Thursday, 25 February 2016 12:10

RBA on hold - policy debate in US a key

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BillEvans small headshot WIBIQThe Reserve Bank Board next meets on March 1. We are confident that the Board will decide to keep rates on hold.

The Governor has made it clear that the Bank will be most closely monitoring progress in the labour market and whether there is any evidence of the recent turmoil in financial markets impacting domestic demand in Australia.

In that regard time will be required to get a clear read on those developments. Markets remain reasonably confident that the necessary information will be available by May with market pricing implying around a 60% probability of a rate cut by then.

We remain comfortable with our long held view that rates will remain on hold throughout 2016.

We were not particularly concerned about the lift in the unemployment rate from 5.8% to 6.0% given that the move was consistent with our forecast that unemployment would edge up to around 6%. That forecast has been contrary to the Bank’s forecast that the unemployment rate would continue to fall through 2016. However we do not expect that the RBA to be too perturbed by the result given the month to month volatility and that ‘trend’ unemployment rate estimates continue to track lower.

Evidence around the impact of the financial turmoil on domestic demand will not be clear for some time. Early evidence around consumer sentiment (up 3.5% in February) and business conditions (stable in February) is not pointing to significant signs of any fallout.

Of course the path of the Australia dollar will also be a key input to the board’s deliberations over the course of the next few months. In that regard the path of the US dollar and US monetary policy will be key factors.

Over the last week I have been travelling in the US meeting with policy officials; real money managers; hedge funds and economists.

Some key themes around US monetary policy; the US dollar; and the state of the US economy have become clear.

The starting point is current market pricing. With virtually no FED hikes priced in for the remainder of the year our current call for three hikes by year’s end looks decidedly ‘courageous’. However that needs to be put in the context of a category of views expecting the FED to be reversing its December rate hike and moving rates into negative. Those low end expectations are skewing market pricing and masking the forecasts of other participants who are expecting a series of FED moves over the course of 2016.

The areas of serious debate are around the US’s current potential growth rate. With very weak productivity growth; growth in the working age population having slowed; and the participation rate weak, even allowing for improving demographics, estimates of potential growth in the US are stuck in the 1.3–1.7% range.

General forecasts for growth in 2016 are around 2%, almost exclusively because of the boost in spending from consumers as strong employment growth boosts incomes and households decide to spend more of the windfall from falls in the oil price (current estimates are that only around 50% of windfall has been spent). Little hope is held out for postive growth contributions from government, inventory accumulation or investment while net exports can be expected to remain a drag.

However, if growth does exceed potential then further falls in the unemployment rate can be expected. Concerns around a sudden lift in wage pressures (which are already building) once the unemployment rate reaches, say, 4.5% are held in many quarters (the debate around the actual level of the NAIRU is lively). Lags between wages and inflation are estimated at around six months making the FED’s inflation target of 2% easily achievable and even posing a potential need to lift the Fed funds rate. This scenario is clearly the key risk to current market pricing.

Evidence is cited that in US states where the unemployment rate has fallen below 4.5% wages growth has reached 3–4%.

This indicates that the link between wages and the unemployment rate still holds although at levels of the unemployment rate that are well below what had previously been expected to be the trigger point. It was further speculated that the lift in wages growth might be non-linear.

On the other hand there is clearly discomfort with the elevated level of the USD (considered to be the most important source of tightening financial conditions). Official research points to the impact on the US economy of the US dollar having long lags (it is notable that since the Fed raised the federal funds rate in December the US dollar index has fallen somewhat). The impact on growth of the 25% lift in the USD over the last two years is still to fully work through the economy. Resumption of the FED’s tightening cycle by June might risk a further substantial lift in the USD, intensifying the drag on the economy.

Earlier periods of USD strength have been associated with much stronger growth particularly due to strong productivity so a 0.5% drag from exports is much more significant when potential growth is 1.3%–1.7% than when it is above 3%.

Resolution of this policy dilemma will play out over the next six months or so. It may take policy makers longer than June to assess the US dollar effect on the one hand and the risks to wage inflation on the other.

Our current view is that the authorities will tread a middle ground. Policy will need to be tightened in anticipation of potential wage pressures but will be focussed on avoiding a USD lift through 2016 of more than 8–10%. Clearly the key variables to watch are jobs growth; the unemployment rate; wage pressures and of course the path of the USD.

 

Bill Evans - Westpac Chief Economist

Thursday, 25 February 2016 12:00

Contagion is unlikely for the banks

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The banks have taken a beating lately, with the financials ex-property subindex falling 27% for the year to date. One of the big fears for investors has been the banks exposure to commodities, oil and gas lending. However, Uday Cheruvu thinks that their exposure is ‘very manageable’ as the banks only have around 3-6% exposure to these sectors on average. The exposure that the banks do have is mostly to well-established players, with very limited exposure to high-yield lending. “Maybe there is a risk, but the size of the risk is significantly smaller than what people are worried about,” he said. Indeed, leading into the GFC, banks had up to 30% exposure to sub-prime loans, whereas total exposure to oil & gas high-yield lending is closer to 2%. Given the limited exposure, he says contagion in the financial system is unlikely.


This video courtesy of PM Capital is well worth watching.

 

Michelle Grattan, University of Canberra

The government is set to secure reforms to the Senate voting system that will squeeze out “micro”-players.

Immediately after the changes were announced by Prime Minister Malcolm Turnbull and Special Minister of State Mathias Cormann, the Greens welcomed the move and called on the ALP to support it.

While the Greens said they would scrutinise the legislation, which was introduced in the House of Representatives immediately after the announcement, they have had extensive negotiations with the government. Support from the Greens is all that is needed to get the measures through the Senate.

The changes would bring in optional preferential voting “above the line”, replacing the present group voting tickets. Voters would be advised to number at least six boxes in order of choice. But their vote would still be valid if they numbered only one box.

At present, people just mark one box but have no control over their preferences. Complicated deals over preferences have meant the election of candidates on tiny votes.

Almost all voters vote above the line.

In relation to below-the-line voting, the government proposes to reduce the number of informal votes by increasing the number of mistakes allowed from three to five, as long as 90% of the voting paper is filled in correctly.

Group and individual voting tickets will be abolished.

A restriction will be introduced to prevent individuals holding relevant official positions in multiple parties.

The changes also allow parties, if they wish, to have their logos on the ballot paper, to reduce confusion. At the last election the Liberals complained that many of their voters thought the Liberal Democratic Party (LDP) was the Liberal Party. The LDP got senator David Leyonhjelm elected in NSW.

Turnbull said there had been much criticism of the last Senate election. People were astonished to see senators elected on very small votes. Under the reforms every Australian who voted in the Senate “will determine where their vote goes. And that’s democracy”, he said.

If there is a double dissolution all or almost all micro-players would be immediately out. A normal election would make it nearly impossible for new micro-players, but the several elected in 2013 would still have more than half of their term remaining.

Amid speculation about a double dissolution, Turnbull said “nothing has changed”. He was working on the assumption that the election would be held at the normal time – which was August, September or October.

Turnbull said the government did not have a view on who would be electoral winners out of the change. He pointed out that the reform was recommended unanimously by the Joint Standing Committee on Electoral Matters.

That committee will now scrutinise the legislation, which the government wants passed by the time parliament rises for the autumn recess in mid-March. It will take the Electoral Commission about three months to make the necessary changes, which means they could be ready for either a normal election or a July double dissolution.

Greens leader Richard Di Natale said the Greens had been putting forward legislation over 12 years for Senate voting reform that ended backroom preference deals and put power back into the hands of voters.

“The only people who support the current system are the faceless men and factional operators who can wield power and influence in back rooms,” he said.

Independent senator Nick Xenophon, who won almost two quotas at the last election, supports Senate voting reform.

Labor, despite supporting reforms on the parliamentary committee, has since become sharply divided. Some factional heavyweights strongly oppose them, believing they would work to the Coalition’s advantage. Opposition Leader Bill Shorten reserved Labor’s position.

Motoring Enthusiast Party Senator Ricky Muir, elected in 2013 on about 0.5% of the Victorian Senate vote, tweeted his disapproval of Turnbull’s move.

Michelle Grattan, Professorial Fellow, University of Canberra

This article was originally published on The Conversation. Read the original article.

Wednesday, 10 February 2016 19:23

Magellan Global Update - 1st Quarter 2016

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Hamish Douglass (CEO Magellan Financial Group) talks about his current views on Global Financial markets.

He talks about the next steps in the US with the Quantative Easing program, China and how he has his fund positioned.

 

As one of Australia's leading investors - Hamish is very much worth paying attention to.

 

 

Tuesday, 09 February 2016 20:19

Apple AC adapter recall (important information)

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Apple has determined that, in very rare cases, the two prong Apple AC wall plug adapters designed for use in Continental Europe, Australia, New Zealand, Korea, Argentina and Brazil may break and create a risk of electrical shock if touched. These wall plug adapters shipped from 2003 to 2015 with Mac and certain iOS devices, and were also included in the Apple World Travel Adapter Kit.

Customer safety is always Apple's top priority, and we have voluntarily decided to exchange affected wall plug adapters with a new, redesigned adapter, free of charge. We encourage customers to exchange any affected parts using the process below.

Note: Other wall plug adapters, including those designed for Canada, China, Hong Kong, Japan, United Kingdom, and United States and Apple USB power adapters are not affected by this program.

Identifying your wall plug adapter

Compare your adapter to the images below. An affected wall plug adapter has 4 or 5 characters or no characters on the inside slot where it attaches to an Apple power adapter. Redesigned adapters have a 3-letter regional code in the slot (EUR, KOR, AUS, ARG or BRA).

Affected Redesigned
Affected adapter detail Redesigned adapter detail


Affected Adapter Prong Types

European Adapter Korean Adapter Australian/Argentinian Adapter Brazilian Adapter
Round thin pins,
slightly slanted inward
Round thick pins Flat angled blades Round thin pins
Continental Europe Korea Australia
New Zealand
Argentina
Brazil

Note: The countries and regions listed are some examples of supported locations for that adapter. Adapters may be used in additional countries.

 

Exchange Process

Please choose one of the following options below. We will need to verify your Mac, iPad, iPhone or iPod serial number as part of the exchange process so please find your serial number in advance. Finding your device serial number is easy.

 

GEM Capital has replaced our affected AC adapters through our friends at the Computer Depot (Unley Road, Unley)  Ph 8357 7111 http://www.computerdepot.com.au

Mark Cunningham from the Computer Depot is happy to exchange Apple AC Adapters without the need to provide serial nunbers - and while you are there check out the latest technology that is available (both Apple and Microsoft).

 

Additional Information

This program does not affect your statutory or warranty rights.

If you believe you have paid for a replacement due to this issue, regarding a refund.

Learn more about using Apple power adapters, cables, and duckheads with Apple products.

Tuesday, 09 February 2016 20:07

The plunging oil price - why and what it means?

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Investment research glassesIntroduction

Our view on the financial market turmoil has been covered in the last two Oliver’s Insights - except to add that central banks are now sounding more dovish. This started with the ECB which is now expected to ease at its March meeting and is also evident from the Fed which last night was less positive on the growth outlook and indicated it was monitoring recent economic and financial developments. The probability of a March Fed hike is now just 20% and rather than four Fed rate hikes this year I see only one or none. The Reserve Bank of NZ has also turned more dovish and I expect the RBA to do the same.

The one big surprise in the ongoing turmoil in financial markets is the role played by oil. Past experience tells us surging oil prices are bad and plunging oil prices are good. But that has not been the experience lately. It seems there is a positive correlation been oil prices and share markets (“shares down on global growth worries as oil plunges” with occasional “shares up as oil rallies as growth fears ease”). So what’s going on?

Why the oil price plunge?

The oil price has collapsed because the global supply of oil has surged relative to demand. Last decade saw the price of oil go from $US10/barrel in 1998 to $US145 in 2008. After a brief plunge during the GFC it average around $US100 into 2014.

Black lines show long term bull & bear phases. Source: Bloomberg, AMP Capital

This sharp rise in the oil price last decade encouraged fuel efficiencies (use of ethanol, electric cars, etc) and more importantly encouraged the development of new sources of oil (offshore, US shale oil, etc) that were previously uneconomic.

Source: Bloomberg, AMP Capital

This is similar to what occurred in response to sharp rises in oil prices in the 1970s. But other factors are playing a role too:

  • Slowing emerging world growth. Chinese economic growth has slowed to around 7% compared to 10% or so last decade and more of this is now being accounted for by services and consumption so it’s less energy intensive.
  • Middle East politics – Iran coming back on stream this year and OPEC no longer functioning as a cartel but rather driven by Saudi Arabia’s desires to put pressure on Iran and assure its long term oil market share (by squeezing alternative suppliers and slowing the switch to alternative/more efficient energy sources).
  • Technological innovation has enabled some producers to maintain production despite the sharp fall in oil prices.
  • A rise in the $US, which has weighed on most commodities as they are priced in US dollars. However, the oil price has also plunged in euros, Yen and the $A.

Last year the world produced a near record 96.3 million barrels of oil a day, which was 1.8m more than was used. More broadly oil is just part of the commodity complex with all major industrial commodities seeing sharp price falls over the last few years.

Are we near the bottom for the oil price?

How much further the oil price falls is really anyone’s guess. Oddly enough having fallen 77% from its 2011 high the plunge is similar to past falls after which supply started to be cut back (see the next chart). I suspect we have now reached or are close to the point where, baring a global recession, it will start to become self-limiting but the oil price could still push down to $US20/barrel which in today’s prices marked the lows in 1986 and 1998.

Source: Bloomberg, AMP Capital

At current levels, even oil futures prices are likely below the level necessary – thought to be around $US50/barrel – to justify new shale oil drilling in the US. And prices at these levels are seeing consumer demand in the US shift back to more gas guzzling vehicles. So I suspect we are near the bottom. By the same token the ease with which shale oil production can be brought back on stream and rapid technological innovation in alternatives suggests a cap is likely to be in place on oil prices during the next secular upswing (maybe around $US60).

Why has the oil prices plunge been a big negative?

There are several reasons why the negatives may have predominated this time around. First, Middle East oil producers consume more of their oil revenues now than in the past and so a collapse in the latter may have forced a cutback in their spending compared to oil price plunges of the 1980s & 1990s.

Second, consumers in developed countries are more cautious than in the past & so respond less to lower energy costs.

Third, the plunge in oil prices at the same time the US dollar has increased has added to the stress in many emerging countries, causing funding problems in such countries and raising fears of a default event in the emerging world.

Finally, much recent corporate borrowing in the US and growth in investment has come from energy companies developing shale oil. They are now under pressure leading to worries of a default event and causing a fall back in investment.

But will the negative impact continue to predominate?

Many of these worries will persist but at some point the positive impact flowing from reduced business and consumer costs will become evident. The historical relationship indicates that the positive impact of lower oil prices and developed country growth takes a while to flow through, with the next chart suggesting the bulk of it is likely to show up this year.

Source: Deutsche Bank, Thomson Reuters, AMP Capital

Lower oil and energy prices also mean a usually one-off hit to inflation as the oil price level falls. This largely impacts headline inflation and is generally thought to be temporary. But the longer it persists the greater the chance that it will flow through to underlying inflation and inflation expectations. This is something that central banks are now grappling with as it makes it harder for them to get inflation back to their target levels, which in turn will mean low interest rates for longer.

What are the implications for Australia?

While Australia is a net oil importer, it is a net energy exporter which means that to the extent that lower oil prices flow through to oil and gas prices it means a loss of national income and tax revenue. For Australian households though lower oil prices mean big savings. The plunge in the global oil price adjusted for moves in the Australian dollar indicates average petrol prices should be around $0.90/litre (see next chart). While prices haven’t dropped this far – apparently due to high refinery margins based on Singapore petroleum prices – the price at the bowser is still well down on 2014 levels.

Source: Bloomberg, AMP Capital

Current levels for the average petrol price of around $1.10/litre represent a saving for the average family petrol budget of around $14 a week compared to two years ago, which is a saving of $750 a year. Some of this saving will likely be spent.

Source: AMP Capital

What happened to “peak oil”?

Last decade there was much talk of an imminent “peak” in global oil production based on the work of Dr M. King Hubbert and that when it occurs it will cause all sorts of calamities ranging from economic chaos to “war, starvation, economic recession and possibly even the extinction of homo sapiens”. The film “A Crude Awakening” helped popularise such fears. Such claims have in fact been common since the 1970s, but they have been wide of the mark with global oil production continuing to trend higher. With the real oil price once again plumbing the lows of the 1980s and 1990s it’s clear that such claims remain way off. While the world’s oil supply is limited, “peak oil” claims ignore basic economics which, via higher prices combined with new technologies, will make alternatives viable long before we run out of oil.

Implications for investors

As long as the oil price remains in steep decline the negative impact on producers is likely to predominate the positive impact on consumers at least as far as share markets are concerned. However at some point in the year ahead, it’s likely the boost to consumers and to economic growth in developed countries and in energy importing countries in Asia will predominate. In the meantime weak oil prices mean that deflationary risks remain and interest rates will remain low for longer.

About the Author

Dr Shane Oliver, Head of Investment Strategy and Economics and Chief Economist at AMP Capital is responsible for AMP Capital's diversified investment funds. He also provides economic forecasts and analysis of key variables and issues affecting, or likely to affect, all asset markets.

The turbulence in financial markets would appear to suggest that the world is heading toward recession.  Leading investment bank have produced a table showing the probability for major countries of recession over the next 8 quarters (2 years).  The table suggests that Australia's chances of recession in the next two years is 21%, which is below the long term average.

Thursday, 14 January 2016 11:16

2016 Lamb Australia Day commercial

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Sam Kekovich, Australia's ambassador for lamb is at it again, producing the 2015 Lamb Commercial for Australia Day.

 

The commercial has been labelled racist and insulting toward vegans, but we do live in the 'era of outrage'.  According to a News Corp survey, the overwhelming majority love it, so we will leave it up to you to judge and enjoy.

 

Paul Docherty, University of Newcastle

So far, it has not been a happy new year for equity market investors. The Australian equity market lost A$100 billion in market value in the first week of trading, mirroring a dire global trend.

If we are are to believe the “January barometer”, things may be about to get worse. The January barometer is based on the belief that when the equity market ends in the black for the month of January, the subsequent year will be prosperous for equity markets, while a negative equity market return in January signals a bearish year for stocks.

The barometer was first devised in 1972 by the editor of the Stock Trader’s Almanac, Yale Hirsch. Hirsch claimed that January returns could accurately predict subsequent equity market returns in 91.1% of years, with the rare failures of this indicator being explained by extreme events such as wars.

If the January barometer were as accurate as has been suggested then this indicator would provide a boon to investors who could use the signal to make asset allocation decisions for the subsequent year. Unfortunately financial markets are like discount airlines; there are no free lunches. Competitive market forces result in investors exploiting, and therefore eliminating, any opportunities to make risk-free abnormal profits.

The weight of academic evidence now shows that the evidence used to justify the January barometer was a statistical anomaly. The result does not appear to hold when a longer sample of years are analysed and there does not appear to be any evidence to support the January barometer outside of the US.

An examination of returns on the Australian equity market from 1974 to the present provides a further rebuttal to January barometer. The figure below provides annual average returns across the subsequent eleven months for years in which the return in January is positive and negative respectively.

Data used to create this chart was sourced from Datastream.

As shown in this figure, the average equity market return in years following a negative January return (5.8%) is actually marginally higher than average returns in years following positive January returns (5.6%).

Recent history is also informative. In 2014 investors had a similarly unhappy start to the year, yet the market subsequently rebounded and ended the year in the black. Last year the market was up 3.2% in January, yet fell by 6.5% over the subsequent eleven months.

It is therefore clear that January returns are not a magic bullet that can be used to forecast stock market performance and make investment decisions. Financial markets are too sophisticated for individual monthly returns to be informative about the future. To borrow a quote from Mark Twain:

“October. This is one of the peculiarly dangerous months to speculate in stocks. The others are July, January, September, April, November, May, March, June, December, August, and February.”

Given the January barometer does not have merit as a forecasting tool, many investors will be anxious to know what lies ahead. Recent stock market declines can be attributed to structural problems across global economies. Chinese growth is continuing to weaken and global debt has increased significantly following a sustained period of low interest rates.

Ongoing global security threats were also identified as a potential limit to economic growth at the G20 summit last year. While predicting the direction of stock market returns across 2016 is fraught with danger, the current uncertainty across global markets appears to indicate that whatever the end result, investors are likely to be in for a volatile ride.

The Conversation

Paul Docherty, Senior Lecturer, Newcastle Business School, University of Newcastle

This article was originally published on The Conversation. Read the original article.

Stephen Bright, Curtin University and Ann Roche, Flinders University

When we think about who experiences harm caused by alcohol, most people think about young people. However, Australian data show the rate of risky drinking among young people has been decreasing, while risky drinking among older adults has been increasing.

The consumption of cannabis shows a similar trend. This is of significant concern since older adults are at elevated risk of alcohol-related harm.

Why are older drinkers more at risk?

The Australian government has specific guidelines for the general population to minimise the potential of alcohol-related harm. However, these guidelines simply recommend that older adults drink less. This is because there is a lack of specific research to indicate more precise levels for low-risk drinking among older people.

Older adults are at increased risk of experiencing alcohol-related harms for three main reasons.

First, with age, the body becomes less effective at metabolising alcohol. This means alcohol has a more potent impact on an older person compared to a younger person consuming the same amount of alcohol. In turn, this increases the likelihood of injury and falls among older people who drink.

Second, older adults are more likely to be taking a range of medications that can interact with alcohol and cause an adverse drug event. A recent study found that 60% of drinkers were taking at least one medication that could adversely react with alcohol. Many of these medications can severely interact with alcohol. For example, drinking alcohol while taking certain blood-thinning medications could cause increased risk of death from haemorrhaging.

Third, older people are likely to experience health conditions that can be exacerbated by the effects of alcohol. For example, high blood pressure and heart disease can be more difficult to treat when a person drinks alcohol. In addition, alcohol is a known carcinogen. As such, it is recommended that cancer survivors abstain from alcohol and that alcohol consumption be minimised to avoid the risk of developing various forms of cancer.

Older Australians have more time and less responsibility, so they may find their drinking increases. from www.shutterstock.com

While some older people who experience alcohol-related problems have been heavy drinkers for much of their life, there are others whose previously moderate drinking escalates with age.

Various events associated with ageing can precipitate the onset of problems associated with alcohol. Such events include loss of identity associated with retirement, more free time and less responsibility. Some older people’s drinking escalates as a result of grief associated with losing a loved one, or inability to engage in activities due to health conditions, or loneliness and isolation.

The role of health-care professionals

Australia’s drinking guidelines suggest that each older adult should seek advice from their GP about what constitutes a safe drinking limit for them that takes into account all of the risks. However, most older adults don’t know about these risks. They are therefore unlikely to seek such advice from their GP.

Conversely, many health-care professionals are reluctant to ask older people about their use of alcohol and other drugs. Most don’t think that the lovely old lady or gentlemen that they see might have a problem with alcohol. Even if concerned, they may feel embarrassed to ask them about their substance use.

Not asking about drinking patterns and levels can result in health-care professionals treating what they believe to be the symptoms of a medical problem, when in fact the symptoms are related to the use of alcohol or other drugs.

To support health professionals to navigate this delicate area, we have published Australia’s first guidelines for health professionals. This provides the necessary skills to assess older adults' use of alcohol and other drugs.

We hope health-care professionals will now be better able to identify older adults at risk of experiencing alcohol-related harm and provide appropriate advice and support. We also hope more older adults will be referred for specialist treatment to address their use of alcohol and other drugs.

Treatment services

Older adults are less likely to engage with traditional treatment services, such as counselling and rehabilitation. They may perceive such services to be for younger people, or lacking mobility access or an appropriate atmosphere.

Many other countries such as Canada, the United States and the Netherlands have developed services specifically for older adults. However, in Australia there is currently only one older-adult-specific treatment service.

The guidelines we have published will assist other treatment services to implement older adult-specific services. We hope this will lead to more such age-specific treatment in Australia.

The Conversation

Stephen Bright, Registered psychologist and sessional academic, Curtin University and Ann Roche, Professor and Director of the National Centre for Education and Training on Addiction, Flinders University

This article was originally published on The Conversation. Read the original article.