Blog

Tue, 30 Oct 2018  |  

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.

Fri, 26 Oct 2018  |  

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.

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.

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.

Fri, 19 Oct 2018  |  

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?

Mon, 08 Oct 2018  |  

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.

Thu, 27 Sep 2018  |  

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.

Fri, 21 Sep 2018  |  

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.

Thu, 20 Sep 2018  |  

This article first appeared on the Yahoo 7 Finance website at this link: https://au.finance.yahoo.com/news/trump-boosts-us-stocks-borrowed-government-money-011637215.html 

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Trump boosts US stocks with BORROWED government money

US stock prices continue to trade at near record highs and a lot of the recent rise has a lot to do with the policies of President Donald Trump.

The surge in the Dow Jones Industrial Average has been phenomenal. Since the November 2016 Presidential election, the Dow Jones is up around 50 per cent despite a few hiccups at the start of 2018 as the US Federal Reserve hiked interest rates and the threats of a US trade war turned into a reality.

The rise in US stocks, whilst impressive, is built on all the wrong things. ‘Wrong’, that is, in terms of sustainability.

As President, Donald Trump has delivered a range of tax cuts that have a total cost to the budget of around US$1.5 trillion. This one-off, impossible to replicate policy like any other policy that dumps cash into the economy has underpinned stronger economic growth and a temporary lift company profits. The tax changes has seen US companies engage in a record level of stock buy-backs which by design, has been a powerful driver behind rising share prices.

The problem with the Trump tax cuts is that every cent of the US$1.5 trillion has been funded with money borrowed by the government.

Such is the destruction to the US budget, that the US Congressional Budget Office is now estimating the US budget deficit to average a staggering 4.8 per cent of GDP in every year in the decade from 2018 to 2028. When Trump became President, the budget deficit had narrowed to just 2.5 per cent of GDP.

Wed, 19 Sep 2018  |  

This article first appeared on the Business Insider website at this link: https://www.businessinsider.com.au/government-debt-stephen-koukoulas-2018-9 

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Everyone stopped talking about government debt, but here's why it still matters

Having been a headline issue for many years, government debt no longer gets the media or political focus that is used to.

At one level, this is odd, because the level of gross and net government debt have continued to rise unrelentingly in recent years, with gross debt at a record high and net debt touching a peace-time high.

The lack of focus on government debt probably reflects the fall from grace of the chief debt fear-mongers Tony Abbott, Joe Hockey and Barnaby Joyce who were vocal advocates of the “debt and deficit disaster” that Australia was allegedly confronting five years ago. 

The fact that the Coalition government has demonstrably failed in its policy approach to the issue is also likely to be a factor why it has dropped off the list of popular political topics. It could also reflect the fact the belated realisation that Australia level of debt and deficit are, and always have been, low and manageable.

So low is Australia’s government debt, even today, that the three major sovereign credit ratings agencies have assigned a triple-A rating even though the path to a balanced budget and debt stabilisation has been slow and unconvincing.
This is not to say that the level of government debt is not an issue. It still is.

And just because it is not a constraint on the economy or a meaningful concern to markets, it doesn’t mean policy makers should take their eye off managing government debt, especially at the moment when the economy is growing and the global economy is giving Australia a helping hand.

Sensible and pragmatic economists are usually pragmatic about debt and deficit. Pragmatic in a sense that a move to debt and deficit are good policy when the economy is weak and debt reduction and surplus are good policy when the economy is growing strongly. Suffice to say it will be important to ensure that the path to small, but growing, budget surpluses over the next few years is kept, but only if the economy continues to grow at a reasonable pace.

THE LATEST FROM THE KOUK

Here's why you need to buy a house NOW

Wed, 29 May 2019

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.

Change of view on interest rates

Fri, 24 May 2019

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.