A few takeaways from the MYEFO splurge (& Buffett's cash pile)

MYEFO malaise

A few quick observations from the mid-year economic outlook released by the Australian Treasury today.

Firstly, economic growth is likely to be lower than was previously projected, with real GDP growth of just 1¾ per cent expected for the fiscal year.

Headline inflation is expected to sit within the target range, with more government subsidies quite likely to be on the way (there was $5½ billion accounted for in the "decisions taken, but not yet announced" big bath, albeit this figure is spread over four years). 

Source: Australian Treasury

Government spending is at near-record levels, so although the unemployment rate is historically low at under 4 per cent, as China's economy slows and commodity prices tumble, there are some thumping projected deficits lying ahead.

These deficits are set to total $144 billion over the course of four years (some $22 billion wider than previously projected in May). 

The budget thus isn't expected to return to balance for a decade.

Dwelling investment has fallen over the 2024 fiscal year, as developer insolvencies continue to climb, and even the rebound in the construction of new housing for 2025/2026 has been revised lower.

The government's Housing Australia Future Fund (HAFF) was due to deliver 30,000 homes over five years, but this has been completely overshadowed by net overseas migration for this year coming in some +80,000 higher the Budget numbers, at +340,000.

Gross debt is expected to rise towards $1 trillion over the course of the year ahead. 

The trajectory for net debt is also a little higher than previously expected.

As a percentage of GDP, Australia hardly has an alarming level of gross debt as compared to many peer countries, but still there's a sense that Australia 'ought' to be faring much better than this given an unemployment rate of just 3.9 per cent and the recent commodities windfall. 

There was little sense from today's release as to whether or not there will be an early election called, but I do expect there could be a few further sweeteners to be announced for households first. 

James Foster ran through the MYEFO figures in more detail here.

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Stocks nosebleed

In other news, stock market valuations have been running at tremendously high levels, with bullish sentiment having reigned supreme in the wake of Trump's victory, especially around tech stocks. 

The Dow Jones industrials index, on the other hand, has fallen more or less continually since December 4. 

While nobody knows what lies ahead, the financial media pages have taken note of Warren Buffett being a net seller of equities over the past two years to build up a record cash pile amounting to an enormous US$325 billion.

That's equivalent to about half of the group's common stocks/cash holdings, although given the Berkshire group's vast size these days closer to around ¼ of the conglomerate's total assets (perhaps a bit higher today). 

With Apple now trading at 41x earnings, Berkshire has sold two-thirds of its stock holdings, in turn incurring a capital gains tax at a rate of 21 per cent. 

Buffett began by buying around US$1 billion of Apple stock at about 10x earnings in 2016, investing US$40 billion in the business in total, but valuations have exploded over the past 8 years leading to the recent sell-down.

Buffett last built up a similarly huge cash pile in 2005, thereafter allowing him to pick up successful investments in Goldman Sachs, Bank of America, and other great businesses at a massive discount. 

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Edit: The Federal Reserve cut interest rates today to 4¼ to 4½ per cent, but will clearly be pausing in January given some relatively solid recent data, leading to a bit of a markets tantrum towards the close. 

Canada has an inflation rate under 2 per cent now as of November, but the US and UK have seen a bit of a bounce of late.

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