‘I for one welcome our new social-democratic overlords…’
Australia’s federal election has seen a change of government, with the Labor Party set to win 86 seats in the House of Representatives against the incumbent conservative Coalition’s 62 seats. The Labor Party secured a two-party preferred swing of around 6%, to win its largest two-party preferred vote share in the post-war period of around 54%. It is likely that incumbent Prime Minister John Howard will lose his seat in parliament. The Coalition will also lose its majority in the Senate. The decisive nature of the Labor win should minimise any negative implications for financial markets that might have arisen from the possibility of a hung parliament or minority government.
The change in government opens up a number of possibilities for positive change. There is a good chance the Labor Party will finally address the Coalition’s legacy of failure in relation to statutory reform of central bank governance, which has left the Reserve Bank of Australia as one of the developed world’s least accountable and transparent central banks. Outgoing Treasurer Peter Costello cites central bank reform as one of his greatest achievements when it is in fact one of his many failures as Treasurer.
Costello’s other great failing as Treasurer was to withhold the benefits of national prosperity from the Australian people, by hoarding Commonwealth revenue on an unprecedented scale. Rather than continuing to nationalise private equity capital and other assets via the Future Fund, it is to be hoped that the ALP will lower the record federal tax burden Peter Costello inflicted on the Australian people.
Malcolm Turnbull has held on to the seat of Wentworth against the odds, almost securing a majority in his own right on the primary vote. The anti-pulp mill left were repudiated, despite a massive campaign against Turnbull. The Labor Party’s George Newhouse was literally bitch-slapped. The result gives Turnbull ample authority to contest the leadership of the federal parliamentary Liberal Party. Turnbull is the Liberal Party’s best chance for renewal.
Perhaps the worst aspect of the federal election is that the balance of power in the Senate will be held either by anti-gaming wowser Nick Xenophon in combination with Family First’s Steve Fielding or the Greens. It is hard to know which of these two possibilities is least friendly to our liberties.
UPDATE: As we predicted back in June, Costello does not have the stomach to lead.
UPDATE II: Turnbull declares!
posted on 25 November 2007 by skirchner in Economics, Financial Markets, Politics
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‘Beyond Insane’
Terry McCrann continues to do battle with those who favour more Commonwealth revenue hoarding:
Imagine if Costello was handing Swan a $60 billion annual surplus—close to a quarter of a trillion dollars over the next four years. The same Swan who is absolutely dedicated to keeping “downward pressure on interest rates”.
Now, of course, we cannot assume either the Mandate of Heaven or the dollars it bestows are already “in the bank” for even the next four years. Further, we still face the fundamental uncertainty of whatever comes out of the US over the next year or so.
This, though, does not validate the depressingly ubiquitous demand from too many economists that such surpluses should be “banked” to allow the “automatic budget stabilisers” to work and/or to target lower or stable interest rates.
The idea of running a “flexible fiscal policy” to target a stable interest rate is beyond insane. And which rate would be appropriate? An official rate of 7 per cent, 6 per cent, 5 per cent?
When we have experienced a structural (upward) shift in budget revenues, the money has to be spent. The only question is whether in tax cuts or in service delivery or infrastructure…
The increases in official rates over the past few years have only succeeded in getting rates back to a sensible level, commensurate with an economy growing at 7 per cent-plus in nominal terms.
posted on 24 November 2007 by skirchner in Economics, Financial Markets
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Election Eve Round-Up
David Uren blames Paul Romer for Ruddonomics:
Rudd is influenced by the new growth theory of Californian economist Paul Romer. Where traditional economics says economic growth results from the forces of labour and capital coming together, assisted by the fortuitous development of new technology, Romer argues that investment in knowledge is a measurable input and part of the growth process. New technology doesn’t appear like manna from heaven but requires investment in education.
Labor’s take on Romer’s work is that investment in education will produce long-term dividends in economic growth. Its election promises such as the tax rebate for education equipment and funds for school computers are tokens of its new approach and could be expected to be followed, if elected, by a more substantial shift of budget priorities towards education.
Econtalk has a superb interview with Paul Romer, in which Romer is very careful to disassociate himself from some of the many abuses of endogenous growth theory.
Sinclair Davidson and Alex Robson calculate the tax cuts that could have been financed out of the election spending promises of Labor and the Coalition:
According to the Coalition’s own calculations of the size of its and Labor’s tax cut and spending commitments, the average taxpayer earning approximately $60,000 per annum would receive a benefit after four years of $65 per week under the Coalition’s plans and $52 per week under the ALP’s plans—if each party’s tax policy was implemented and if the amount each party promised in new spending was instead devoted to tax cuts. If the Sunday Telegraph’s calculations were used these figures would be $58 per week under the Coalition’s plans and $47 per week under the ALP’s plan. Using the estimates of The Age/SMH and The Australian after four years the average taxpayer would be $94 per week better off under the Coalition, and $66 per week better off under Labor.
It can be said therefore, that regardless of who’s figures are believed the average taxpayer would be better off after four years by at least $58 per week under the Coalition and $47 per week under Labor, Labor, if tax cuts were delivered instead of spending increases.
The Intrade federal election contract is giving an 88% chance to a Labor win, although there is actually more market depth on the short-side of the Labor contract, suggesting that at least some people are looking to take advantage of Labor being over-priced.
posted on 23 November 2007 by skirchner in Economics, Financial Markets, Politics
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The Dow Theory Sell Signal
Financial newsletter tracker Mark Hulbert notes that the Dow Theorists are selling:
the DJIA seesawed all day Wednesday above and below its August closing low of 12,846. In fact, it wasn’t until the final few minutes of trading that it became clear that it would close below that level, and thereby trigger a Dow Theory sell signal.
The Dow Theory’s popularity should trigger additional selling when investors currently on vacation return from their Thanksgiving holidays, either on Friday, or more likely this coming Monday.
Barry Ritholtz quotes Richard Russell of Dow Theory Letters:
People don’t understand the significance of the ‘bear market signal’ of November 21. I stated on Wednesday’s site (Nov. 21) that the breakdown of the Industrials signaled THE EXISTENCE of a primary bear market. It didn’t signal the beginning of a bear market, Wednesday’s action gave us the final word via Dow Theory that a primary bear market was in force.
... A precept of Dow Theory is that neither the duration nor the extent of a bull or a bear market can be predicted in advance. It is far easier to IDENTIFY the end of a bull or bear market than it is to predict their end. Bull markets tend to build extended and often deceptive tops while bear markets tend to build more definite and identifiable and faster bottoms. Therefore, it’s usually easier to identify the bottom of a bear market than it is to identify a bull market top.
... I expect a lot of wild and confusing movements from the stock market in the days ahead. But I remind subscribers that a rally here, even a powerful rally, will not mean that the bull market has suddenly been reborn. This bear market will not end in four months. But any rally here will allow subscribers to ‘trim their sails’.
posted on 22 November 2007 by skirchner in Financial Markets
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That 1969 Feeling
Matthew Johnson argues that financial markets should be getting nervous ahead of this weekend’s federal election in Australia:
It’s starting to feel a little bit like Florida 2000 to me. It’s perfectly possible for the Coalition to win in court (Newhouse’s invalid nomination) and to do so with a minority of the vote. Given this risk, I’d sooner not go home long AUD or Aussie equities on Friday – no decision creates complications in all sorts of places (FIRB for example), and it’d be a clear ‘sell Australia’ signal.
Instead, I would suggest it is starting to feel like 1969, when the Labor Party secured its largest post-war two-party preferred swing of 7.1% and a majority of the national two-party preferred vote, yet failed to secure a majority in the House of Representatives. Indeed, 21% of post-war elections have been won on a minority of the two-party preferred vote (1954, 1961, 1969, 1990 and 1998).
Amid broad-based USD weakness, the Australian dollar has been a notable underperformer in the run-up to the election. Recent AUD weakness reflects flight from currencies with negative net international investment positions in favour of the Japanese yen. But the AUD has also underperformed those currencies with which it is traditionally highly correlated. AUD-EUR has broken below multi-year trendline support from the October 1998 monthly lows. AUD is also underperforming its commodity bloc peers NZD and CAD, with AUD-NZD slipping to lows of 1.1529, levels not seen since late August, while AUD-CAD fell to a low of 0.8540, below the highs for the year at 0.9512. Weakness in base metals prices is the most likely explanation for the underperformance of AUD. But this weekend’s federal election and the risk of a hung parliament may also be playing a role.
posted on 22 November 2007 by skirchner in Economics, Financial Markets, Politics
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The Dynamic Benefits of Tax Cuts
Alan Wood, on why fiscal policy should not be used for demand management:
fiscal policy has a higher purpose than keeping interest rates at politically comfortable levels. Would we really be better off, as the Government’s critics suggest, with budget surpluses of 3 per cent, 4 per cent, or 5 per cent of gross domestic product and lower interest rates?
The answer is no. The appropriate role of fiscal policy is to redistribute the revenue windfall from the China boom in economically productive ways, and tax cuts meet this criterion admirably. If this leads to higher interest rates than otherwise, so what?
At worst the contribution is marginal compared with the other forces at work on the economic cycle, and the dynamic economic benefits exceed the costs. For most of the past five years, according to the RBA, fiscal policy has had no impact on monetary policy.
And according to analysis by IPAC’s Johnson, even under the extreme assumption that the tax cuts were entirely responsible for the interest rate rises that did take place, the economy-wide benefits exceeded the cost by several billion dollars.
Howard and Costello’s mistake has not been their tax cuts, but the fact they didn’t deliver more vigorous tax reform earlier in the economic cycle, before the economy ran up against capacity constraints.
As we noted at the beginning of the election campaign, Federal government revenue hoarding has also been bad political strategy. The government’s campaign promises in relation to further tax cuts would have been much more credible had they been announced in the May Budget and legislated ahead of the election campaign. As things stand, the tax cuts were a one day wonder, long since forgotten amid all the election campaign trivia.
posted on 21 November 2007 by skirchner in Economics, Financial Markets, Politics
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China’s Credit Crunch
The Chinese authorities are resorting to administrative window guidance in order to control the inflationary implications of the exchange rate peg to the US dollar, according to the WSJ:
In recent weeks, regulators have quietly ordered China’s commercial banks to freeze lending through the end of the year, according to bankers in several cities. The bankers say that to comply, they are canceling loans and credit lines with businesses and individuals.
A China Banking Regulatory Commission official here confirmed that local and Chinese subsidiaries of foreign banks have been asked to ensure that loans at the end of the year don’t exceed the total outstanding on Oct. 31. The official described the request as “guidance aimed at supporting the macro-control measures being implemented.”…
Bankers say they will honor the lending edict, partly because it comes with threats of financial penalties for noncompliance. “Which commercial bank would dare not obey this?” says Liu Haibin, chairman of the supervisory committee of Shanghai Pudong Development Bank Co.
posted on 19 November 2007 by skirchner in Economics, Financial Markets
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US Dollar Down, or Euro Up?
Alan Reynolds notes that there are two sides to any exchange rate:
Is the dollar down or is the euro up? It is the same thing viewed from different sides, of course. Yet the topic is too often viewed from just one side. Looking at the dollar alone, many economists blame the Fed for lowering interest rates. Viewed from the other side, however, one might wonder why other central banks have not lowered their interest rates.
Rising currencies are not necessarily a sign of strength. The U.S. dollar rose sharply before and during the recession of 2001. The trade-weighted index of the dollar’s value against 26 currencies rose 10.5% from March 2000 to January 2002, as the stock market and economy tumbled…
The euro’s recent rise involved betting on the expectation that the Fed will soon cut interest rates again, but also that the ECB will not follow suit. Yet the ECB has always followed the Fed’s interest-rate moves, albeit quite slowly. The ECB did not begin reducing rates until May 2001—five months later than the Fed. And the ECB did not put rates above 2% until December 2005—a year later than the Fed.
posted on 15 November 2007 by skirchner in Economics, Financial Markets
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The Cato Institute’s 25th Annual Monetary Conference
The Cato Institute held its 25th Annual Monetary Conference yesterday. Fed Chair Ben Bernanke used the occasion to announce some important enhancements in the transparency of the Federal Reserve’s economic forecasts. The WSJ’s RTE blog has a round-up of reactions to the changes.
posted on 15 November 2007 by skirchner in Economics, Financial Markets
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Peter Costello and Interest Rates
A remarkable story, if true:
Jon Faine on ABC 774 in Melbourne has revealed yet another extraordinarily ill advised conversation between a leading politician and a journalist.
The Treasurer, Peter Costello, was in Faine’s studios in late September and during a break for the news, Faine said to him: “I can’t believe you haven’t called the election to get it out of the way before the cup day interest rate rise.
“He looked me in the eye. He put his thumb down as he sat there in the chair and he said, ‘There will not be a rate rise in November. Take it from me.’
“I said : ‘You might be right, you might be wrong, but you’re prepared to punt on it.’
“And he said : ‘There will not be a rate rise in November.’…
How is it that the Treasurer of the country could so misread the mood of the Reserve Bank Board when virtually every analyst in the country was predicting the opposite?
posted on 08 November 2007 by skirchner in Economics, Financial Markets, Politics
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Blame Martin Place III
The statement accompanying today’s increase in official interest rates on the part of Reserve Bank confirms what was already effectively implied by the Q3 CPI outcome:
By the March quarter of next year, both headline and underlying measures of inflation are likely to be above 3 per cent.
This forecast presumably includes the anticipated impact of today’s tightening. The RBA will be unable to publish a target-consistent inflation forecast in its November Statement on Monetary Policy. The RBA is effectively admitting to a monetary policy mistake. It is Governor Stevens rather than John Howard who should be in the dock.
The question that has to be asked now is, what path will official interest rates have to follow to bring the inflation forecast back into the 2-3% target range? On this, the RBA was characteristically silent. There is really no excuse for the RBA failing to spell this out in today’s statement or next week’s quarterly Statement on Monetary Policy. The RBA continues to short-change the public with its lack of transparency in relation to its future policy intentions. The Bank is only making its job harder, by robbing itself of the ability to let market-determined interest rates do some of the required tightening work. Interbank futures are still giving less than a 40% chance to a follow-up tightening in December.
posted on 07 November 2007 by skirchner in Economics, Financial Markets, Politics
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Who’s to Blame for Higher Interest Rates?
Andrew Norton notes a Gallaxy poll on interest rates:
‘If interest rates rise again in the near future, which of the following do you believe is mainly to blame?’
The political answer, John Howard, received blame from only 12% of respondents - 17% of Labor voters and 3% of Coalition voters. The other responses were ‘international factors’ (37%), the Australian economy (30%), and the Reserve Bank (14%).
‘International factors’ and the ‘Australian economy’ happen to be the most correct answers. It suggests that the electorate are actually much less parochial than the commentariat and also understand the endogeneity of interest rates to economic conditions. If the electorate can grasp these basics, what’s the commentariat’s excuse?
posted on 06 November 2007 by skirchner in Economics, Financial Markets, Politics
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Equines and Equities: The Cup Day Effect
Alan Wood considers the Melbourne Cup Day effect:
Worthington applies econometric techniques to isolate the impact of the Cup from the other stock market anomalies, such as the day-of-the-week effect, mentioned earlier. He studies closing prices on the
Australian Stock Exchange over the 45 years from January 3, 1961 to December 30, 2005 - 11,327 trading days. And what does he find? Stock market returns on Melbourne Cup day are not only significantly higher than on any other Tuesday in November, but also higher than on any other Tuesday of the year.
They are also higher than Monday, Wednesday, Thursday and Friday returns throughout the year, and less volatile.
In short, the Melbourne Cup is associated with abnormally high returns on the Australian stock exchange. On Melbourne Cup day in 2005 alone, the Cup was associated with abnormal gains of more than $2 billion.
posted on 06 November 2007 by skirchner in Economics, Financial Markets
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State Capitalism: The Rise of Sovereign Wealth Funds
Alan Wood discusses some of the issues around the emergence of sovereign wealth funds, including Australia’s Future Fund:
An emerging theme in international discussion is the return of state capitalism. After decades of privatisation and the retreat of government from state ownership of enterprises, sovereign governments are becoming a major force in global asset markets…
Although most Australians don’t realise it, Peter Costello’s Future Fund, perhaps soon to become Kevin Rudd’s plaything, is a sovereign wealth fund. And in a world where the lack of transparency and accountability of sovereign wealth funds is a major concern, it is open to criticism…
Their assets are already larger than hedge funds ($US1 trillion to $US1.5 trillion) and private equity funds ($US700 billion to $US1.1 trillion).
And their assets are growing rapidly.
Standard Chartered estimates they could total $US13.4 trillion in a decade. They already hold over 1 per cent of the world’s total stock of equities, bonds and bank deposits and could hold 5 per cent or more of the global stock of financial assets in a decade.
posted on 03 November 2007 by skirchner in Economics, Financial Markets
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More Hints of Possible RBA Reform
More hints of possible RBA reform under Governor Stevens:
Reserve Bank governor Glenn Stevens has refused to rule out changing the RBA’s current policy of not publishing board minutes.
At a speech in Sydney on Wednesday night, Mr Stevens said he had an open mind on the publication of minutes, but would want any policy change to ensure that the robustness of boardroom debate was not crimped.
posted on 01 November 2007 by skirchner in Economics, Financial Markets
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