My take on the Wall Street wobbles + Great news for property owners

Hi everyone,

The countdown to Christmas is well and truly on. For the Koch household it means a very full house at times with the West Australian crew back for Christmas and the Sydney gang moving in for periods as well.

Christmas Day is a little quieter for us this year as we have a rotation between in-law Christmas and ours. So, Brie and the kids are in Melbourne with CJ’s family as is AJ with Carolina’s brother and her visiting parents. Georgie is in Berlin with Alex’s parents while Sam has lunch at Toby’s parent’s but will meet us at the Koch Christmas at my mum’s place in the evening.

As you can see it has the precision of a military exercise. As it stands Libby and I will wake up Christmas morning without children in the house for the first time since 1979. We are quite looking forward to it!

From my family to yours, we hope you have a great Christmas/New Year period.

This will be the last weekly newsletter for the year and we’ll be back mid-January.

But the week before Christmas has been jam-packed with financial and economic news.

In this week’s newsletter:

• Big government spending is sinking the Budget.

• Wall Sreet gets a dose of the wobbles.

• The stocks to buy in 2025.

• Profits on property sales reach $300,000.

• How owning a property makes you happier.

• Earning extra income: Why a record number of people have a second job and how to make it work for you.

• My guide for rebooting finances

Big government spending is sinking the Budget

The Federal Treasurer updated the Federal Budget outlook this week ... officially known as MYEFO (mid-year economic and fiscal outlook). Not only is the record spending of the Federal Government fuelling inflation, but they are also doing it at a time when tax revenue is falling (because of the slowing economy) and export revenue is dropping (because of falling commodity prices driven by a weak Chinese economy).

Spending going up as income drops means the Federal Budget is in tatters.

In dollar terms for this financial year, this sees budget deficit rises from the forecasted $26.9 billion to $28.3 billion. But then it deteriorates badly with the next financial year’s deficit rising to $46.9 billion. This is the sixth largest deficit on record.

Interestingly, that figure includes $5.6 billion worth of "policy decisions taken but not yet announced" over the four term years (up to the Financial Year 2028). That is political speak for election promises yet to be announced to buy your vote.

The Government blames the blowout in costs on "unavoidable spending" on health, cost-of-living relief and veterans’ care, plus the Aussie economy slowing because of high interest rates and inflation. But the Treasurer insisted government spending would help ensure a soft landing.

This is where the Federal Treasurer and I differ in opinion. He says government spending is keeping the economy afloat while I believe the Government spending is keeping both interest rates and inflation higher which is slowing the economy. Cut spending, interest rates and inflation falls, and the economy picks up momentum. You want the economy to be driven by consumers and business - not the Government.

As a result of these deficits Australia’s net debt will climb to 22.4 per cent of GDP in 2027/28 but it would still remain low by international standards, as I showed in last week’s newsletter.

But these budget deficit figures could improve because the Government’s fiscal “slush fund” is still in place. It is forecasting revenue based on iron ore prices (our biggest export) at $US60 a tonne when the current market price is $US105.

Interestingly, despite all the rhetoric around reducing migration levels, the MYEFO estimates net overseas migration for this fiscal year is up to 340,000 from the previous forecast of 260,000 in May. That’s 80,000 more people which will add pressure to the housing market.

Wall Street gets a dose of the wobbles

Financial markets hate uncertainty and they hate disappointment. Wednesday night’s Wall Street crunch is a classic example of that, as is the bounce back this morning.

The disappointment and uncertainty is focussed around interest rates. That’s why the ‘Santa rally’ of American stocks came back to earth with a thud and it could be contagious globally - as we saw as the Aussie market took a hit yesterday.

The US Federal Reserve, as expected, cut official interest rates back to a 4.25-4.5 per cent range but it was what Fed boss, Jerome Powell, said in his press conference that spooked markets. With Trump, and his election promises of tax cuts and tariff increases, set to come into power in 2025, there is considerable speculation it will cause a rebound in inflation.

The Fed aggressively increased official interest rates in 2022 and 2023 to fight inflation … and it succeeded. Job done. The reward for that aggression was an interest rate cut of 0.5 per cent in September and another 0.25 per cent last month. Markets were also expecting a string of rate cuts in 2025 and the Fed had been encouraging that thinking.

But this week America’s central bank blinked. Powell said any further rate cuts would be dependent on further progress of inflation trending down and the jobs market staying solid but not overheating.

In January US political power shifts to Donald Trump and his raft of election promises. If he delivers on those election policies then inflation is heading back up in the US and the size, and speed, of any future rate cuts are in jeopardy.

It’s a big “if” on whether Trump will follow through with those election promises. There is a school of thought that Trump simply follows the traditional political strategy of “say anything to get elected and then, once in power, do whatever you like”.

Just as Trump 1.0 showed, he does tend to talk a big game and often doesn’t follow through on some of his more outrageous plans. That plan to build a wall along the Mexican border, and get the Mexican Government to pay for it, didn’t turn out as planned. In fact, only an extra 80 miles was added to the already existing walls during the last Trump term as President.

So, there is some scepticism about the promises of Trump 2.0. Let’s hope that scepticism is right. If it’s not, then US inflation is back in a big way.

Trump’s plan to deport all illegal migrants is just a crazy idea which will lead to labour shortages, sparking wage rises and potentially corporate failures across key industry sectors.

The logistics behind the mass deportation of millions of illegal migrants alone are hard to comprehend. But the impact on key industries would be devastating.

The construction industry workforce consists of 14 per cent illegal migrants (1.5 million workers), 13 per cent of agricultural workers are illegal (244,000 people) as are 7 per cent of hospitality workers which total 1 million workers. Take those migrants out of the workforce and those industries would teeter on the edge of collapse.

Not only would the resultant supply chain disruption add to inflation but the labour shortage would spark big wage rises as employers compete for replacement staff at a time when unemployment is already at a low 4.2 per cent

And, as a side note, 47 per cent of all undocumented immigrants live in California, Texas and Florida. These are the three economic powerhouses of the US economy. A workforce loss of that magnitude would bring those states to a standstill.

So when Jerome Powell talks about the state of the labour market when determining future interest rate cuts, Trump’s deportation plans will be a significant factor.

Then there is Trump’s tariff policies to supposedly protect the jobs of American workers. His theory is to make imported products more expensive to encourage consumers to buy locally manufactured products and to discourage US companies from manufacturing overseas.

He has already announced that on his first day in office he will impose a 25 per cent tariff on Canadian and Mexican imports and add another 10 per cent on Chinese imports to the tariffs imposed during his first term in office ... which President Biden maintained.

Sounds very patriotic in theory but these three countries are the major suppliers of products to US consumers and the tariff increases will be passed onto consumers. One US economic think tank estimates these tariff increases will increase the annual costs to US consumers by $US2,600 a year.

The US sharemarket has had a stellar 2024 led by the so-called Magnificent 7 technology stocks and the prospect of further rated cuts. But the future looks a lot more uncertain with Trump in power..

Christmas stocks to buy

In the lead up to Christmas the regular experts on the Ausbiz business streaming network (www.ausbiz.com.au, SevenPlus and Samsung smart TVs) share their stock tips and their favourite companies to invest in for 2025.

This year’s batch included:

• Telix Pharmaceuticals - Martin Crabb, Shaw and Partners.

• Newmont Corp - Henry Jennings, Marcus Today.

• Data3 - Sanjee Nerandran, Team Invest.

• Life360 - Zach Riaz, Banyantree Investment Management.

• Objective Corp - Mark Gardner, MPC.

• Echo Ltd - Adam Dawes, Shaw and Partners.

• Coles Group - Grady Wulff, Bell Direct.

Median profit on property sales reaches almost $300,000

It is always great watching a rising property market and there is a huge sense of relief knowing that your biggest asset is increasing in value. But, as we all know, you can’t eat your house or spend that value rise unless you borrow against the equity or sell the property.

Selling crystalises that value increase into cold hard cash, particularly if you’re downsizing and can bank that profit rather than leverage it into a more expensive home.

Even though some markets are turning, auction clearance rates are falling and time on market to sell is extending, a huge proportion of sales are achieving record profit levels.

For the September quarter of 2024, property research group CoreLogic measured 95,000 property resales. The incidence of loss-making resales across those property sales fell to just 5 per cent. This was the lowest level since March 2008, or the lowest level in sixteen-and-a-half years. The portion of properties making a nominal gain from resale has trended higher since the June 2023 quarter, coinciding with the start of a recovery in home values from February of that year.

The median nominal gain from resale reached $295,000, which is the highest level since this measurement series started in the mid-1990s. The median loss from resale was steady in the previous quarter at $40,000, but up slightly from a five-year average of $39,000.

Homeowners in total earned $34 billion in the September quarter from selling their homes.

Nationally, 97.1 per cent of house resales made a profit and 90.6 per cent of home units. Take a look at Adelaide where 99.2 per cent of houses and 98.5 per cent of home units were sold for a profit . Most capital cities had strong results with the only laggard being Darwin.

In terms of correlating length of property ownership with the amount of profit made on a sale, it seems the sweet spot of selling a property in under 10 years is the most profitable if you measure a per annum return.

Property owners are stress free

Economists always talk about the huge psychological impact a rising property market has on consumer sentiment. If the value of your biggest asset is rising you at least feel rich, even if it is hard to make ends meet on a day-to-day basis.

This chart from IFM Investors is just fascinating. As you can see, Australians who own their property outright are much happier, with a higher consumer sentiment, than those with a mortgage or renters.

I would suggest sentiment is so low among those with a home loan because of the frustrating wait for interest rate cuts. Also, many home owners are shocked when coming off low fixed rates onto much higher variable rates.

As for renters, they have been shocked by the lack of availability which has caused a huge spike in rents and been a major inflation booster.

Working a second job to ease the cost of living

In a sign of how tough Australian households are finding the cost-of-living crisis, almost a million Aussies are working a second job to earn extra income - that’s a record 6.65 per cent of all workers.

When Libby and I were raising four young kids, money was always tight. We decided from the start that Libby would be the homemaker dedicated to the kids and I would be the breadwinner.

That was our decision and it’s not for everyone. There is no right or wrong in the mixing of work and home duties in a relationship, it’s up to each couple. We soon realised it was tough to raise a family on one income and we had to find extra cash, particularly during times of economic recession, high inflation and soaring interest rates. A bit like now.

Thankfully being a journalist gives some flexibility. While working for the Australian I was also the Australian columnist for the Economist in London. While at BRW magazine I provided finance reports for radio breakfast shows and hosted a nightly radio investment program while working at Personal Investment magazine.

That extra income was not only invaluable to balancing the family budget but also provided a great training ground to establish our future family businesses.

Starting a business part-time is the first and most secure route to turning that dream of becoming your own boss into a reality. It means entrepreneurs can get a taste without the sink-or-swim risks of diving in with big upfront costs to sustain it.

The alternative is the riskier strategy of starting a business full-time and struggling to meet the overheads when income is still volatile. Mistakes are a lot more costly. In effect, moonlighting in a part-time venture is providing the business with seed funding to get started. The bank manager will be comforted by the fact that all those early mistakes were made with your money rather than theirs. It is a difficult balancing act although modern technology certainly helps.

The growth of the internet, social media, mobile phone, AI services, personal computers and remote admin can give customers the impression of a fully-fledged operation.

The secret is to become a time-management expert. Family life can suffer and the risk of divorce increases. Weigh up these sacrifices before making your decision. It isn’t easy, but it can be done if you follow some simple rules:

Talk to the family. It is essential that you have the support of your family before starting a part-time venture. Discuss the idea with them and explain the pressures it will create on family life and free time.

Give family members tasks. The best way to involve the family is to make them part of the venture. Give them tasks which make them feel as though they are contributing.

Be a time manager. Juggling the hours in the day for full-time work and a part-time dream means you have to take advantage of every minute of the day. Use lunch hours and free time to work on the business but do it in a disciplined way.

Forget the luxuries. Quiet nights in front of television, going out to the movies and restaurants could be sacrificed initially to spend time on the business. You must be prepared for this.

Confine business to one room. The last thing you want is for a part-time venture to disrupt the whole household. Try and limit your office equipment and storage to just one room, otherwise you'll be constantly in turmoil and unable to escape the pressures.

Don’t let the day job slip. The performance at your full-time job is critical. It must not deteriorate. Remember the job is providing that all-important financial security to allow you to try a new business.

Don’t make business calls during your day job. The number one reason: you will get fired!

Tell the boss. There is no reason why you should tell your employer about the part-time business but if you have a good relationship it would do no harm. You never know they may become a customer.

Never compete with the boss. Apart from being unethical, you can be accused of fraud by pinching ideas and systems. Start a totally different business or a completely separate niche.

Don’t use company equipment. Unless you have permission from your employer and offer to pay for anything used, do not use the boss’s photocopier or computer for your business.

10 ways you can start your 2025 money reboot now

The lead-up to Christmas is frantic but for most people life slows down between Santa and the New Year which is a great time to plan a financial reboot.

Taking the financial stress out of your life will transform the way you live. You’ll be happier and have more confidence to take on the world. All it takes is the self-discipline to put these 10 reboot resolutions into action.

If you’re in a relationship go through the process as a team so you’re both on the same financial wavelength right from the start.

1. Set financial goals

   Just like in your personal life, setting a goal gives you something to aim for and motivates you. It could be to get out of debt or a savings goal for something you’re dying to have. Paying off the mortgage as soon as possible or making contributions to superannuation are two of the best savings goals to have. Concentrate on the mortgage first, and when that’s under control make superannuation the priority.

2. Get control of your finances

   Know exactly where your money is going each day. Sit down with your bank and credit card statements and list everything you’re spending money on, from rent and food to clothes, coffees and transport. Carry a notebook for a month and write down every time you spend on incidentals, a newspaper, coffee, sandwich etc. At the end of the month look at your list and I bet you’ll be amazed at where your money has gone, and you’ll see some obvious areas to save. This is the best way to plug financial leaks.

3. Write a budget - and stick to it!

   So many people ignore writing a budget and then wonder how problems sneak up on them. Sit down and go through the list of expenses. Figure out where your money is going, what you can cut out of your spending, then write up a budget that tells you how much of your wage goes into the savings account, how much to your necessary expenses, and how much to play with. Most importantly, stick to your budget!

4. Shop around

   Whether you’re at the grocery store, wondering what to do with your insurance renewal, filling up the car or organising your utilities, make sure you always do your research ahead of time and get the best deal possible. Comparing prices should be at the top of your 2025 to-do list.

5. Never, ever automatically renew anything

   When it comes to energy and insurance, never just accept a renewal or price hike. If you’ve been with the same retailer or provider for some time, ensure you’re still on the best possible deal with them or compare your options to see if you could save by switching to another plan or policy.

6. Fix your banking

   You are mad to be putting up with a bank account that costs you money. Most of us have a range of different savings and transaction accounts with a bank. Each of them probably attracts a certain level of fees. It’s time to assess all these accounts which have built up in number over the years and see which ones are really needed. Consolidate accounts or shift them to lower or no-fee, online accounts which usually earn great interest.

7. Stay away from credit

   Credit cards are dangerous. If you’re in financial trouble the first thing you should do is cut them up. If you are disciplined and always pay them off on time, then you should be fine. Think of replacing credit with a debit card which can be used like a credit card but only ever takes the money out of your own account.

8. Beat the mortgage

   The same goes for the mortgage. Always think about how you can wipe some time off your mortgage by paying a bit extra. Do anything to increase monthly payments, pay fortnightly or just pay off a bit extra when you can, and it could end up saving you thousands. Also ask your lender for a better deal on your mortgage.

9. Start a savings program

   It takes discipline but it’s worth it. Here are a couple of ideas: Each pay day, organise to have 10 per cent of your salary automatically transferred into a separate savings account. At the end of the day, empty the change from your pocket or purse and put all the loose gold coins in a jar. When the jar’s full, bank the coins in a savings account. Watch it grow.

10. Earn more money

    Think about ways you can boost your income, either within your current job or by doing something else on the side. Sit down with your boss and discuss whether you deserve a pay rise and what you can do to earn it. Or you could start up a small business and moonlight in your spare time.