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."

Saturday, September 4, 2010

How will bond markets react?

In meeting with international investors in Singapore and Hong Kong, I was regularly asked for my views on the outcome of the election. (I was actually surprised by how well informed investors were about Australia.) In any event, I was quick to respond that I had no idea which way it was going to break. Yet one thing that was evident in these discussions is that offshore investors are very focused on the economic impact of the new government.

In a recent note to clients, ANZ opined that markets may not react well to a formal coalition between one party and the Greens if that resulted in them controlling both the lower and upper houses of parliament. The thinking goes that in order to lubricate legislation through the senate we will see much more “green-mail”, the budget will remain in deficit for longer than would otherwise be the case, and government debt levels will not come down as quickly as has been forecast (having said that, debt levels are very low).

A related concern that was voiced to me was the question of policy stability. Here investors seem to be thinking about the inflationary (and hence monetary policy) consequences of the ETS, the effects of a new resources rent tax, and other major projects, such as the $26-43 billion taxpayers will spend on a publicly-owned national broadband network.

This is, of course, just speculation. The markets will ultimately pass their own judgment, as Greece recently discovered. In this regard, it will be fascinating to see how the long-term government bond market reacts to the decision of the three independents, which is slated to be delivered on Monday.