18
Jan
2012

>Those Nasty Foreigners – Buying Our Farms!

>

Foreigners have been buying Australian farm land.  About 11% of it apparantly.  It is generating some heated discussion which is not helped by commentary along the lines:
  • “Foreigners now dominate Australia’s key food processors and own a tenth of the nation’s farmland and irrigation water, escalating a political brawl yesterday over “selling the farm”.

 It’s almost universally portrayed as a bad thing.  It creates a sense of insecurity with implications that these foreigners will grow all the food here, ship it back to the mother country and leave us poor Aussies starving.  At least I think that’s the concern.
The discussion misses a few critically important facts.
Perhaps most importantly, the true-blue, dinky-di Aussie farmers who sell their land presumably do so for financial reasons.  They receive an offer, presumably it’s high or else they wouldn’t sell.  Indeed, it looks like those offers from foreigners to the farmers have been generous enough to tempt a lot of farmers to sell.  There is no compulsion, no directive to sell the farm, nothing like it.  Presumably the Aussie land owning farmers get an offer they can’t refuse.  And like sensible people in those circumstances, they take the money and run.
I wish someone – even a foreigner – would make me an offer I can’t refuse!
What if such foreign purchases were banned or restricted?  Those Aussie farmers would be worse off, and would simply rely on other farmers or some local person stumping up a bucket of cash for their land.  I suspect they wouldn’t be offering the same amount as these foreigners.  So selling land to foreigners is actually a good thing!  
Posted in Stephen Koukoulas | Leave a comment
18
Jan
2012

>Consumer Sentiment in the Doldrums; Bank Costs Rise

>

The Westpac-Melbourne Institute Index of consumer sentiment recorded a medicine ball bounce of 2.4% in January after slumping 8.3% in December.  The index, at 97.1 points, is consistent with very weak growth in consumer spending and bodes poorly for non-mining economic growth in the early part of 2012.  That level of sentiment is consistent with real growth of about 1.5% for consumer spending, which if realised, is near historical lows.

The interest rate cuts in November and December have not been sufficiently positive for sentiment to offset whatever the other negatives.  This means quite clearly that the RBA will need to keep on cutting official interest rates.  Maybe consumers are erring on the side of pessimism because of falling house prices, a soggy stock market, rising unemployment, the global economic funk  - who can be sure.  But history shows, quite clearly, that when sentiment is depressed, so too is growth in spending.

Also supporting interest rate cuts in the months ahead is news that the large funding deal from CBA was painful.  Bloomberg reported it along the following lines:

“Commonwealth Bank of Australia sold $3.5 billion of five-year covered notes to yield 175 basis points more than swap rates yesterday in the biggest ever offering of financial debt in the currency. That’s higher than the spreads paid by the nation’s four biggest banks on benchmark domestic senior bonds in data compiled by Bloomberg since 1991.”

Quite clearly, there is yet more evidence that bank funding costs are rising which will have implications for retail interest rates in Australia.  It seems all but certain that the gap between retail lending rates and the cash rate will rise quite a lot as these higher costs feed through.  This also argues for more interest rate cuts from the RBA in the months ahead as it targets the amount consumers and business pay and it works to stop the unemployment rate from rising towards 6%.    

Posted in Stephen Koukoulas | Leave a comment
17
Jan
2012

>Mr Robb’s Error

>

Mr Robb’s representation of the growth is debt is easily explained, which makes his alarmist “analysis” all the more contemptible.  The reporting of it, unquestioned, it just as extraordinary.

I’ll explain it this way.

Think of two countries of similar size in terms of GDP.

In time Period 1, Country One has net debt of $2 billion.  Country Two has net debt of $50 billion.

In time Period 2, Country One’s net debt rises to $20 billion.  Country Two’s net debt rises to $150 billion.

The way someone like Mr Robb would mischievously present these numbers is that Country One’s net debt has risen by a whopping 900%; Country Two’s net debt has only risen by only 200%.

Hence, County One has had a massive blow out in debt compared to Country Two.

Hhhmmm.

You decide which country has the debt problem.  Mr Robb can’t.

Posted in Stephen Koukoulas | Leave a comment
17
Jan
2012

>Mr Robb’s Embarrassing Lack of Understanding

>

OMG!  The Coalition Parties seem to be keen to keep on highlighting their frightening ignorance on economics and economic management.  Even basic maths seems to be an issue sometimes.
It perhaps wouldn’t matter so much if it were an odd backbencher shooting from the hip, but this time it is the Shadow Finance Minister, Andrew Robb, mouthing an analysis of Australia’s debt and fiscal position that would be humiliating to any high school economics student, let alone someone wanting to run the budget of Australia’s $1.5 trillion economy. 
In The Australian today, Mr Robb is quoted:
  • “growth in the nation’s level of indebtedness since Labor came to power has been outstripped only by global financial crisis casualties Iceland and Ireland; it [the Opposition] warned of a European-style budget crisis here.”

Mr Robb also said:
  • “Under Labor, commonwealth debt in gross terms has grown by around 250 per cent, putting us third only behind those powerhouses Iceland and Ireland.” 

What?  Is this a mistruth or a very basic misunderstanding?
The facts show that Australia’s net debt is projected to move from a net asset position of 3.8% of GDP in 2007-08 to a net debt position peaking at 8.9% of GDP by 2011-12 – a widening of around 13% of GDP.
According to the IMF data base, Iceland’s net debt is projected to rise by 58% of GDP, from 11% in 2007 to 69% in 2012.  Ireland’s net debt is projected to rise by 92% of GDP from 12% in 2007 to 104% in 2012. 
Then there’s this suggestion:
  • Mr Robb said a commodities slump could push Australia into European budget crisis territory. “Debt just keeps growing under this government and if we experience any downturn in commodity prices the $50 billion budget deficits that have become the norm under Labor will stretch out as far as the eye can see,” he said.

Let’s have a look at some of those “European crisis levels” of net government debt:
Between 2007 and 2012, net government debt is projected to rise by 53% of GDP in Greece (from 105% to 158%); Portugal 32% of GDP (from 58% to 90%) and Spain 30% of GDP (from 26% to 56%).
As an aside, according to the same IMF database, net debt in the US is projected to rise by 35% of GDP between 2007 and 2012 (from 42% to 77%); in the UK, the rise is 41% of GDP (from 38% to 79%), while in Italy, is a relatively modest 13% of GDP albeit from a high starting point (from 87% to 100%).
All of which make’s Mr Robb’s claims completely ridiculous and for him, quite embarrassing. 
Posted in Stephen Koukoulas | Leave a comment
16
Jan
2012

>A Bond Market Boom

>

In simple terms, there are two key drivers of 10 year government bond yields – risk and inflation.  Right now, I think all sensible people would suggest risk is very elevated which is a key factor biasing yields higher.  In countries where there is no dispute about what is elevated risk (Greece, Italy, Portugal, Spain to name a few), yields are stunningly high.  This seems sensible.

In many other countries, 10 year bond yields are stunningly low.  The 10 year government bond yield is currently around 1.85% in the US, 0.80% in Switzerland, 0.95% in Japan, 1.95% in the UK and 1.75% in Germany.  With the notable exception of Switzerland, these other countries are hardly rolled gold examples of fiscal rectitude and low risk.

So why are yields so low in these countries?

In terms of inflation, there has been a small pick through 2011 although the hugely problematic outlook for the global economy suggests inflation won’t go much higher.

Indeed, part of the story could be that the market is pricing in a deflation funk in the year ahead.  If inflation was to fall sharply, these low yields could well be justified and not painted as some form of bubble.

But there is another factor – the massive central bank intervention in the guise of quantitative easing, printing cash, whatever you wish to call it has been targeting the bond market and working to push yields lower.  This unconventional monetary policy action is in place because most central banks can’t cut interest rates any more (anyone fancy a -2% cash rate?).   Central banks are working to push bond yields lower in the hope of pushing borrowing rates lower for businesses and households.  This of course is because they are as they try to engineer some form of economic recovery and help the otherwise insolvent banks.

Fair enough too.  It’s all hands on deck to try to minimise the misery that a rolling recession brings in the form of high unemployment and wealth destruction.

For now, it seems likely that bond yields will stay stunning low.  There needs to be many months (maybe even a couple of years?) where growth is unquestionably robust before yields click higher even though with each massive budget deficit, the risk level rises. 

Posted in Stephen Koukoulas | Leave a comment
16
Jan
2012

>Of Electricity, Beer & Mars Bars

>

Some wise heads suggested that I shouldn’t take too much notice of comments from usually anonymous contributors on any article published … and I think this is probably good advice.
That said, it is hugely interesting and enlightening to see how people responded when my article, Electricity versus Beers versus Mars Bars (http://tiny.cc/l3652 ) was published on the ABC’s The Drum this morning under the title, Worse Off Under The Carbon Tax?  Hardly…
Obviously The Drum has a wider audience than my humble blog, but I find it interesting to look at the 290 odd comments http://www.abc.net.au/unleashed/3773412.html  for clues on how some people are viewing the carbon tax and cost of living issues when confronted with some facts on average household spending patterns.
It is clear from the comments how the political debate on dealing with the carbon price is going. 

Posted in Stephen Koukoulas | Leave a comment
16
Jan
2012

>Inflation Is In Check … Mate

>

One of my favourite economic indicators, the TD-MI Monthly Inflation Gauge, shows prices rose a quite hefty 0.5% in December, but this follows a fall of 0.1% in November and a total rise of 0.1% over the prior three months.  As you can easily calculate, over the past 6 or 7 months, inflation is rising at an annualised rate of about 1 and a bit per cent even allowing for the up-tick in December.

There is absolutely no doubt that inflation is decelerating to a point where it is likely to remain at or even will fall below the bottom of the RBA target range of 2 to 3%.  The current sub-trend economic growth momentum, the high (over-valued) Australian dollar and slowing wages pressures are likely to be having some impact on prices.  Also forcing inflation lower is the drop in prices in fruit and vegetables as “normal” seasonal conditions return.
Whatever the causes, it does look like the December quarter CPI (due for release on 25 January), could be stunningly low, perhaps even negative.  If the CPI is zero or indeed negative, it will make an interest rate cut all but certain when the RBA Board next meets in February, with discussion likely to be along the lines:

   Should we cut 50 basis points which means consumers get about 30 and the banks 20 knowing of course that the banks will not pass on anywhere near the full RBA move?

   Should we go just the 25 basis points, see just how much is passed on and revisit the issue at the March Board meeting when we can cut again?

   Should we keep rates steady, risking interest rate rises for retail borrowers as banks pass on higher costs, leaving the already over-valued AUD to rise further and risking a sub-trend growth rate for a little longer?

Clearly, the first two items will dominate. 
My guess right now is that the RBA cuts 25 basis points next month and signal it is on a path to further cut rates in the months ahead.  A 50 basis point cut cannot of course be ruled out.  Global conditions are fragile and central banks elsewhere have in place some of the easiest monetary policy ever seen.  Australia is no where near that.  In addition to the low inflation rate, unemployment is edging up, wages growth is slowing, house prices are falling, credit growth is stuck in the mud and the fiscal policy tightening is still working to dampen activity.
As an aside:  Roughly 10 years ago when I was looking how best to created a monthly inflation gauge for Australia with Professor Don Harding and Dr Lei Lei Song, it was thought best to have a timely measure which detected changes in inflation momentum.  We were not too hung up about trying to replicate the ABS CPI (which would require a different methodology), but nonetheless, we have been delighted to see just how accurate the inflation gauge has been in level and year over year terms since it was created.  The gauge was meant to be most useful when there was a clear run of consistently higher or lower inflation readings because there could be some confidence that inflation pressures were also changing in that direction.  Of course, as the ABS note, monthly data are by construction more volatile than quarterly readings, but there is nonetheless a lot of timely information in the monthly inflation gauge we created.

Posted in Stephen Koukoulas | Leave a comment
13
Jan
2012

>The Global Economy – On A Knife Edge

>

While no real surprise, the credit rating downgrades meandering through Europe only go to reinforce the parlous nature of the global economy and its financial markets.  This is not just because the eurozone, as the world’s largest economic entity is almost inevitably lurching into a recession, but because when the public finances of the US are considered, it too is likely to be downgraded further over the course of 2012.

On current projections, the level of net government debt in 2015 with be around 15% of GDP higher in the US than in the eurozone as a whole.  The structure of Congress and the huffing and puffing around the Presidential election means that fiscal settings will more likely drift for longer.  It’s not a welcome outlook.

Throw in the fact that monetary policy options in most G7 countries are hamstrung by a zero bound on interest rates and more quantitative easing will be as useful as an ashtray on a motor bike, and it looks increasingly likely that 2012 could be a bad one for the world economy.

Sure, there have been a few snippets of better economic news in the US in recent times, but these could merely be related to unseasonably warm weather rather than a sustainable shift in the growth momentum.  It will be telling as to whether the better news is sustained into March.

For Australia, the government is locking in a pretty dramatic fiscal tightening which for the moment should be continued.  This together with the massive headwinds from the world, mean a lot of the policy lifting will fall to the RBA.  And with the banks signalling clearly that the margin between their retail rates and the RBA cash rate will likely widen, many more rates cuts are destined for 2012.

How low will rates go?

Who knows.  But expect to see the cash rate down to 3.5% by mid year with all the risks skewing to yet lower rates beyond that.

Posted in Stephen Koukoulas | Leave a comment
13
Jan
2012

>ANZ Points to Rate Hike

>

The ANZ January interest rate review (http://ow.ly/d/sLF) left variable interest rates for mortgages and small businesses unchanged.  Strategically this was no surprise, but the ANZ is doing a good job at starting to articulate the breaking of the link between official interest rates set but the RBA, its funding costs and therefore the interest rates is changes retail borrowers.
There was a clue in the statement that funding pressures will cause the ANZ to either hike retail rates in the months ahead or more likely, not pass on in full any future cuts in interest rates delivered by the RBA.
ANZ CEO Philip Chronican noted:
  • “we wanted to be clear that these higher interest rates we are now paying our depositors and the elevated prices we are required to pay for wholesale funds are going to be sustained”.

 In other words, the gap between official interest rates and retail rates will continue to widen.
There are some implications for markets from this – for the RBA to achieve its monetary policy objectives by targeting retail borrowers, official rates will be lower than they would otherwise be.  As a result, market pricing for future interest rate moves should be heavily biased to lots of cuts.  3.5% still looks a reasonable target for the cash rate mid year, with the risks to the downside as inflation falls.  Or it could be that the bottom of the interest rate cycle will be pushed out to the second half of 2012 or even 2013.
This may well help undermine the Australian dollar which remains overvalued on most measures.  

Posted in Stephen Koukoulas | Leave a comment
12
Jan
2012

>Electricity versus Beer versus Mars Bars

 

It’s less than six months until the carbon tax comes into effect.  There already has been and no doubt will be a kerfuffle about the impact of pricing carbon on household budgets.  The best estimate from Treasury is that the carbon price will impose a one-off rise of 0.7 per cent in the Consumer Price Index (CPI).  In other words, for every $100 currently spent on household items, prices in total will rise by 70 cents.
One of the popular and certainly headline grabbing ways that opponents of the price on carbon try to demonise the issue is to create an impression that there will be a huge impact on electricity prices and therefore household budgets will be under increasing pressure.  Spending patterns of the average household based on the weights in the CPI show that this issue is massively exaggerated given what else the average householder spends their money on.
When the facts are examined, it’s hard to see how the average Australian will “do it tough” when the price on carbon takes effect given what else we spend our money on.  The upcoming rise in electricity prices, which builds on what have already been large increases over the last few years, is small beer in the scheme of household expenses.
According to the weights and items in the CPI, spending on electricity accounts for 2.1 per cent of all household spending.  Sure, it is usually a one-off quarterly bill that makes most of us gasp, but did you know that the average household spends more on beer (2.2 per cent of all household spending) than they do on electricity?  Throw in wine and spirits, and total household spending on alcoholic beverages is 4.7 per cent of household spending – well over the double the amount we spend on electricity.
While some may jokingly argue that a few beers and the odd chardonnay are essential items, it puts in perspective the impost that the carbon price will impose on the household sector.  Most Australians face a First World Problem of having to pay a few dollars extra each week for their electricity, whilst simultaneously spending twice the amount they spend on electricity on a few beers and the odd gin and tonic.
But it’s not just beer that we spend more on than electricity.
The average household spends 2.3 per cent of their hard earned income on tobacco.  Give up the smokes and you can double your use of electricity and be financially better off!  I dare say spending on health would also decline.
Again the electricity issue is put into some perspective given that “meals out and takeaway foods” account for a whopping (or is that a whopper?) 5.4 per cent of household spending.  In other words, the average household spends two and a half times more on restaurant and takeaway meals than they do on electricity.
In addition to that, 1.0 per cent of household expenditure is on “snacks and confectionary” with an additional 0.9 per cent spent on “waters, soft drinks and juices.”  Together, spending on mars bars, chips and bottled water account for almost as much as is spent on electricity.
Finally for now, 4.9 per cent of household expenditure is on holiday travel and accommodation, split roughly half between domestic adventures and overseas sojourns.  Another First World Problem it seems which again puts in context the rise in electricity prices and the overall price level when the price on carbon kicks in.
I suspect the price of electricity generates an emotive response because prices have risen dramatically over the past 5 years or so.  What’s more, the electricity bill is a large one-off amount that creates a shock when it comes in unlike spending on beer, confectionary and the odd takeaway chicken tikka masala which is a few dollars here, a few dollars there, but spread out over time.
Oh, of course there’s the compensation to most households that will be delivered as a result of the carbon tax.   The bulk of households will soon be getting an increase in their social security payments or cuts in tax rates, paid for by the revenue received from the carbon price.   This means that most households will in fact be better off when the carbon price comes in, even if spending patterns don’t change.  Imagine how much better off we all could be financially if we spent a little less on the booze, cigarettes, burgers and soft drink?  I wonder what all the fuss is about?
Posted in Stephen Koukoulas | Leave a comment