The author has been described by News Ltd as an "iconoclast", "Svengali", a pollie's "economist muse", and "pungently accurate". Fairfax says he is a "Renaissance man" and "one of Australia’s most respected analysts." Stephen Koukoulas concludes that he is "85% right", and "would make a great Opposition leader." Terry McCrann claims the author thinks "‘nuance’ is a trendy village in the south of France", but can be "scintillating" when he thinks "clearly". The ACTU reckons he’s "an enigma wrapped in a Bloomberg terminal, wrapped in some apparently well-honed abs."

Sunday, February 7, 2010

Economic picture-book

I’ve pulled out some of the more interesting charts from the latest Statement of Monetary Policy. And they tell many important stories...

Core inflation has remained remarkably stable in the G7 countries (first panel) since the inflation-targeting framework really got traction in the mid 1990s.


The ‘lucky country’ is nicely leveraged to trading partner growth that is above the global average.



Japan’s working age population, and population overall, will fall rapidly through to 2050. Contrast this with the expected 60 per cent plus increase in Australia’s population over the same period.


The RBA is alerting us all to the importance of India as a trading partner with its share of exports rising quickly to over 6%.


Observe how in contrast to Australia’s central bank, the US Federal Reserve exerts very little influence over the all-important 30 year fixed rate mortgage (over 80% of all Australian borrowers have adjustable rate loans). Another reason why we are the lucky country.


The next two charts are classics: they demonstrate that there is basically no diversification to be gained from investing in Australian equities and global equities—they move in near 1:1 lockstep. Why, then, do Australian pension funds typically split their equities exposure 50:50 between the two? Another mystery.



I wonder what Australia’s P/E ratio would look like if pension funds cut their total domestic equities exposure in half to bring them closer to the Future Fund’s desired weights…Also, remember compulsory super was introduced in 1992.


After a secular decline, the household savings ratio has rebounded nicely.


Private house, and, to a lesser extent, medium density, building approvals have recovered strongly following their GFC lows.


This is one bubble that you can spot. Here’s a hint: look at the inflation-adjusted valuations in the right-hand-side panel in the late 1980s and in the years prior to the GFC. And this lagging, pro-cyclical sector is still suffering from rising vacancy rates, especially in cities like Sydney where there has been a torrent of new supply coming on to the market. Let’s hope the work-from-home trend abates for commercial property investors’ sake!


The unemployment rate has peaked at less than 6%. I reckon Scott Haslem at UBS has to be congratulated for picking this one almost exactly at a time when it was fashionable to forecast 9-10% levels. And hours worked are rebounding too.


Mixed news for the banks. Short-term funding costs are back at pre-GFC levels.


Deposit funding is vogue, but…


The cost of deposit funding has skyrocketed.


While medium term funding costs also remain elevated.


Securitisation is making a very, very slow comeback. But at least there has been some non-government issuance of late (first panel).


Finally, the quarterly trimmed mean measure of CPI (second panel) is back in the RBA’s sweet-spot.