25
Sep 2020

Does the Level of Government Debt Matter Anymore?

Does the Level of Government Debt Matter Anymore?

Written by Hudson Adviser Phillip McGann

Check out Phil's article here as a webinar. 

The short answer is no - well not yet at least.

The longer answer is wait and see …

The level of government debt coming into this year was large and growing . The GFC from ten years ago continued to have a lasting impact on government budgets where deficits were the order of the day for the past decade.

Australia had not seen a budget surplus for over ten years and debt levels were growing.

The government was about to announce a budget surplus in the May 2020 budget and would say it was on track to paying down our debt levels. 

Then Covid-19 hit in February.

Governments around the world in response to the medical pandemic effectively closed down huge swathes of their economies to protect their citizens from the virus.

The result - predictably - was a massive  economic  contraction.  Up to 20% in the June quarter for the UK and 9% for the US. Locally we saw a 7% contraction in June.

So the government mandated slowdown was met with government stimulus. Locally the government instigated JobKeeper which has been responsible for supporting over 3 million jobs. It increased the payment rate for JobSeeker just as numbers ballooned away.

But the alternative was not worth thinking about.

If the government did not act a severe recession would have become a full blown depression and we saw how that ended up in the 1930’s - mass unemployment and long lasting economic contraction.

So governments locally and internationally went into stimulus mode and started spraying around cash. This had to be funded and so the level of debt has increased dramatically.

The best measure of this is to compare a countries government debt level to its GDP. In other words how much does a government owe compared to the productive output of its economy.

Debt to GDP ratio

Country

Dec 2019

Projected for 2020

USA

106.9

120

ITALY

134.8

157

JAPAN

236.8

250

AUSTRALIA

45.1

50

Source: Trading Economics website  

So looking at the table Australia compares favourably with other leading economies.  And this is why we can easily fund out debt even though the actual numbers appear enormous.  It is projected the crisis will see the Federal government spend upwards of  $300 Billion.  

The government body responsible for the issuance of Federal Government debt is the Australian Office of Financial Management (AOFM).

Over recent months it has been very active in the debt markets. 

In July it issued 30 year government bonds at 1.94% and raised $15 billion.

In August it raised $21 billion of 10 year debt at a rate of 1.05%

Both issues were oversubscribed substantially so the demand is there from the market  to meet the government’s needs.

So who is buying all this government debt? 

Mostly it is offshore fund mangers and banks and large investment institutions that are keen to get set in AAA rate government debt at interest rates that are slightly better than they get overseas.

So does the level of government debt matter anymore? 

I would argue no - well not yet anyway. 

Investors are happy to fund the government spending  for now but the future will hold many uncertainties around economic activity, interest rates and inflation.

Watch this space!

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04
Jul 2020

What Will Australia's Economy Look Like in September as the Various Stimulus Packages Recede?

What Will Australia's Economy Look Like in September as the Various Stimulus Packages Recede?

Written by Hudson Adviser Phillip McGann

Economists are increasingly becoming concerned of what the short term outcome for the economy will be as we come to the end of the government assistance later this year - indeed within the next 100 days .

The Federal Government, State governments and many large corporations (including the banks) have been very proactive in providing the economy with a "crutch" to keep things going through the enforced lockdown of large swathes of the economy.

  • The Federal Government has provided colossal support via its three stimulus packages since March covering apprenticeships, tax relief, social security increases via JobSeeker payment and the big one of supporting over 3 million workers with JobKeeper.
  • State governments have come up with sector specific grants ,payroll tax waivers and deferments as well as outright loans.
  • The banking sector has provided wholesale loan repayment holidays (not actually cancelling the interest owed just capitalizing it) until better times return.

These are all welcome and targeted and have had a large impact to stem the job losses and allow us to "only" record an unemployment rate in May of 7.1% when the real figure without Jobkeeper may well have been 14% or even more.

However what happens when these programs run out?

What happens when they all run out together at the end of September?

  • The JobKeeper program has an end date of the 30th September.
  • The JobSeeker increase in payments (effectively doubling the payment ) is due to expire about he same time.
  • Likewise the banks have set there repayment holidays to run out at the end of September.

All of these by themselves are major changes but if they all happen at once (with no other changes brought in) will we potentially see a spike in unemployment as the lockdowns are still in force.

Many industries that rely solely on close human interaction (hospitality, tourism, sport, education etc) may well be devastated as business owners are no longer able to keep staff on board without the Jobseeker lifeline.

This leads to potential business closures and the myriad after effects of loan defaults and forced property sales etc.

Is this outcome avoidable? Of course it is.

The Federal (and to a lesser extent the State Governments through border lockdowns etc) has created this environment by closing whole industries down.

For legitimate health reasons we are in the midst of a government induced recession.

And it is up to governments to step up and step in and compensate the population as best it can in a collective sense to enable the economy to get back on its feet. This is a combination of unwinding the lock downs as well as maintaining fiscal assistance.

If this necessitates massive debt - as it has so far and as it will going forward - then so be it.

As Australians we all collectively own that debt and to use it to keep the economy afloat whilst we get through the pandemic is simply what we will have to bare.

The debt will accrue and we will have to service it and eventually pay it off (or write it off) via future income from taxes and inflation.

This is what happened in previous episodes of war and this current pandemic is akin to a "war on a virus" with all the restrictions previous war conditions entailed.

So yes, the government can and likely will extend the assistance past September to massage the economy's recovery from the pandemic. The alternative is a more severe and longer lasting recession or even depression and no government wants that on its watch.

Likewise the last thing banks want to do is foreclose on loans if any alternative is available. If the banks went "in hard" demanding repayment of debts come October they would be shooting themselves in the foot as they would be trying to sell property in a depressed market created by multiple sales of foreclosed properties from themselves and other institutions.

Banks are in the market place to lend money not foreclose on collateral unless absolutely necessary. So expect further assistance for the banks going forward particularly form home owners.

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30
Aug 2019

Recession? What Recession?

Recession? What Recession?

Written by Hudson Adviser Michal Park

Recession? What recession?

The longest expansion in US economic history is now being threatened by escalating trade tensions causing havoc amongst sharemarkets globally.  On top of the trade war, we’ve got Brexit, which is another political decision resulting in huge global change.  But is the current sharemarket downturn a sign of a major bear market, or simply a correction?

There is no question that global growth has slowed.  Below shows US economic growth over the past three years – lately, not able to meet the peak reached in mid 2018 due to the ongoing tariff threats:


AMP chief economist, Dr Shane Oliver, does not feel a recession is on the cards.  Yes, there are risks -  the most obvious being trade wars and recent inverted yield curves.  History shows that US presidents get re-elected after a first term except when there were recessions in the two years before the election and unemployment is rising.  Trump is aware of this and would be starting to panic about getting a deal done with China in terms of trade.               

Regarding inverted yield curves, they are not a reliable indicator of recession, merely a warning sign – though when found to be correct, a recession usually presented 18-24 months out. The Wall Street Journal reported in mid August that “the yield curve is no longer a reliable predictor, and other economic indicators are strong…the curve was flat for most of the 1990s, and even inverted briefly in 1998 without a recession” (switzer.com.au)

In Australia, inverted yield curves in 1985, 2000, 2005-2008 and 2012 meant nothing. 

US equity strategist at Credit Suisse, Jonathan Golub reported that in the 18 months following an inversion, the market rallies more than 15% on average.

Again in Australia, Shane Oliver’s reasons that our 28 years of continual expansion will avoid recession include the fact that there has been:

·         no excessive optimism,

·         no surge in debt,

·         no excess in the economy (apart from real estate – but essentially no investment boom),

·         modest private sector growth,

·         low inflation (so central banks have not slammed the brakes on).

In addition, our economy has seen:

·         Infrastructure spending,

·         Continued solid demand for exports,

·         Business investment turning the corner to offset a downturn in housing construction.

So it’s actually not all doom and gloom out there.

To finish on an even more upbeat note, chief economist at Morgans, Michael Knox, predicts that “in 2019 and 2020, Australia will grow twice as fast as the Euro area, twice as fast as Japan and faster than the USA”.  And with cash and bonds providing no returns, there may just be more inflows into shares.

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07
Aug 2019

Do I Really Need an Off-Road Caravan?

Do I Really Need an Off-Road Caravan?

Written by guest author and Hudson member J.D. Chadwick

With the Caravan & Camping show season about to commence many of you will be thinking of getting into this great outdoor lifestyle, or perhaps wanting to upgrade your van. All hoping to find the perfect rig at the best price at the show.

Before you get to the point of temptation you will need to know what to look for in a caravan. What will suit your needs, not what the manufactures want you to buy.

Hopefully this article will help answer many of the questions about ‘what you think you need’ and ‘what you really need’.

The number 1 asked question I’m asked: “Do I really need an off-road caravan to travel around Australia?’

Obviously, there are many factors to consider but for most of us the short answer is NO!

Which may come as a shock to some readers. There will always be a few consumers who really need an off-road van, but generally these types of vans are not required for most travellers.

Off-Road Caravans have several disadvantages not considered by the uninitiated buyer.

Let me clarify.

Firstly; RV manufacturers nearly all offer an off-road version in their range. These are there due to demand, not necessity. Perception is half the problem.

Apart from the coast, Australia is 80% Outback. This conjures up a perception that once you leave the cities things get very rough and tough and you are going to need a van that will tackle these conditions.

The reality is, we are like any other first world country have good roads, regional towns have everything you need, and our National Parks are some of the best on the planet. You can access most of this great country in a car – ask any visiting overseas backpacker!

So, what do you really need in a Caravan?

Questions you need to ask yourself. (be brutally honest and put aside dreaming for a moment)

  • Will I be wanting to drive for long hours on rough corrugated tracks?  E.g. Tanami Desert, Birdsville Track, Great Central Road, Gibb River Road to name but a few?

  • Do you like far away places with very little of interest other than the challenge of getting there?

  • Are you willing to take a brand new $90,000+ dollar van down very rough unsealed roads with the potential to do damage to car and van?

  • Do you have enough money to pay for the extra fuel consumption?

  • What type of tow vehicle do you own?

  • Are you going to have to buy a new 4x4 to match the off-road caravan? A very expensive exercise especially if you won’t be using it to its max.

  • Do you have a high garage or car port to store a tall off-road van?

  • Is climbing into a van OK. Would you prefer a small step up?

I’ve seen so many off-road vans on the road looking far more immaculate than ours, having never been down more than an access road. Some being towed behind totally unsuitable vehicles for a rough track.

So, I ask myself, what is the point of owning one if you are never going to use it for its intended purpose.

Most retirees will head off around Australia travelling along the well-worn tourist routes visiting the ‘must see’ sights and have a fantastic time without owning an off-road RV.

The last thing you need is a great big rig behind you that is sucking the dollars out of your wallet faster than the house contents in a tornado.

To be Off-Road capable vans have to have a much higher ground clearance which in turn subjects them to greater wind resistance than a lower on-road van.

Headwinds are our nemesis and they will always blow hardest from the direction you wish to travel to!

When it comes to visiting coastal cattle stations (mainly in WA) and popular freedom camps that have gravel access roads you will not miss out because you don’t own an off-road van.

For short distances on gravel, even very corrugated roads, you simply let your tyres down and take it easy and you will get there with no problems or damage.

There are not many places we haven’t been in our decade of discovery - and we do not own an off-road van.

Yes, there will always be a few instances where you wish you had a van capable of taking you down some of the unsealed roads to those unique places.

The Gulf country Savannah Way comes to mind. And we would have loved to have done the Gibb River Road and the Cape York Highway but at what cost?

The latest Off-Road Caravans can handle these tracks easily, they have superb suspension (which is what you are paying for). However; is your car up to it? Are you up to it?

Corrugated roads, especially bad ones, can impose a lot of stress and strain on a non-upgraded 4x4 vehicle, not to mention the driver and passenger taking a pounding hour after hour. I’ve met many a traveller whose off-road caravan has done the job, but their car failed miserably. Road side rescues are expensive in remote areas. 

Eva has massaged many a weary traveller who has just come off an outback track or corrugated highway. Their caravan showing no signs of wear but their bodies needing some serious TLC.

A normal Australian built caravan will take you to 90% of the best places in OZ, no problem.

They are lighter, cheaper, lower (less wind resistance) and easier to tow. Can be towed behind smaller SUV’s and larger road cars (E.g. Commodore). Be sure to match your rig to the tow vehicle whatever you end up buying. They are also easier to store at home.

Generally, there is no difference inside. All vans are alike. It’s the souped up under carriage that is makes it an off-road van.

Remember; If you don’t have an Off-Road set up you can easily take a guided tour to the more remote areas. No risk to your vehicle or RV, guaranteed to see all the best spots and it will save you money in the long run.

Take a leash to the caravan show…

Ladies…it’s the men who are the problem.

They are the ones who get excited when they first see the off-road vans on offer. The beefed up, butch image has a tendency for Hubby’s common sense and rational thinking to leave his body. At this point clip on the leash and gently lead him away.

In conclusion; I am all for off-road vans for those who genuinely wish to get off the beaten track (myself included) but they are not really needed by the majority of travellers. If you really want to go bush, then a camper trailer may be a better option.

Buy wisely.  Then invest what you save with Hudsons.

Chad

RV Guru

PS: This article is an extract from Chad’s monthly RV Newsletter ‘Aussie Life On Wheels’ which, thanks to Hudson Financial Planners, you can grab a copy FREE of charge by clicking this link: www.AussieLifeOnWheels.com/free-issue.html

An entertaining read and a useful tool for all Caravan & Motorhome owners and would be owners. It’s free!

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03
May 2019

Helicopter Money

Helicopter Money

Written by Hudson Adviser Michal Park

With inflation still below the 2-3% target band  (core inflation just 1.3% over the year – the weakest reading since the series began in 2003), the cash rate looking likely to be cut twice this year (as early as next week and up to four times according to some economists), and the Australian economy in what can only be called dire straights, the term ‘helicopter money’ is being bandied around for the first time since former Federal Reserve Chairman Ben Bernanke alluded to it in 2002.

The term Helicopter Money conjures up images of cash being showered onto households from above – and that’s not far from the truth.  It is essentially the production of money by the central bank to handout directly to households in an effort to boost disposable incomes and spending.  In fact, our government did exactly this back in 2009, handing out one off payments of $900 to Australian’s earning less than $100K per annum, and $950 in back to school bonus’ aimed at helping families with school aged children.  The caveat was for those in receipt of these payments to spend the money on locally-owned businesses to protect the country from recession.  Well, history will show that we did indeed avoid a recession, but how much of that success can be attributed to the cash splash?

The term ‘Helicopter Money’ was coined by Nobel economics prize laureate and free-market advocate Milton Friedman in the late 1960’s, and it seems it is being considered as a viable option for the Reserve Bank of Australia in the current climate – that is, to drive up inflation and the stimulate the stagnating economy. 

The risk, of course, in giving households handouts is that they will simply save the cash instead of spending it which defeats the purpose entirely.  Another major risk is the potential for uncontrolled inflation – but inflation (or lack thereof) is one of the precise reasons why the RBA should/would consider this strategy. 

The point is that the RBA may have to be creative if interest rate cuts aren’t enough.  With the current cash rate standing at 1.50%, there really isn’t a lot of monetary policy wriggle room before we hit negative interest rate territory.  So alternative choices to help kick start the economy may just include a little helicopter money.


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