I’d like to dedicate this edition of the newsletter to Kai Zen for his constant service to this publication, including his kind donation of this week’s article. Written by the highly respected French economist Thomas Picketty it outlines the potential benefits the refugee ‘crisis’ could infact have for the still fragile European economy. He also highlights how pre-GFC, Europe had a very different attitude towards immigration, but the past 8 years have changed their view and not for the better, linking poor economic management with a deteriorating social tolerance.
Arguably, this was one of the biggest weeks for economies internationally and domestically this year. Starting with the Australian economy, the change in PM is expected to have a substantial impact on business confidence, at least in the short term, judging from the historical spikes experienced in the two Rudd/Gillard transitions.
Even with potentially favourable short-term expectations on the horizon, RBA Governor Glenn Stevens adopted an ‘upbeat’ assessment of the domestic economy in the medium term. Claiming recent descriptions of the domestic situation was “more negative than facts actually warrent”, Stevens dampened expectations of a rate cut in the near future and also boosted confidence. Further, he mentioned that he was reassured by the weakening of the domestic currency over the past 12 months and the 200 basis point buffer we still retain.
Obviously familiar with the old joke ‘talk is cheap as supply exceeds demand’, Australia’s chief central banker certainly knows to use such statements sparingly, and thus to great effect. His positive words rounded off what was a good week on domestic markets with the All Ords closing at 5193 and the AUD moving back up to USD 0.72, at least for the time being.
However, this was in part also due to the unexpected decision by the US Federal Reserve to leave rates on hold,once again demonstrating that the consensus of ‘market economists’ can mean very little. Fed Chair Janet Yellen (interestingly enough married to Nobel Laureate George Akerlof) expressed concerns about weaker global conditions, namely lower growth, continuing market volatility and the instability in China. While Stevens downplayed this issues as not unexpected in the RBA’s long-term assessment of the global economy.
Coming from over 30 years ago, this weeks article is by no means new. However, the ideas it discusses are still avidly debated even today within economic spheres. It investigates the differences between three forms of time utilised by economists; the standard logical time oft used in microeconomics, the rarer historical time familiar to some more eclectic economists, and perhaps the rarest form, mechanical time. Each form has a substantial effect on how different schools of thought perceive the economy, so if the internal debates within economics fascinate you then have a look.
Last week the AUD slumped mainly due to favourable employment data from the US but this week it was our own turn with some unexpectedly good results. The domestic jobs growth figure was three times what the market expected, bringing the unemployment rate down from 6.3% to 6.2%.
While this was not a spectacular fall, some might recall the RBA commenting a few months ago that they expected the unemployment rate to peak and start to fall. While the broader market was not as confident with the RBA’s assessment, it seems once again they’ve proven that they still possess the greatest predictive power in the economy.
Looking more closely at the data for the past two years both in terms of hours worked and employment itself, there’s been an upward trend of 1-2% for the past couple of years. However, to make significant impacts on the unemployment rate a 2-3% range is required. This data saw the AUD end the week at around USD 0.70 with the gradual downward trend expected to continue for a few more cents yetFinally, this week domestic energy stocks were hard hit this week, but then again that’s diminishing marginal utility for you.
This is a very unique article espousing the belief that if you compartmentalise an individual’s life into distinct time frames then the choices they make which might appear irrational are infact rational. Now while that might sound a bit confusing if you read the article it’s sure to give you a brand new perspective on choices and decision making.