Alan Kohler, Tim Toohey & the RBA get it wrong

On 9^th May 2011, Alan Kohler wrote the following on the Business Spectator web site:

Don’t be misled by last week’s commodities crunch, the Australian dollar is heading higher – much higher. That’s partly because of the return of the carry trade.

Kohler’s article was sent to me by a friend and it made me chuckle because it was absurd.

In that same month, I wrote an article on this blog (see The Volatile Australian Dollar), stating why I thought that both Alan Kohler and Tim Toohey (a Goldman Sachs economist, whose research Kohler’s article was based on) were completely wrong.

Now when Kohler made his characteristically bold pronouncement, the Australian dollar was trading at around $1.07 to the US dollar. But Kohler and Toohey told us it was going much higher!

In July of 2011 it reached $1.10 (as it had a few months prior), but from there it was all down hill.

With the Australian dollar now around $0.92 to the US dollar and never having traded above $1.10, we can say that Kohler and Toohey got that call completely wrong. In fact, it would not have been possible to have gotten it more wrong.

I also quoted John Taylor (CEO and founder of FX Concepts) in my May 2011 article. Taylor had the opposite opinion to Kohler and Toohey. Taylor of course was correct (as I strongly suspected he would be).

Now anyone can get a call wrong and that’s ok as long as your original rationale was sound. In this case the argument made by Kohler and Toohey was not sound. And both of them should have known better (especially Toohey). It was also unfortunate for Kohler that he put misplaced faith in Toohey’s research and went on record with it.

Of course, as a business journalist, you can make all sorts of incorrect predictions safe in the knowledge that no one will hold you to account for them. But why shouldn’t we hold people who make their living writing such things to account for what they go on record as saying? In Kohler’s case, he also sells an investing newsletter and therefore should be held to much higher account than other business journalists.

Kohler and Toohey are obviously not important figures, but unfortunately for everyone who lives in this country, the Reserve Bank of Australia (RBA) is an important entity.

The market ignored a few of the unnecessary interest rate cuts made by the RBA prior to May 2013, but the cut on 2 May 2013 was not ignored. It resulted in a devaluation of the Australian dollar by approximately 10 percent against several currencies in a matter of weeks.

This is quite scary stuff and the worst part is it’s not of any benefit to the country. The only end result of further devaluation of the Australian dollar can be inflation coupled with the reduction in income to self-funded retirees (and others who derive most of their income from fixed interest investments).

Having seen the fierce and disorderly devaluation of the Australian dollar in no time at all and the spooking of the share market by the cut, one would think that the RBA will hold off on any future cuts, but I honestly believe they are stupid enough to make further interest rate cuts. They have done stupid things in the past, remember how they ramped up interest rates at the beginning of the GFC? I have no faith in their ability to properly manage economic conditions or in their forecasting ability.