Pete Wargent blogspot

Co-founder & CEO of AllenWargent property advisory & buyer's agents, offices in Brisbane (Riverside) & Sydney (Martin Place) - clients include hedge funds, resi funds, & private investors.

4 x finance/investment author - 'Get a Financial Grip: a simple plan for financial freedom’ (2012) rated Top 10 finance books by Money Magazine & Dymocks.

"Unfortunately so much commentary is self-serving or sensationalist. Pete Wargent shines through with his clear, sober & dispassionate analysis of the housing market, which is so valuable. Pete drills into the facts & unlocks the details that others gloss over in their rush to get a headline. On housing Pete is a must read, must follow - he is one of the better property analysts in Australia" - Stephen Koukoulas, MD of Market Economics, former Senior Economics Adviser to Prime Minister Gillard.

"Pete Wargent is one of Australia's brightest financial minds - a must-follow for articulate, accurate & in-depth analysis." - David Scutt, Business Insider, leading Australian market analyst.

"I've been investing for over 40 years & read nearly every investment book ever written yet I still learned new concepts in his books. Pete Wargent is one of Australia's finest young financial commentators." - Michael Yardney, Australia's leading property expert, Amazon #1 best-selling author.

"The most knowledgeable person on Aussie real estate markets - Pete's work is great, loads of good data and charts, the most comprehensive analyst I follow in Australia. If you follow Australia, follow Pete Wargent" - Jonathan Tepper, Variant Perception, Global Macroeconomic Research, and author of the New York Times bestsellers 'End Game' and 'Code Red'.

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Wednesday, 3 July 2013

Are low interest rates working?

The job of a central bank, in the words of the famous old quote, is to "take away the punch bowl just when the party gets going". In other words, the bank wants to promote a healthy, growing economy and steer the economy away from recession, but not to allow the economy to overheat.

With the Aussie economy slowing in recent times, interest rates have been cut repeatedly from 4.75% to a record low of 2.75% in a bid to stimulate the economy.

Australian Cash Rate graph

A lower cash rate as set by the RBA should theoretically lead to a faster-growing economy (and eventually, possibly higher levels of inflation) because saving will become less attractive, and borrowing and spending become more appealing. So is the lower cash rate working?

Saving ration since the GFC

It's quite clear that since the global financial crisis, Aussies have been saving more and risk-aversion has been the order of the day. In theory, the household saving ratio might now begin to fall as yields on bank accounts and term deposits are so low that they are now inferior to dividend yields on many stocks.

Household Saving Ratio graph

The effect on share market indices is clear - check out the run-up in financial stock valuations below. Other sectors have also been fired up and investors shun bank accounts and deposits in search of yield. Resources stocks have been weak in contrast, as commodity prices have tanked.

Australian Share Price Indices graph

Consumer spending?

Retail sales are showing promising signs, but we'll need to see a few more months of solid results here before we get more comfortable.

Retail Sales Growth graph

Household debt

Tapering, and that's good, because we don't want household debt to increase further from the current levels.

Household Finances graph

Dwelling prices

Moving up fairly strongly since May 2012, but on a national level, they remain below where they were in 2010. The RBA seems to be very comfortable at this stage, but Sydney and Perth markets seem to be heating up which will have been duly noted.

Dwelling Prices graph

Business credit

Remains very soft at just 0.3% growth in the last reported months. This is very disappointing and much work still to be done here. The RBA may need to cut rates again to just 2.50% to get the domestic economy moving.

Business Finances graph

Dwelling approvals and construction

Residential building is up, but nowhere near enough to plug the gap left by the massive mining construction boom. This is a key reason that we are likely to see another interest rate cut. 

Graph: Value of building work done

There is some light at the end of the tunnel, potentially, as dwelling units approvals have increased very substantially over the past 12 months (more than 27% on a seasonally adjusted basis). Australia needs the approvals to translate into actual construction. Here's dwelling units approved:

Graph: Dwelling units approved

Private sector houses approvals also up, although more steadily:

Graph: Private sector houses

Source: ABS


Number of employed persons is increasing, which has been great to see:

Graph: Employed Persons

Unemployment numbers reported have been all over the place, in fairness, but figures look likely to run higher than the present unemployment rate of 5.5% as the labour-intensive mining construction boom unwinds, and the trend is moderately up since 2012.

Graph: Unemployment Rate

Source: ABS


Well, it depends on whether you're glass is half empty or half full. 

I see lots of promising signs but much work to be done, with the RBA retaining the ammunition to cut rates further as required. Others note a slowing economy and see risk, risk and more risk. 

Commodity prices have fallen which is a real concern:

RBA Index of Commodity Prices graph

On the plus side of the ledger, the Aussie dollar has tumbled dramatically against the greenback in to the 91 cent range:

Australian Dollar Against US Dollar, Euro and Yen graph

Inflation remains benign and comfortable within the RBA's 2-3% target range, so it looks likely to me that we will see another rate cut in the net few months which should begin to fire up the economy.

I remain an optimist at this juncture.