Before I get on to today’s Money Morning, we’ve received some feedback from yesterday’s article. The complaint has been that we didn’t compare apples with apples.
That it’s not fair to compare the return of a leveraged investment property with an unleveraged dividend paying stock.
Of course that’s nonsense. Of course it’s fair. As we pointed out in yesterday’s article, the over-riding sales pitch for property investors is the benefit of negative gearing. That you should borrow as much as you can in order to be able to get the biggest tax advantage.
The property spruikers can’t have it both ways. When was the last time you heard a property spruiker tell you that you should only ever pay cash for a property? Hmm, thought so!
Anyway, on to today…
At roughly the same time as you receive today’s Money Morning, the Australian Bureau of Statistics (ABS) will release the latest quarterly consumer price index (CPI) figure.
You can almost guarantee that whatever the outcome, the mainstream commentators and economists will paint it as positive news for the Australian economy.
If the CPI is lower than expected then that’ll be good news as it ‘proves’ that stimulus spending hasn’t ignited inflation. And if it’s higher than expected it will ‘prove’ how resilient the Australian economy and consumers have been.
Then there will be the follow-on analysis as to what this means to the Reserve Bank of Australia’s (RBA) interest rate decision next week.
But if the analysis of the “top macroeconomist” from Access Economics, Chris Richardson is anything to go by, prepare to be bamboozled and baffled.
In a wonderful piece of illogical thought, according to today’s News Ltd article, families will be able to make savings on their mortgage repayments this year thanks to rising interest rates.
Has some clever way of fiddling the books that would be worthy of a “Cut your mortgage in half” story on Today Tonight been discovered?
Erm, not quite.
Money Morning reader Adrian brought our attention to the story from News Ltd this morning:
“Mortgage respite in sight for homeowners”
At first glance you could be forgiven for thinking Mr. Richardson is predicting that interest rates will fall, or at the very least remain unchanged this year.
But look, we’ll give him the benefit of the doubt. Either he’s one of Australia’s most inept economists or John Rolfe at The Daily Telegraph is one of Australia’s most inept journalists.
Or maybe it’s both, who knows.
According to the article, “Futures markets predict the Reserve [RBA] will raise official interest rates by 1 per cent this year, beginning with a 25 basis point increase in February or March.”
We won’t argue with that statement, the Futures markets are indicating that as a strong possibility.
But have no fear, because this is where the “savings” come in.
Despite the prediction that the RBA will increase rates by 1%, Mr. Richardson believes the banks will only pass on 0.7% of the increase to borrowers.
Should they do so then “homeowners repaying a $300,000 mortgage would save more than $60 a month.”
Of course the “saving” only comes after they’ve seen their mortgage repayment increase by over $120 a month. But as the paper points out, “That would be great news for new homeowners such as Strathmore Meurer and Sarah Emms. The St George customers, who bought a Petersham house, have already been hit by repayment increases of $300 a month.”
Oops! So ‘lucky’ Strathmore and Sarah can look forward to possibly an extra $120 a month on top of the $300 increase by the end of this year. And that’s providing Mr. Richardson is right and the banks don’t follow the RBAs rate increases.
But at least it may not be an extra $180 a month. The $60 difference is the saving apparently.
But wait, the “savings” are expected to continue into 2011 as Mr. Richardson claims, “We are probably looking at 30 basis points in 2010 and another 30 or 40 points in 2011.”
So if we take the current outlook from the Futures market on the direction of interest rates, it’s building in the likelihood of rates reaching 5.1% by June 2011:
So giving Richardson another benefit of the doubt he’s predicting that borrowers will only be burdened by an interest rate rise of 0.75% over the next eighteen months…
The rest will be savings!
We’ll believe that when we see it.
Look, we’ve no idea where interest rates will end up. All we do know is that it will be higher than 3.75%. But the mistake the mainstream is making is the idea that RBA interest rates at 5% is the ‘normal’ level for interest rates.
That by increasing the cash rate to that level is just returning them to a neutral point in the interest rate cycle.
Unfortunately, as the example of Strathmore and Sarah shows, that’s not true. “Normal” for them was when the cash rate was 3%. Just as “normal” was 7.25% for new borrowers in March 2008.
When interest rates move back to 5% and the mortgage rate increases to 8% or 9%, it will be very abnormal for those that have borrowed at all-time low rates.
In fact, you can guarantee those borrowers won’t be cheering the “savings” they’re making just because the mortgage rate is at 9% instead of 9.5%. Far from it.
But it’s the whole idea that an increased cost is being repackaged by the mainstream media as a saving. Of course, it’s not that different from the shopping bargain hunter who’s ecstatic at getting something for half price even though they’ve bought something they wouldn’t normally have purchased.
There’s no saving at all, just an increased cost.
Today’s CPI number will likely produce a similar reaction. A lower figure than expected will have the commentators all of a lather that the inflation genie hasn’t been let out of the bottle, ignoring the fact that the cost of living has still risen.
Whereas a higher than expected number will get the cheerleaders excited about the prospect of a further interest rate rise and all the lovely “savings” borrowers can make in the coming months.
Cheers.
Kris.
60-Second Market Round Up
by Shae Smith
On Monday, the S&P/ASX 200 was down 70 points in the first 15 minutes of trading. After the initial drop, the index closed the day down by only 32 points to 4,717.90.
The Australian Bureau of Statistics will release the Consumer Price Index (CPI) for December. These figures are the last set of figures the RBA is waiting on for when they meet next Tuesday.
The Dow Jones Industrial Average was down on Tuesday, closing at 10,194.29, lower by only 2 points.
The Fed’s two day Open Market Committee began yesterday, however many are expecting rates to remain unchanged as Ben Bernanke is yet to be confirmed as chairman for a second term. Read more here.
In the UK, the FTSE was up by 16 points, ending the day at 5,276.85. Surprisingly, it was the Pharmaceutical companies that pushed the Footsie higher, with most averaging a again of 1.5% for the trading session.
The Nikkei was down by 1.78%, closing at 10,325.28.
The price of spot gold in Australian dollars is trading at $1,222.37 while in US Dollars it is trading at $1,098.18. The price of silver in Aussie dollars is $18.68 and in US Dollars it is $16.78.
The Aussie dollar versus the US dollar is trading at USD$0.8985, and against the Japanese Yen JPY80.57.
Crude Oil closed at USD$74.71
For the biggest movers on the market yesterday click here…
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cb – hilarious sketches… a good find.
Hi all,
Puntpal – you asked about adverts crying out about the shortage of houses… while this has certainly massively reduced, every time i hear an economist or RE representative give their view verbally on the future state of Australian housing the statement goes something along the lines of…”the Australian property market has a few challenges over 2010 not least of all is the fact that housing has never been as unaffordable as it is now, but our banking system is strong and rates are low so this should help stabilize the housing industry to show mild growth of only 10% across the year. Oh, and there is an inherent shortage of houses as always that makes it difficult for buyers to find a property”
these days the shortage argument is still made.. but its a tag on at the end of the interview. Like you said… i have not seen wide spread coverage of the increase in vacancy rates….?
I listened to Obama give his talk earlier today…. gotta say the guy made a lot of sense. At one time i thought he was talking about Australian … saying that the people were skeptical about everything they were told… and why shouldn’t they be? Government argues for the sake of it over everything and accomplish nothing productive, the media are bought by the large corporations and industry groups and will therefore print whatever is in their best interest… serious debate is turned into a one liner and then a joke…. increasingly selective reports abandon the goal of reaching the truth and focus on their agenda and last but not least those we trust with our hard earned money; banks, take such huge risks for profit that billions of dollars form tax payers money is needed to support them only to see this money used in equally unscrupulous maneuvers to post billion dollar profits once again. what do the people have to trust in?”
like i said… is he taking about America or Australia? perhaps the globe. Either way this could just be a great speech and the norm will continue… but if he is given the chance and the tools to make a difference, he might just be once of those politicians who went into the game to actually work for the people that Puntpal and others on this site have been waiting for…. not we need one in Australia.
AC – Obama is hostage to Wall street, and so are the majority of the politicians, and who knows, even the unelected head bureaucrats. Remember the stress tests? This will be no different, and it will have the same desired and intended result: to pull the wool over people’s eyes for just a little bit longer. Give them some glimmers of hope, while the looting by the elite continues. And even if Obama genuinely tried, his proposals will end up bleeding from a thousand cuts. The example here is his health care reform proposals.
Puntpal -
I am amazed to hear that you hope Rudd is re-elected and that you feel that Abott is only marginally better when it comes to running the economy…
As a liberatarian you suck! ;p
The media has ‘milked’ this whole “virginity” line ad nauseum … it’s just a ploy to try and get women – and young people – to vote for the big tax, big government Socialists who call themselves the ALP! They supposedly represent modern and “cool” ideas socially, but are economic morons! so how’s that working for ya??
and – judging from your comment – they (the media) are succeding hands down…
Come to think of it, it’s amazing how superficial voters here in Australia are! in fact i recall countless people saying in 2007 that they’re voting for Rudd because he’s “better looking” and “younger” than “Howard”. what a croc!!
And where are we sitting today? With a “handsome” prime minister heading a socialist government which is bankrupting this nation with debt for generations to come.
get your priorities straight
Sandra – I hate Rudd more than any other PM I have seen (I have only seen 3 before him). He is phony, he is patronising and he is an egomaniac. However I wrote a thesis on public education in 2006 and the ALP has brought in about every one of the policy recomendations that I put forward (teachers getting paid on performance/skills, league tables, IT revolution – seriously, public schools were a joke when I was there only a decade ago – no net, no computers, no staff with any IT skills, it tok me a year to catch up at Uni).
I also think the NBN will be a better policy than others think – I am massive believer in the powers of the internet and this was infrastructure that was never going to be built by the private sector.
So I do see a role for Government, I differ from Sayce and co. because I am a third way believer and would have protested in support of Latham or Turnbull if they had of hung around.
However Abbot is not a libertarian either, he is a conservative and they are not my type. He wants Australia to go back to the 60s and I for one want us to become a republic and to stop thinking of ourselves as a former British colony. When it comes to taxation etc.. I prefer Libs, but they have too many old conservatives for my liking.
Its such a shame people will feel forced to choose between the two of them.
PuntPal, of late I have been casting protest votes only, advising the drones to get a decent job. What else is one to do when the ballot paper fails to offer genuine choice? What we have is pretty much like they have over in the USA, a two headed beast for creating the illusion that the two heads represent different animals. Sadly, they do not. What is the difference between Howard and Rudd? For all intents and purposes that really would matter, I fail to see.
But, Mate, you really surprise me with your enthusiasm for the NBN. The whole thing is unviable. That is why no private company is going to build it. Besides, we already have adequate coverage, if only Telstra and its network weren’t such a political football. But what really raised the red flag for me is the announcement a couple of months ago that Goldman Sachs is going to play a major role in stitching up the financing for the NBN.
Huh?, Goldman Sachs? Anything that vampire squid touches is to be avoided like the plague. That is my humble opinion. Anyhow, this is my prediction: Our savings in super are going to be tapped and a good chunk of it will be drained into this white elephant of a project, while Goldman Sachs will stitch up a massive debt to make up the difference – for a massive fee, of course, which will be a cost to our retirement savings and taxes. Sorry, mate, but all those pushing for the NBN are just salivating at the opportunity to jump onto yet another gravy train, and a massive one at that at our collective cost.
Mark my words, it will not be long before our super savings are going to be tapped and sucked dry by these shysters and parasites, and the proposed NBN will be one of their main weapons for doing it.
cb – you have to compare the spending on NBN to the other ways the Government spends its money.
We spend billions on middle class welfare, we spend billions on Government stimulus programs, we spend billions on defence needs…all of these things are total wastes of money.
Will the NBN make a ‘profit’ or be ‘viable’ maybe not, but the advancement it will allow for in terms of e-health and education are not being factored into the cost/benefit analysis of many people – including Telstra (that is why they didnt want to build it – they are not keen on seeing the productivity of the nation increase).
In another thread, you support subsidising industries like manafacturing so we have diversity – that sounds way more illogical that a country investing in infrastrucutre that will make every individual, business, hospital and school more productive.
Mark my words, the NBN will be a much more powerful force in a decade than any of us can even fathom now. Havent we learnt anything from the last decade…technology always surprises us and I see no limits to the advancements we can make.
Sandr and cb
p.s. A lot of that waste (middle class welfare) was initiated under Howard, so its unfair to portray the Libs as these shrewed managers of the economy. They were lucky with their timing, they were in charge during a debt fuelled boom and they added all the help they could to the housing bubble (which is going to wreak havoc).
So its totally unfair to now view the Libs as our economic saviours. They say wouldnt rack up as much debt as Labor, but its easy to say that in opposition.
With the resource boom we had in 2000-2007, the Libs could have squirrelled away a lot more money then they did. They could have updated our infrastructure and they could have realised household debt was getting out of control.
They didnt – so excuse me for not falling over in a rush to vote the Libs back in. If Turnbull was there, I would have for sure – but not some wingnut, conservative!
Puntpal -
People choose (largely) between two parties because there are only two parties capable of winning an election here.
For me it’s therefore an easy choice.
i hate socialism more than anything on earth – because i come from a country where i’ve seen it destroy the very fabric of society.
It’s an unfair system where people are bullied into paying for other people against their will. It’s a system where certain people can live entirely off the fruits of other people’s labor – without putting in a day’s honest work themselves. I view it as an evil system which goes completely against the grain of human nature.
As a liberatarian myself i believe in helping others through voluntary co-operation – often through their own communities. This is how things worked in the United States, where government was kept small but played a critial and very effective role in the areas in which it is SUPPOSED to be! (Like protecting property rights and protecting people from criminals) Free markets and capitalism are what made the US the greatest country on earth. At least this is the way things used to be. Until socialism reared its ugly and destructive head…
Puntpal -
There’s nothing wrong with conservatism by the way.
It’s the destruction of family values and the lack of father figures in particular which is at the heart of our delinquent society today. The role of fathers in particular is something which has been diminished by our modern western society. Hell, men aren’t even required to father children anymore… at least that’s the modern ‘liberal’ teachings.
As a result, teenagers go hoaring around and use drugs because the family unit does not exist anymore the way it is supposed to.
Parents (especially single parents) are too busy being “pals” with their kids instead of parents to them.
We need more conservatism in our society, or will continue down the current path of juvenile delinquency an ever increasing problem.
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