Important new market indicator launched – says rate cut is go and “Little Lady” in the 5th is a sure thing.
So things are certainly shaping up for a rate cut later today.
After you’ve been in the game for a while, you get to recognise how it works.
You see, the RBA doesn’t want to freak any body out. They don’t want to drop any bombshells on the market. They want their decisions to go down as smoothly as possible, to avoid any collateral damage.
So they work hard to manage expectations.
That process typically involves letting a couple of their key guys in the major papers in on the deal.
The markets know these guys have extra access, so when they come out the week before a decision with a very reasonable argument as to why the bank should cut rates, then there’s a very reasonable chance the bank is actually going to cut.
The markets adjust themselves accordingly, without being able to take big bets on it because you just don’t know for sure. Not totally. But by the time the decision actually rolls around, it’s no big deal.
Everyone just rolls with it. All very reasonable.
The RBA never officially endorses their mouth pieces of course, but it’s taken as a bit of an open secret.
Seems though it’s not such a secret anymore.
Because when their men cam out this week with some very reasonable arguments as to why a rate cut was done deal, I thought, there’s an opportunity here.
So I headed on over to Sportsbet.com to see what odds they were offering.
The whole online betting things a bit of unknown to me. The odds are calibrated to even out the wins and losses in the betting pool, less a margin for the service.
So it’s the collective mood of the betting pool that determines the odds.
But who is this betting pool?
And while I’m guessing that pool is collectively across all the details of Race 5 at Randwick, what’s their collective wisdom going to say about interest rates?
There could be some knowledge gaps worth exploiting here. If I imagine my local TAB, I’m seeing a lot of form guides and not a lot of financial newspapers.
And I’ve just come out of a very enjoyable experience with a knowledge gap – Donald Trump.
A lot of people would say that Donald Trump is a knowledge gap himself, but early on in the run for the primary, I saw what he was brining to the fight, and knew that the others didn’t have a chance.
And Sportsbet were offering fantastic odds – 7:1.
Know you might say I had unique insight and an affinity with Trumps game so that’s how I got the inside running. But remember, this is at a time when Trump was leading every opinion poll!
The data were saying he was hugely popular, but the bookies were running him as an outside chance.
It was just such a curious knowledge gap. I had to take a punt on it just for curiosity’s sake.
Anyway, Trump sealed the nomination and I took my payout last week. Very sweet.
And so on the back of that high, I’m thinking, maybe I could have a little flutter on interest rates. Maybe the punting pool doesn’t know about this inside man caper.
It was a little disappointing. Sportsbet are leaning very heavily to a rate cut today. They’re offering just 1.67 for a 25bps cut, while no move is paying 2.1.
Maybe 1.67 a little generous. That implies something like a 60% probability of a cut. I think it’s quite a bit stronger than that, but not a huge amount. And it doesn’t make all that much difference to the payouts.
So it doesn’t look like there’s anything to exploit here. Turns out the punting pool at Sportsbet is quite well informed.
It makes me wonder how they set their odds. The bookies probably got research teams on it and plays in secondary markets. I guess the interest rate isn’t too whacky a thing to be betting on.
They are offering 4:1 on the chance of two more rate cuts this year. That’s one tomorrow and one some place else. Would you give that a 25% probability?
I wouldn’t think so. I think we’ll see a rate cut today and at least one more this year. I guess the question for me is one or two.
Because the Aussie dollar keeps edging upwards and risks getting away from its handlers. Domestic conditions are stable but there’s some pretty serious headwinds looming – as the mining transition completes and the apartment building boom comes off the boil.
Rate cuts will juice the property market even more, but what are you going to do? You can’t sacrifice the whole economy just to keep a lid on house prices.
And everyone else is doing it mum. Japan’s threatening to go helicopter money, the UK and euro are getting loose and limber, and the US, after promising a return to normal levels, has delivered just one little rate hike since the end of last year. Disappointing GDP numbers last week are actually making it harder and harder to make the case that rates should rise.
In a world we’re pretty much everyone is cutting (oh, did I mention China), you have to follow suit. If not, your assets look to attractive, and foreign capital bids up the Aussie dollar.
It’s already higher than the RBA is comfortable with. If it goes even higher then the local economy will have a tough run ahead of it.
That’s life as a small open economy. You don’t really get to set your own interest rates. You’ve just got to roll with it.
So any argument that says that interest rates here hold or even go up is assuming that the rest of the world will be feeling comfortable enough with things that they think that can start normalising rates.
I just don’t see that happening. Not in the next 6 months.
So, 4 to 1. I make take that bet…
Where do you see rates going? Any plays with online bookies you can see?
Kathy says
Trouble is that nowhere in the world are low, zero or negative interest rates working to even stimulate any country’s economy, let alone fix it.
If we want to know our future, look to Japan, who is heading into their 3rd straight decade of no growth and deflation. They’re 30 years ahead of us. This is our future.
Why will this rate cut work when the last dozen have done absolutely sweet FA? Anyone who was going to borrow money has done so already. People are no longer prepared to take on any more debt to fund consumption.
We’re too far down the rabbit hole now for any more rate cuts or quantitative easing measures to work any more.
We have a huge debt overhang (with most of that debt tied up in unproductive or non performing assets like real estate) acting as an anchor to economic recovery and most of the world’s developed countries face a demographic cliff that all the low interest rates and money printing isn’t going to fix.
You would think our world’s central bankers would have cottoned onto this by now.
Hugh says
Retirees who lost heavily in managed funds in the GFC put what was left of their money into cash, but with every rate cut their income decreases and they have to withdraw more – their retirements are grim, facing just the age pension.
Hugh says
In the next 7 years the world looks like going over a huge financial cliff. Those trying to steer it away are trying one action after another, but really don’t have the answers. The situation is far too complex and too far gone.
Manu says
Kathy your spot on. Poor RBA and ‘property experts’, they just don’t get it – you have people so overleveraged in NSW and VIC with so much debt that no amount of cuts can stimulate the economy anymore – people on $50k-$250k just making interest only pmts. Hugh, to counter the lower IRs, there will be a wave of retirees selling family homes downsizing, living off equity for a few years. Also, the world is not going over a cliff. In the US, Asia, Europe, can live very well , save a high % of your income, enjoy good food, holidays VS life for most in NSW and VIC, with ‘equity’, on 6 figures, working 2 jobs each and worried about the consequences of buying a coffee. FYI Australia is the only nation that allows foreigners to buy real estate with no restrictions or extra taxes (do some research) – please ensure your kids know Chinese, as they will be signing those rental agreements in 10 years… rate cuts will not juice the market, The only thing that will juice markets if Chinese money continues, which I expect. Good luck OZ and suggest you voice concerns with Govt.
Tom says
USA threw the spanner in the works with their Quantitative Easing.
They more than trebled the amount of USD in circulation.
Had they used all that extra money to pay for productive infrastructure projects, they would have a thriving economy right now. Full employment might have caused wages to rise, as projects competed for workers. This would have fuelled inflation, causing rising interest rates.
However, the decision to print all the money was not a national or Government-led idea. It was the Fed’s idea and that is a privately owned bank, which plays its own banking industry game, regardless of the national welfare. The money was all passed straight to their fellow banks, in an attempt to sort out the balance sheet mess their irresponsible greed had caused during the GFC.
Since WW2, the world’s financial systems have been based on the assumption that growth could be maintained, ad infinitum.
Now, the world’s resources and demand for them is levelling out. The growth module is now meaningless. For decades now, planned obsolescence and consumerism have combined to boost consumption and so industry, in the Western world – but the world’s resources are limited and the demands of a world population, grown too rapidly, have already outstripped supply. We now need a ‘Maintenance Model’. However, this will be hindered by the idea Jon raised earlier regarding the pending mayhem as robots take over the bulk of jobs, which is already well on the move, but only just starting to be recognised.
Our whole democratic, capitalist social structure is in for a drastic revolution. With no work for the masses, the current models based on the rich getting richer, at the expense of the working poor will inevitably cause dire social unrest. However an armed revolution will no longer be an effective answer. A change of ruling class will solve neither the robot problem, nor the dwindling per-capita reserves of resources.
The ‘soup kitchens and circuses’ model works for only a limited time, as the late Roman Empire found out. People need something productive and rewarding to occupy their time.
Without hunting, gathering or work to fill their days, the disenfranchised will revolt, en messe.
The USA government realises that armed revolt is almost inevitable. That is why they have supplied billions of rounds of hollow-nose bullets to all their civil control militias. These dum dum bullets are banned in international warfare, because they wreak such havoc within the victim’s body. They are the ultimate ‘shoot-to-kill’ ammunition – not ‘crowd control’!!! Is it any wonder that their people cling so desperately to their rights to have their own lethal weapons, for defence of themselves and their families?
China is coming off the boil and their social unrest is starting to become evident. They will also find that imposed law and order can only be maintained up to the breaking point. Then what???
Rob says
Tom, China has the Thatcher solution available!
– Start a war – so everyone forgets their problems and rallies behind the leader. Easy peasy!