House price are falling: This is good news, for sure, but careful what you wish for. The first few months of 2018 could spell some risks if house price falls accelerate and widen geographically.



The AUD not a major problem for exports/import competing sectors - at between 0.7500 to 0.8000 it is more a stone in the shoe; uncomfortable and slows you down when you are trying to pick up speed. Sub 0.7500 might be needed to see growth and inflation lift.

Buoyant business confidence is not being driven by top line economic growth, rather the squeeze on input costs – eg, wages. This is fine, but not as good for the jobs market if it was because business was booming. This is a vital change in dynamics for analysing the business surveys and what they are saying about the economy.

Capex / public spending are looking good for now: Risks tilting down on an 18 month time horizon especially as several infrastructure projects near completion. This is a risk to the 2019 forecasts,

The market pricing for rates reflects RBAs wonderful “Chatham House” briefing of market economists. They usually take the RBA view (don’t fight the RBA – 'its argument is quite good'). Calling the RBA out for policy failure and those meetings will dry up.

RBA needs to change market sentiment: Low wages data to be released next week may be the catalyst for a sea change. 

A low CPI in April, following a soggy GDP result in May and unemployment ticking up to 5.7% might see interest rate cut priced in by mid year.

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THE LATEST FROM THE KOUK

Why Australians have lost $300 Billion this year

Mon, 22 Oct 2018

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.

Labor almost home, not quite hosed

Mon, 22 Oct 2018

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.