For a time of year when not much usually happens, economically or politically, January was pretty busy.
And, for investors, too. January is usually ‘confession season’, where companies do a quick sum of their last six months and, if the numbers have come in light, share the bad news with the market in advance of the release of their formal earnings announcements, in February.
Then, of course, the RBA starts its new meeting regime this month.
Rather than a half-day meeting, on the first Tuesday of every month (bar January) as has been the tradition, they’ll now meet for two half-days at a time, but only eight times a year.
That’s yesterday and today, with an announcement on rates due at 2.30pm AEDT this afternoon.
Me? I like that they’re spending more time discussing each rates decision. But I’d far prefer they met 11 (or even 12) times a year. During occasional times of particular economic uncertainty or change, having fewer meetings could tend to mean the RBA is less agile in responding, has to wait longer to respond, and/or has to make bigger movements, when it does.
Turns out neither the Treasurer or the RBA Governor asked me, of course, so they’re going with eight!
But back to January.
We got some important economic data, notably retail sales (down 2.7% for December, but off an unusually big November) and inflation (down to a still-too-high 4.1%, from 5.4% the previous quarter).
We are, it seems, potentially at an inflection point (which is why many think the RBA will keep rates on hold this month, and that the first cuts in this cycle are now likely to be sooner than previously expected). I’ll return to predictions in a minute.
A couple of economic thoughts, first, if I may.
The government’s decision to change the legislated Stage 3 tax cuts â which they voted for, in opposition â took up a lot of airtime over the last few weeks.
I tweeted about it, at the time. Here are my thoughts:
First, let’s review the state of play. I’ve repeatedly said that Stage 3, as legislated, was
– Irresponsible, because it was unfunded
– Inflationary, by adding to demand when the RBA is trying to cool the economy; and
– Unfair
Based on the changes, where are we?
First, the good. The government has resisted the urge (and urgings of some) to increase the cost of the tax cuts by any significant amount. That’s very good news, economically-speaking. More cash splashed would have made debt and inflation worse, and locked in a higher structural deficit.
The better: Given the current cost of living pressures, it is axiomatic (based on the maths) that lower and middle income earners need support more than high(er) income earners. I think the reported reallocation across the tax brackets is fairer.
(A parenthesis here: I would have benefited more from Stage 3 as legislated than from the planned changes. On a personal level, this new proposal makes me worse off than I would otherwise have been. I don’t love that. But it’s the right policy, fairness-wise).
The bad: My issues with Stage 3 were and are three-fold, per the above. The government has taken steps to address ‘fairness’ (though everyone will have their take on what fairness means, and might disagree with my assessment), but has ducked the economically important issues of debt/deficit and the inflationary impacts.
And that’s very bad. ANZ reportedly thinks Stage 3 is worth about 0.5% of rate cuts (in other words, the RBA could likely reduce rates by that much, if Stage 3 was cancelled). Plus, it locks in an irresponsible Budget position and does nothing for national debt.
So if you’re going to do Stage 3, and spend $20b this year, this is better than the original proposal, but it’s like choosing between economic illnesses, rather than trying to return to health. So it’s decently better than the original plan, but nowhere near good enough.
The inflationary impacts are probably worse than planned, despite reports that Treasury advice says they won’t be. I trust the boffins, but if you give Twiggy $1, he probably won’t spend it. If you give it to someone on welfare, they absolutely will.
That’s not a bad thing – the lower income earner will spend it because they need to – but it absolutely lays bare the economic impact of these unfunded tax cuts and directly works against the RBA’s efforts. The cuts should be funded or cancelled. At least reduced.
They won’t be, of course. Because of politics. But that doesn’t change the economics.
Speaking of politics, there’s been a lot of angst about lies and broken promises.
For what it’s worth, I don’t think the government lied. My strong sense is that they were scared of the political implications of a ‘broken promise’, which is why they waited so long to finally decide to change the mix of the Stage 3 tax cuts.
But it’s also clearly a broken promise.
Now, it’s better to break a bad promise than to stay with bad policy, in my view. (We can argue about whether Stage 3 is bad policy â as mentioned above, but that’s a different discussion.)
As I tweeted this week:
“If you think a promise is more important than good policy, you’re partisan or bloody-minded.
And if you think breaking a promise doesn’t matter, you’re partisan or unprincipled.”
So, what implications does all of this have for investing?
Well, as I said above, Stage 3 is bad for inflation, and that’ll have an impact on interest rates. That matters if you’re borrowing money to invest, if the companies you own have significant amounts of debt, and interest rates matter for share prices, too.
(Also, a reminder that many companies have fixed rate loans, many of which still haven’t rolled over. So keep an eye out for that.)
The changes to Stage 3 are probably good for spending, particularly for discretionary retailers. As long term investors, it’ll likely not be a particularly important boost, measured over years, but it will put some extra air in the tyres of those companies over the next 6 or 12 months.
And the ‘promises’ thing has some import, too. Not the political implications themselves, but as a reminder of the way things can change, and the folly of promises or expectations based on predictions.
We’ve already heard from some companies who over-egged their profit guidance, and have had to walk it back. I’d bet we haven’t heard the last of it, yet.
As I tweeted in relation to the political machinations, an Opposition Leader (and, frankly, a PM), should, when asked for a promise, reply:
“I understand why you’re asking. But I’m not going to play the game of ruling things in or out. Australia deserves a competent government that will do what’s required, when it’s required… not a government that plays political games.”
Which is exactly the same sentiment a CEO should express when asked to give profit guidance. Will that make her unpopular for a while? Maybe. Will it lead to headlines and criticism? Probably. For a bit.
That doesn’t mean it’s the wrong thing to do, either for our pollies or the managers of our companies.
It also applies to economics, too. I’ve lost count of the number of times I’ve been asked to make a prediction on interest rates, economic growth, or the level of the ASX.
Each time, I simply say ‘I don’t do predictions, because no-one knows’. I do then go on to outline some of the risks and opportunities, and ranges of outcomes, to help inform my audience, but I flatly refuse to predict. It’s a parlour game that owes far, far more to luck than skill, and so is all-but useless.
We should prepare, not predict (or promise). It’s an approach that I’m convinced is far, far more useful â and profitable â for investors, economists and politicians alike!
Fool on!
The post Unpacking some big economic changes appeared first on The Motley Fool Australia.
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