Blog

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.

Tue, 18 Sep 2018  |  

 The ABS residential price series confirmed further broadly based price falls in the June quarter.

It will no doubt get the hysterical house price forecasters very excited.

It also allows me to give an update on the offer I made to Martin North from DFA about his heroic forecast that house prices would drop by between 40 and 45 per cent over the next few years. The letter to Martin and the offer are reproduced below.

Suffice to day, house price falls are continuing. And from the peak level:

  • Sydney: down 3.9 per cent (peak June qtr 2017)
  • Melbourne: down 1.4 per cent (peak Dec qtr 2017)
  • 8 cities: down 1.4 per cent (peak Dec qtr 2017)

 

We are, unsurprisingly to sober analysts, a long, long, long way from the 40-45 per cent Martin is forecasting a long way from the 35 per cent I offered to wager Martin at 6 to 1; and still a long way from the 22.5 per cent fall, in any of those markets, I offered Martin at 2 to 1.

The offer is still open to Martin for a couple of weeks, if he wishes to reconsider.

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Mon, 17 Sep 2018  |  

My open letter and offer to DFA’s Martin North – Skin in the game on house prices

I have sent this to Martin North, founding Principal, Digital Financial Analytics.

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Dear Martin

Congratulations on your cameo on the TV program 60 Minutes. It was gripping viewing and a quite fantastic story.

I note with a huge amount of interest your forecast for property prices to fall by “40 to 45 per cent”.

It is a big call and certainly grabbed the attention of many in the public.

I note also that on your blog, you suggest the quote which included that forecast was not given the context you attached to it, namely, you rated it “only a 20 per cent chance” and that the 40 to 45 per cent price fall would be “over 3 years or so”.

That context is important.

Over the many years I have been making forecasts for the economy and markets and seeing others do the same, I find that forecasts without any skin in the game are often compromised. It is easy to construct a headline grabbing forecast for a significant move in markets, including house prices for example, but when they fade into oblivion, there are no implications for the forecaster. Forecasts really only has validity if the forecaster has an interest in the forecast being correct.

In other words, would the forecaster really make that forecast if they put their money where their mouth is?

Wed, 29 Aug 2018  |  

This article first appeared on The Wire website, for FIIG, at this link: https://thewire.fiig.com.au/article/commentary/opinion/2018/08/21/three-downside-risks-to-the-aud 

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Three downside risks to the AUD

A certain calm in currency markets, including for the Australian dollar, was briefly punctured in early August when the Turkish lira collapse spread to other emerging markets and sparked a jump in the US dollar.

Since early 2015, the AUD has traded over 90% of the time in a 71-78 cent range against the US dollar. The moves outside this range have been marginal and short lived.  It was and still is rare for the AUD to be so steady, for so long. A bevy of factors that normally impact its value have had minimal lasting impact or have been offset by news elsewhere. Even the Turkey and emerging markets disruptions appear short lived with the Aussie dollar bouncing back in recent days.

That said, for reasons other than the global turmoil, we are probably starting to see the early stages of a realignment of the AUD which will have important implications for other markets and investors. In recent months, the AUD has been trading in an even narrower range around 72 to 76 cents, with the data flow and run of events having little lasting impact.

Any upbeat news is offset by downbeat news, meaning the net effect is inconsequential.  Think of the following events: US interest rate hikes, commodity price falls, clear weakness unfolding in the Chinese economy, the emerging markets ructions and the changing outlook for Australian interest rates are all big news, but have not been enough to see the AUD break out of its range.

THE LATEST FROM THE KOUK

“Bitterly disappointing”: We are seeing a once in a generation policy failure

Thu, 12 Sep 2019

This article first appeared on the Yahoo Finance website at this link: https://au.finance.yahoo.com/news/rba-interest-rates-government-can-stimulate-economy-but-wont-210050650.html 

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“Bitterly disappointing”: We are seeing a once in a generation policy failure

Imagine having the power to promote economic growth, lower the unemployment rate and set in train the conditions to boost real wages growth and inflation?

It would be immensely satisfying to change policies to improve the living standards and quality of life for every day, hard-working Australians and their families.

Wouldn’t it?

Next imagine a harsh reality where economic growth is weak and slowing, the unemployment rate is rising and wages growth and inflation well below a satisfactory level, and you choose not to wield the power reverse these uncomfortable circumstances?

Doing nothing, unwilling to pump some much needed cash into the economy because of a political dogma wedded to a notion that budget surpluses are good and that holding interest rates unnecessarily high so you might dampen demand for houses – which is seen as a problem - and household debt overwhelms your power to make things better.

The RBA admits it stuffed things up – sort of

Mon, 22 Jul 2019

This article first appeared on the Yahoo website at this link: https://au.finance.yahoo.com/news/did-the-rb-as-monetary-policy-put-our-economy-at-risk-033940907.html

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The RBA admits it stuffed things up – sort of

The Reserve Bank of Australia needs to be congratulated for publishing research which implicitly confirms that it made a mistake when setting monetary policy in the period mid-2017 to early 2019.

Not that the research explicitly says that, but the RBA Discussion Paper, Cost-benefit Analysis of Leaning Against the Wind, written by Trent Saunders and Peter Tulip, makes the powerful conclusion that by keeping monetary policy tighter in order to “lean against” the risk of a financial crisis, there was a cost to the economy that is three to eight times larger than the benefit of minimising the risk of such a crisis eventuating.

The costs to the economy includes lower GDP growth and higher unemployment, that lasts for at least for several years.

A few terms first.

According to the Saunders/Tulip research, “leaning against the wind”, a term widely used in central banking, is “the policy of setting interest rates higher than a narrow interpretation of a central bank’s macroeconomic objectives would warrant due to concerns about financial instability”. In the RBA’s case, the “narrow interpretation” of the RBA’s objectives are the 2 to 3 per cent inflation target and full employment.

In the context of the period since 2017 and despite the RBA consistently undershooting its inflation target and with labour underutilisation significantly above the level consistent with full employment, the RBA steadfastly refused to ease monetary policy (cut official interest rates) because it considered higher interest rate settings were appropriate to “lean against” house price growth and elevated levels of household debt.