‘I am not proposing that money be free, but…’
Glenn Stevens’ first appearance before the House Economics Committee in his capacity as Governor of the Reserve Bank saw very little change in the dynamics of these hearings.
Committee Chair and federal member for Qantas, Bruce Baird, did his usual thing of reading out loud newspaper articles and seeking the Governor’s reaction, which says a lot about his level preparation for these hearings. The Labor Party’s Sharon Grierson disgraced herself with this contribution:
I am not proposing that money be free, but why can’t Australians enjoy the low interest rates being enjoyed by countries like New Zealand.
New Zealand’s official interest rates are of course 100 bp higher than in Australia, but I guess we can take comfort from the fact that she is not, afterall, proposing ‘free money.’
Glenn Stevens avoided addressing the monetary policy outlook directly in his prepared statement, only to make a more explicit statement under questioning (see Terry McCrann on the significance of Stevens’ remarks). This only serves to highlight the fact that the Bank is being less than candid in its Statements on Monetary Policy and in its opening statements before the Committee.
Governor Stevens’ informed the Committee that his own home was ‘a piece of spec rubbish, built in the 1970s,’ which was somehow meant to be reassuring. Former Governor Ian Macfarlane also had occasion to note the appalling standard of housing in Australia in his own youth. Much of the silly prejudice against housing investment among the commentariat in Australia stems from the failure to recognise how woefully undercapitalised Australia’s housing stock has been, at least until the most recent boom in residential investment.
Stevens laid to rest a long-standing myth that there is a convention against the RBA adjusting interest rates in the context of federal election campaigns:
There seems to be a view abroad that there is some almost unspoken tradition that we do not adjust rates in an election year. I have seen a number of references to my predecessor supposedly having said that. I do not recall that he did say that. What I can recall is that he said we would not be all that keen to be changing them in the election campaign. I know that the political process often talks about being in permanent campaign mode, but what I think he meant by that was the formal campaign in the months prior. He also said if it had to be done it would be. So I do not accept, and I do not think we ever could accept, the idea that in an election year—which, after all, is one year out of three—you cannot change interest rates. When you think about that, I do not think any central bank could accept the notion that somehow a rate change is off limits for one year out of three. That would be crazy. So the answer to the question is: if in August it needs to be done it will be done.
Unfortunately, these myths have a life of their own, and this one will almost certainly feature in pre-election commentary this year.
posted on 22 February 2007 by skirchner in Economics, Financial Markets
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New Appointments at the RBA
Not before time (see previous post), Treasurer Costello appoints RBA Assistant Governor (Financial Markets) Ric Battellino to the position of Deputy Governor of the RBA. Graham Kraehe AO, Chairman of BlueScope Steel, has also been appointed as a non-executive member of the RBA Board. For such a conservative choice for the Deputy Governor’s post, the delay in making this appointment is difficult to fathom. Graham Kraehe’s appointment is unremarkable, although after the Bob Gerard affair, one can only assume he has no outstanding matters before the Tax Office.
The non-executive board members generally vote in favour of the monetary policy recommendations put forward by the bank’s senior officers. As I argue here, given the rubber stamp role of the non-executive directors in relation to monetary policy, it would make sense to separate monetary policymaking from the other governance functions of the RBA Board. As things stand, the main role of the non-executive directors is to allow the Bank’s senior officers to effectively monopolise decision-making. The non-executive members also provide a convenient, though completely bizarre, argument against releasing the minutes of Board meetings. The RBA argues that the non-executive board members are too conflicted by their day jobs to have their role in monetary policymaking open to public scrutiny. In any other governance role, this argument would be completely laughable, but it is one that suits the desire of the Bank’s senior officers to avoid public scrutiny and external interference in monetary policy.
posted on 14 February 2007 by skirchner in Economics, Financial Markets
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The Understrength RBA Board
Treasurer Costello continues to neglect his portfolio responsibilities:
PRESSURE is mounting on Peter Costello to appoint a new deputy governor of the Reserve Bank amid unease in the markets and internally at the length it is taking to beef up the under-strength board…
And with an election due this year, there is a risk that further extended delays could politicise new appointments…
It is now five months since deputy Glenn Stevens succeeded Ian Macfarlane as Governor. But the wait to replace controversial independent member Robert Gerard has blown out to 14 months…
Mr Costello raised eyebrows last year when he said he would look for internal and external candidates to fill the deputy role. But private-sector economists believe any of the three leading internal contenders are more than capable and are puzzled as to why it is taking so long.
A spokesman for Mr Costello said: “The Treasurer has indicated that he will look externally and internally at all the best candidates and that is what is going on.”
Leading contenders for deputy governor are assistant governors Ric Battellino, 55, Malcolm Edey, 47, and Philip Lowe, 45.
There have been rumours Mr Costello could appoint a senior bureaucrat from Treasury to join Treasury Secretary Ken Henry on the board. But recently that rumour mill has slowed. Treasury executive directors Martin Parkinson and Mike Callaghan have been touted as candidates.
posted on 13 February 2007 by skirchner in Economics, Financial Markets
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The RBA’s Inflation Forecast
The RBA’s Statements on Monetary Policy have frequently been criticised on this blog, because up until now they have fallen well short of the detail that has come to be expected from inflation targeting central banks, not least the Bank of England and the RBNZ. However, the RBA’s February Statement incorporates a significant improvement in the RBA’s presentation of its inflation forecast.
Until now, the RBA has presented its inflation forecast in a very informal way. For example, the RBA’s November Statement said little more than that ‘underlying inflation will remain at around 3% over the next year.’ By contrast, the February Statement now includes a table with point forecasts for both headline and underlying inflation for the years ended in June and December 2007, as well as an expected range for the years to June and December 2008. The RBA has also defined what it means by underlying inflation: the average of RBA’s the trimmed mean and weighted median measures of the central tendency of inflation.
This is a significant improvement in transparency on the part of the Bank. The forecasts for inflation still suffer from not being fully endogenous. It makes more sense for an inflation targeting central bank to forecast its own policy rate or to incorporate a market forecast for the policy rate and then base the inflation forecast on this projection. Instead, the RBA still makes its inflation forecast on a ‘no policy change’ basis. There are arguments for and against endogenising the inflation forecast, but the main argument for is that it makes it more explicit that inflation outcomes are not exogenous under an inflation targeting regime. But at least now we have a much better insight into how the RBA’s thinking about inflation informs policy outcomes.
Interbank futures are now giving no chance to an RBA tightening in March, although this probability rises to around 36% by August of this year.
posted on 12 February 2007 by skirchner in Economics, Financial Markets
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Index of Economic Freedom Portfolio
First Trust Portfolios LP (who employ Brian Wesbury as their chief economist), has launched a fund that tracks the Heritage Foundation/WSJ Index of Economic Freedom:
This unit investment trust seeks to provide the potential for above-average capital appreciation by investing in exchange-traded funds, closed-end funds and stocks that we believe are representative of the countries that are identified in the 2007 Index of Economic Freedom.
According to the Liberty Investment Group, who have back-tested the portfolio:
Over the past 11 years, the Economic Freedom Portfolio has far outperformed world stocks in general. While the MSCI World Stock Index rose 140% during this time, and the Emerging Markets Index climbed 85%, the Index of Economic Freedom Portfolio rose an astonishing 254%.
posted on 10 February 2007 by skirchner in Economics, Financial Markets
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‘Wimps, Ninnies & Pointless Skeptics’: The Anatomy of Davos Man
Michael Lewis gets to the core of what’s wrong with the Word Economic Forum:
Davos is where people with no talent for risk-taking gather to imagine what actual risk-takers might do. Davos Man needs to sit in judgment; Davos Man needs to brood. So great is this need that he will brood about virtually anything, no matter how little he knows about it.
So why do these people waste so much of their breath and, presumably, thought, with their elaborate expressions of concern? Even if these global financial elites knew something useful that you and I don’t — that, say, 50 hedge funds were about to go under and drag with them half the world’s biggest banks along with a third of the Third World — they would be unlikely to do anything about it.
And if they really believe the markets mispriced risk, or were about to adjust, they must also believe they could make vast sums of money if they quit their day jobs and opened a hedge fund to take the other side of stupid trades. But they don’t really believe that, or at least some of them would be off doing it, rather than spilling the beans to Bloomberg News.
Is perhaps the only point of standing in the snow and expressing your doubts to a television camera to prove that you are the sort of person whose doubts matter?
Speaking of economic girlie men, Nouriel Roubini is now trying to put me out of business, by providing his own self-critique:
Readers of this blog may also think that the second paragraph above is a [sic] typical Roubini “doom & gloom” fear mongering and describing a scenario that is totally unlikely to occur in 2007.
Just what Nouriel said!
posted on 02 February 2007 by skirchner in Economics, Financial Markets
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I Know What Nouriel Roubini Did Last Summer III
Nouriel Roubini’s forecast of flat US GDP growth in Q4 lies in ruins. Reaction from Brian Wesbury:
Real GDP increased at an annual rate of 3.5% in Q4, beating the consensus forecast of 3.0%. Real GDP was up 3.4% versus a year ago…
Today’s GDP report shows that the economy remained strong in Q4 and suggests robust growth ahead. There are still no signs that the on-going correction in the housing market is damaging the rest of the economy. Excluding housing, real GDP growth would have been 4.8%. Consumption and business investment, combined, contributed 3 percentage points to the real GDP growth rate. Although business investment declined for the first time in almost four years, we believe this will be reversed quickly as firms make use of the past few years of high profit growth and strong corporate balance sheets. Moreover, the decline in inventory investment in Q4 makes room for more GDP growth in early 2007. We also note that the growth rate of nominal GDP over the past two years shows the Fed is still loose and higher inflation is in the pipeline. Nothing in today’s data alters our 2007 outlook for both better growth and more inflation than the consensus expects.
And from Action Economics:
Whereas some analysts in 2006 focused on whether the growth slowdown was excessive, the real issue is whether it will prove adequate to relieve pressure on inflation, as was our concern, and the stated concern of the FOMC since the start of the policy “pause.”
Nouriel now ludicrously refers to his ‘current view of a 2007 hard landing with a growth recession.’ As with all his previous forecasts of gloom and doom, Nouriel’s recession call is forever receding into the distance.
UPDATE: Reaction from the WSJ:
you may have noticed that 2006 ended without a recession. This follows the recessions of 2003, 2004 and 2005, all of which also never occurred, though they were widely warned about in the press and even forecast by many economists at some point during each of those years.
posted on 01 February 2007 by skirchner in Economics, Financial Markets
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Inflation, Interest Rates, the RBA and John Howard
Take two central banks, both with 3% as the upper bound of their inflation targets. One is presiding over an inflation rate of 3.3%, the other 2.6%. Which central bank would you think is more likely to raise interest rates? According to financial markets, it’s the latter, otherwise known as the Reserve Bank of New Zealand. RBNZ Governor Bollard this week warned that further increases in interest rates were likely, causing NZ interest rate futures to tumble and the New Zealand dollar to rally.
Yet across the Tasman, interest rate futures in Australia rallied and the Australian dollar fell sharply as the Q4 CPI came in lower than expected, causing markets to all but price out any future interest rate increases by the Reserve Bank of Australia. The RBA’s preferred measures of underlying inflation are all running at the top end of the 2-3% target range and Australia faces capacity constraints almost as severe as those in NZ, yet there is a much higher level of complacency about inflation and interest rates in Australia than in NZ. This says a great deal about the very different operating styles of the RBA and RBNZ, despite having superficially similar inflation targeting regimes.
The RBA will likely leave its inflation forecast unchanged in its February Statement on Monetary Policy. Coupled with its usual reluctance to venture any meaningful discussion of the policy outlook, this will almost certainly lead many observers to conclude that the interest rate cycle in Australia has peaked, a conclusion that has been erroneously drawn after several Statements this cycle.
The Australian Financial Review’s discussion of the Q4 CPI and interest rates was conducted almost entirely in terms of its implications for federal politics, as if interest rates determined election rather than inflation outcomes. In particular, it was suggested that Prime Minister John Howard might be ‘fortunate’ enough to go into this year’s federal election with interest rates heading down rather than up. But as we have pointed out previously, turning points in the official cash rate are closely related to turning points in the unemployment rate in the opposite direction. If interest rates are heading lower into the federal election, the unemployment rate will almost certainly be heading higher. Which has better predicative power for the two-party preferred vote? According to the models, it’s the unemployment rate. Higher interest rates reflect good economic news, not bad. As an incumbent, I would rather go into a federal election with rising interest rates and a falling unemployment rate than vice versa. My suggestion for John Howard’s next campaign slogan: ‘Who do you trust to keep the unemployment rate low?’
posted on 26 January 2007 by skirchner in Economics, Financial Markets
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Doomsday in Davos
Brian Wesbury reviews the sorry record of the great and the good assembled in Davos:
In January 2006, the global glitterati of business, politics and economics gathered in Davos, Switzerland at the World Economic Forum. A number of participants including Martin Wolf of the Financial Times, Stephen Roach and Lawrence Summers argued that the global economy was unbalanced, and they warned of a potential “adjustment.”
This “adjustment,” many felt, could have serious negative consequences for the global economy. But, even though global economic activity slowed in the second-half of 2006, led by a sharp slowdown in the US housing market, global real GDP growth was 3.9% - an acceleration from 2005 and the third year in a row of robust global growth.
Ironically, this excellent worldwide economic performance, and a continued surge in global liquidity is fueling another round of pessimism this year. With just a few days remaining before the 2007 World Economic Forum in Davos kicks off, there are already news stories that some of these same themes will be discussed again.
As reported by Bloomberg News, Lawrence Summers and ECB Bank President Jean-Claude Trichet will tell the world that it has “become too complacent about risks ranging from trade imbalances to terrorism.” Dr. Summers will warn that markets were very upbeat in mid-1914 before the world turned very ugly. He says that, “complacency can be a self-denying prophecy” - whatever that means.
According to some Nervous Nellie’s, a recent 25% drop in Venezuela’s stock market is a stress fracture in the global financial architecture and indicative of potential problems. But, this is not a very good example. Venezuela’s president Hugo Chavez has just pledged to nationalize many industries, which will cause a huge drop in investment. Economic catastrophes do not happen out of the blue, just because people are complacent, they happen because governments make mistakes.
Freedom and good public policy are the keys to long-term economic growth and market performance, not trade balances, the price of oil or how optimistic private-equity firms become. A sharp movement away from freedom, or a significant mistake in monetary policy are what markets should really worry about. Right now, these mistakes do not appear likely. As a result, the ice cold water at Davos is unlikely to spill over the globe.
Needless to say, Nouriel Roubini will be there again this year, having failed to take the advice of Italy’s economy minister last year. Note that Nouriel is now quietly backing away from his recession forecast:
The US is also fragile as it is not clear whether the bust of the housing bubble in the US will lead to a soft landing as the consensus view goes or a hard landing that could take the form of a growth recession or, less likely now, an outright recession.
Since when does a ‘growth recession’ qualify as a hard-landing? This sounds like a desperate fudge. Nouriel, we know what you did last summer!
Incidentally, when in Davos, be sure to check out the excellent Kirchner Museum.
posted on 23 January 2007 by skirchner in Economics, Financial Markets
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Socially Irresponsible Investing
Chris Dillow points to the Vice Fund, which has achieved an 18% annual average return since inception, with its portfolio of alcohol, tobacco, gaming and defence stocks. Dillow attributes this outperformance to the defensive nature of these stocks. A ‘vice’-oriented fund could conceivably also help investors to achieve diversification, and thereby enhance returns to a wider portfolio, by offsetting the trend in the broader wealth management industry to ‘socially responsible investing’ and the politicisation of both private and public sector investment mandates.
posted on 22 January 2007 by skirchner in Economics, Financial Markets
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More of What Nouriel Roubini Won’t Tell You About the US Economy
Yet more of what Nouriel Roubini won’t tell you about the US economy, from my associates at Action Economics:
The robust round of Michigan sentiment figures for January have closed out a week of solid reports that have all but put to rest fears of a hard landing for the economy. These solid confidence readings join solid consumer spending figures, robust labor market reports, solid wage and income trajectories, and an improving outlook for U.S. trade to round out a picture of a healthy overall economy. The figures have correctly brought the market focus back to the more relevant question all along of whether the slowdown in the economy will prove adequate to reduce inflation pressures, and not whether the slowdown will prove excessive. Though our expectation that the next Fed move would be a tightening looked like quite an outlier two months ago, expectations of any near-term easing are now quickly dissipating with each new upside surprise.
posted on 21 January 2007 by skirchner in Economics, Financial Markets
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Yet More Federal Persecution of the Online Payments Industry
The US feds continue their persecution of those who facilitate capitalist acts between consenting adults:
Stephen Lawrence and John Lefebvre, founders of Neteller, the UK-listed online payments company, were last night charged with conspiracy in connection with a multibillion-dollar money laundering scheme linked to internet gambling.
The pair were arrested on Monday after an FBI sting operation discovered that Neteller was being used to allow Americans to place illegal bets on sporting events via internet gambling companies based in foreign countries…
Neteller claims to operate the largest independent online money transfer business in the world with 3 million customers in 160 countries and over $7 billion in annual transactions.
It specialises in providing instant payment services where money transfer is difficult or risky because of issues of identity, trust, currency exchange, or distance. In the past, it handled funds for online gamblers in the US but it is said to have stopped the practice when tough new laws banned internet gambling in America last October.
Last year authorities arrested a number of prominent executives for breaching US gambling laws, including two from Britain. David Carruthers, the former chief executive of BetOnSports, was arrested in July while Peter Dicks, former non-executive chairman of Sportingbet, was arrested in September.
posted on 21 January 2007 by skirchner in Economics, Financial Markets
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I Know What Nouriel Roubini Did Last Summer II
The slow death of Nouriel Roubini’s forecast for flat US GDP growth in Q4 continues, with the December retail trade report. One economist’s reaction:
Almost every piece of recent economic data - employment, unemployment claims, car and truck production, construction, and the ISM indexes for both manufacturing and services - has come in above expectations. Today’s report on retail sales is no different. The economy ended 2006 with a full head off steam. Weakness in housing has not filtered through to the rest of the economy. Retail sales, excluding autos and building materials, are a direct feed into GDP data (auto sales data come from another source and building materials are counted as investment). With these sales up 1.3% in December after a revised 0.9% gain in November, real consumption growth likely increased about 4.5% at an annual rate in the fourth quarter. Our forecast for fourth quarter real GDP growth is now 3.5%, a significant improvement from the second and third quarter average growth rate of 2.4%. At this rate of growth the Fed is going to get increasingly uncomfortable with market expectations of its next move being a rate cut rather than a rate hike.
posted on 13 January 2007 by skirchner in Economics, Financial Markets
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I Know What Nouriel Roubini Did Last Summer
We have previously noted that the US November retail trade report almost single-handedly tanked Nouriel Roubini’s call for flat US GDP growth in Q4 2006. The November trade and wholesale trade data releases have seen economists further revising their Q4 growth forecasts, with some seeing a 3%-handle as increasingly likely.
posted on 11 January 2007 by skirchner in Economics, Financial Markets
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More on TEN’s US 2007 Recession Contract
At the instigation of James Hamilton, TEN has tightened up the specification of its US 2007 recession contract:
Expiry will be based on the data reported by the U.S. Department of Commerce (Bureau of Economic Analysis, Table 1.1.1, “Percent Change From Preceding Period in Real Gross Domestic Product”) as reported by the BEA as of February 15, 2008.
If the table as reported at that time indicates that any two consecutive quarters between (and including) 2006:Q4 and 2007:Q4 are negative, then the contract will expire at 100. Otherwise, the contract will expire at 0.
This is a considerable improvement on the former contract specification (although the press release with the previous contract specification is still showing at Tradesports’ sister site Intrade). TEN could benefit from closer collaboration with the economics community in the design of their contracts, preferably before the contracts are actually listed for trading!
UPDATE: Felix Salmon shorts Nouriel:
Economonitor is going to make a bold prediction, though: that the contract won’t trade higher than 25 any time soon. I’m a seller at these levels.
UPDATE II: Felix once again proves the value of RGE Monitor as a contrarian indicator:
OK, so I was completely wrong yesterday afternoon when I said that the Intrade recession contract wouldn’t rise above 25: the first thing I see when I walk into the office this morning is that it managed to trade at an eye-popping 35 overnight.
posted on 09 January 2007 by skirchner in Economics, Financial Markets
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