Friday, October 16, 2009

Rate rises do matter to consumers

Just incase you think that a rate rise wont dampen consumer confidence, or that it takes time to work its way through to discretionary expenditure, maybe you should consider the take up of pay TV as a guide.

Robert Gottliebsen was interviewing Kim Williams for Business Spectator. Williams is the head of Foxtel in Australia. If you've been watching any TV lately, you'll know that Foxtell are currently conducting a major marketing campaign (perhaps irritatingly so). In the interview Williams mentioned he noticed that when the Reserve Bank increased interest rates last week, pay TV order conversion dropped sharply, despite inquiries remaining strong.

Bull market or just bull?

"Foundations for a bull market are now as strong as they've been in years,
though an early and sustained uptrend can't be taken for granted"
"I think it is pretty well conceded that we have reached or passed the bottom of
this depression and from now on can look to gradually improving business"

Do these quotes from news reports sound familiar?

They probably should. Lately we've been hearing them as regular as clockwork. However, these particular ones aren't from last weeks papers or your favourite business show, they're from the Wall Street Journal back in October, 1930

This is not 1930 but back then, a few good months months lured investors back into the market, just like they're doing now. Hindsight is a wonderful thing and it tells us that the optimism apparent the year after the 1929 stockmarket crash soon proved woefully premature.

Back in 2009 and the Australian sharemarket has risen by more than 50 per cent since it bottomed in March. Even more incredibly, the troubled US market is up almost 50 per cent! What is driving these gains?

There are concerns we're becoming a bit complacent – and in some cases, even irrationally exuberant. Cautious optimism beats irrational exuberance in any market, but especially this one.

(source: Sydney Morning Herald)

Thursday, October 15, 2009

BIS says rate increases a mistake

Chief economist for BIS Schrapnel, Frank Gelber, thinks the Reserve Bank has increased interest rates too soon. Glenn Stevens was as nervous as all hell about a cash rate at 3 per cent but rates in most other economies are going to be stagnant and hovering at less than 1 per cent for some time to come. Although a significant contributing factor, the Aussie dollar was rising independent of interst rates. Further increases in the dollar's value is going to have an real impact on a range of sectors beyond commodity exports.

Here is Gelber's argument;

We all know that interest rates have to rise, and rise substantially, at some stage. These are emergency rates resulting from the global financial crisis and intended to prevent recession.
Australian rates aren't nearly as low as overseas rates. Mind you, most of the Western world really needs low rates. They face severe recession. To turn around the old saying, America has a bad flu but we're only sneezing. The US, Britain and parts of Europe are experiencing financial crisis but we're experiencing a credit and equity squeeze.

I thought the rate rises would start later. But now that they have begun, the question is not so much how many more rises are to come, but when. One, or even several, rate rises won't be fatal. The damage would come from a series of aggressive rate rises, stifling recovery.
And there is still time for the Reserve Bank to postpone further interest rate rises until the economy does strengthen. By the end of the tightening process, cash rates will go back to a neutral rate of about 5.5 per cent. Indeed, we think they'll overshoot and end up at about 6.5 per cent. But we think that will be in 2012 when the economy is strong.

Timing will be important. As always, for the RBA it's a balancing act. The trick is to tighten from the current unsustainably low levels without damaging economic recovery.
Why did they raise rates so early? What are they trying to achieve? I hate trying to second-guess the RBA's logic, but this is important. The RBA obviously thinks the economy is a lot stronger than we do. Even in these more open and enlightened times, RBA statements tend to be vague, and open to several, often contradictory, interpretations.

Having said that, they seem to think that investment is recovering. It's not. The capital expenditure figures were boosted by the tax concessions on equipment investment. And government building and infrastructure spending, though strong, won't be enough to offset the prospective collapse of business investment.

The construction sector's direct and indirect contribution of about minus 2.5 per cent this financial year, won't be as bad as the negative 4.7 per cent that caused the downturn in 2001. But the shock will be hard to withstand. Worse, not only will investment decline this financial year, but it will happen when household disposable income is weak. Business profits have started to fall. The sector is just emerging from a credit squeeze and, when finance is available, companies face high interest rates. So business is in cost-cutting and cash preservation mode, curtailing unnecessary investment.

Meanwhile, sluggish wages and employment growth means that household disposable income is weak, indeed negative in real terms, and that will constrain spending. Rising interest rates will further weaken household incomes. The run of good data will end. There will be some pretty weak readings towards year end as government stimulus recedes. The data will weaken with the economy. And confidence will sag with the data.

Confidence can't be sustained under its own steam. It's strong now with the improvement in the economic indicators and less fear of unemployment. But the world isn't a series of indicators in isolation. When news on the weaker economy comes through, the indicators will deteriorate and confidence will weaken.

Having said that, a few interest rate rises won't do a lot of damage. And just as well.
In this environment, households are tending to absorb much of the stimulatory effect of last year's interest rate declines by maintaining their mortgage payments, thereby reducing debt more quickly.

The other side of the coin is that this gives them more leeway to maintain (and not increase) payments in the face of rising interest rates, thereby cushioning the impact on spending. The cohorts most affected are recent housing buyers who stretched to finance large mortgages.
But it's bad for the dollar and competitiveness. And that's contractionary. Australia is tightening before other Western countries, raising the interest rate differential and boosting the Australian dollar.

That's a disaster for what's left of the domestically produced tradables industries -- in particular manufacturing, tourism and education for overseas students. And, while primary production and Chinese demand remain strong, the higher dollar hurts prices received for agricultural and minerals commodities. With weak investment, weak household disposable income and an overvalued dollar, I wouldn't be surprised to see a negative September or December quarter gross domestic product result.

Only housing is picking up. But we need the housing recovery to drive growth. And we need the housing. The rate rise will reduce household disposable income and therefore expenditure and reduce the affordability and hence demand for residential property. Maybe the RBA is trying to dampen the aggressiveness of housing owner-occupiers and investors so that there is less damage as interest rates do rise.

Meanwhile, there is no hurry to raise interest rates. With overseas rates likely to remain low, the resultant strong dollar will dampen already weak growth and perhaps cause structural damage to the remains of our tradables industries. I would have waited until well into next year.

Wednesday, October 14, 2009

Budgets: A tale of two garages

Of course budgets can be very useful, it’s just that when created they usually require a great deal of self discipline. The simple fact that you need a budget to get out of financial trouble is exhibit number one that self-discipline was probably absent in the first place. Pinning your financial dreams on the assumption that you’re going to be “good” next month generally leads to devastatingly poor results. Your personal finances are too important to risk with little more than hope and optimism.

Just incase you think that the previously absent self discipline will save you from financial flagrancy tomorrow, take this brief exercise:

Question: How much self-discipline do you have today?
Answer: Exactly the same amount as you’ll have tomorrow.

In his book “How to live within your means and still finance your dreams”, Robert Ortalda suggests that to understand the discipline required to maintain a budget; “you have to think about garages”. He says, and I agree, there are generally two types of people when it comes to garages. There are those that have clean and tidy garages, and those that have messy ones.

The clean ones are maintained by an exclusive group of garage zealots. They have peg-boards on the walls with pictures of the tools and things that should be hanging there. You never get to see the picture of the thing because the thing that should be hanging there always is. Jam jars are screwed into lids that are nailed to shelves. These contain every sort of nut, screw, nail, grommet and widget any self-respecting handy-person could ever need. Everything has a place and everything is in its place. And may whatever god you believe in help you if you move anything or don’t put something back.

The other type of garage is always full of mess. Things go in there and then they don’t come out again. The car has trouble fitting in. It’s full of dust and empty paint tins. The people who have these kinds of garages have a mantra they keep chanting over and over again “One day I’m gunna clean out the garage”.

Finally that day eventually does arrive and after several mini-skips, the garage is beautifully clean. It’s so good its just missing the peg-board with the pictures. But after a while is gets messier and messier and finally it’s back to the way it was. Then the mantra begins again “one day I’m gunna clean the garage”

The people who own the first type of garage demonstrate a tremendous amount of self-discipline. They have to. It takes a lot of thought and a lot of work to keep a garage that clean. Daily maintenance – sweeping, tidying, putting things back on the pegboard after you finish with it – not leaving it where you were working.

For a budget to work, it’s got to be designed with the second type of person in mind. Those who sporadically like to clean out the mess.

If you think it’s easier to tweak the little expenses and do it week after week to save twenty or thirty dollars, then go ahead and knock yourself out. I reckon it’s a lot easier to just to do one or two biggies and enjoy the savings over and over without the effort. Why scrimp on essentials that call out to you every time you shop when you can just scrap the cable TV and save heaps. These are ‘structural’ changes to the way you previously spent your money. Doing things this way makes daily self-discipline significantly less important. Kind of like ripping off a band-aid – do it fast and do it once. Or if you’re into it, you can go the other way and slowly take it off over and over again, day after day of band-aid ripping.

Sure the once off clean-out can cause pain. I know you can’t watch re-runs of Seinfeld and keep up with the latest on Fashion TV when you dump cable but when you get your financial house in order you can always put it back on. When you do you might find that Jerry has come out of retirement and you can watch new episodes – oh but wait, you’ve already seen those on free to air!

Tuesday, October 6, 2009

October interest rate rise?

(source: Sydney Morning Herald, 6 October 2009)

Monday, October 5, 2009

40 per cent less millionaires

Australia has taken third place in a survey of the biggest casualties of the global financial crisis, a report shows. Boston Consulting Group's latest Global Wealth Report found Australia suffered the third largest drop in personal wealth among 62 countries surveyed, due to a high exposure to equities markets.

Personal wealth in Australia - excluding housing and self-owned businesses - fell 27.1 per cent to $1.67 trillion in 2008, from $2.3 trillion in 2007. Only the UK and Sweden experienced larger declines in personal wealth, losing 32 per cent and 28 per cent respectively.
Globally, personal wealth dropped to $US92.4 trillion in 2008, from $US108.5 trillion in 2007.

The report also shows that the financial crisis slashed the number of millionaire households in Australia by 40 per cent. Millionaire households in Australia, as measured by households with minimum personal wealth of $US1 million, fell to 49,452 in 2008, from 82,242 in 2007.

(source: Sydney Morning Herald)