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Interest rates Up or down? Next three months are crucial

Discussion in 'Real Estate' started by Billv, 5th Aug, 2008.

  1. Billv

    Billv Getting there

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    People are understandably reluctant to talk of recession. After 17 years of growth, it's hard to believe it's going to end now. And there are at least four good reasons to think it won't.

    But there is a new sense of fear in the air. You could feel it this week in the spare, austere tone of the International Monetary Fund's latest update on the world economy.

    Once the IMF used such reports to warn policymakers of the dangers ahead and urge reform. Not now: the dangers ahead are obvious to everyone, and it's too late for reforms to help. In recent weeks the data from the economy and the financial markets has become scarier. Consumer confidence has fallen in a heap. Business confidence has crashed alongside it. Firms and households have stopped borrowing, banks have stopped lending, consumers have stopped spending — or so it seems.

    The economy was meant to slow, but not at this pace. At the end of last year, business borrowing was growing at an annualised rate of 25%. Six months later it grew at a pace of just 4%. That is serious braking — and, as Westpac senior economist Andrew Hanlan notes, it probably puts paid to the boom in business investment that the Treasury thought would keep the economy humming in 2008-09.

    Tim Toohey, chief economist at Goldman Sachs JBWere, used to be the only market watcher warning of a possible recession. These days he has plenty of company. "We've always thought there was something like a 40% chance of a recession," he says. "Now, at best, we're looking at slow-speed growth, with the non-farm urban economy close to recession."

    Michael Blythe, chief economist of the Commonwealth Bank, disagrees. "The negatives may be greater than at any time in the past five to six years — but so are the positives," he says, pointing to the commodities boom that had helped protect the Australian economy from various shocks over the past five years. The big stimulus is coming from export prices, and it is huge. The Bureau of Statistics estimates that, between March and June, the amount Australia was paid for its coal exports increased by 95%, and our payout for iron ore exports increased by 54%. Given the amount of the stuff we sell, that is an enormous increase in earnings. Some will go to overseas owners, some will buy foreign machinery, but most of it will flow back into the economy to be spent over the coming year.

    Then there's more than $10 billion a year of tax cuts that started flowing into our pockets last month. There's the rain soaking into the fields, boosting hopes of a profitable year on the land at last. And there's the fact that if the economy starts to stall, both the Reserve Bank and the federal budget are in a good position to get it going again.

    In the short term, none of the market professionals expects the Reserve to panic and cut rates by September, as one newspaper forecast excitedly yesterday. The Reserve set out quite deliberately to slow the economy, put downward pressure on inflation and (most importantly) prevent expectations of higher inflation becoming entrenched. As the underlying inflation rate of 4.3% in the year to June suggests, that battle is far from over. The Reserve won't move until it is confident it has won.

    That makes the next three months crucial. Think of it like this: we are in a car that has been braking sharply as a result of higher interest rates, higher petrol prices, diminishing household wealth and fear of what might lie ahead. Now the car has slowed sharply, the question is whether we, the decision-makers of the economy, keep our foot on the brake, and slow down even further, or release it to keep cruising at our present speed.

    The Reserve's goal was the latter: if Australia's growth in output slows to about 2.5% — 2% excluding farms and mining — it believes inflation will gradually crawl back within its target zone of 2% to 3%.

    A Reuters survey of 21 financial institutions found that roughly half now think the Reserve will start cutting rates before Christmas, most likely in November after it gets the September quarter inflation figures. If they show the pace of underlying price rises falling — as it arguably was in the June quarter — then the Reserve will feel able to declare victory and ease the pressure on the economy.

    The big question then would be how much they would ease. With world oil prices falling sharply and global financial markets likely to settle down eventually, the National Australia Bank's chief economist, Alan Oster, predicts rates could fall quite a lot in 2009

    Author: Tim Colebatch
    http://www.domain.com.au/Public/Art...ine=Up or down? Next three months are crucial
    Original Publication: The Age
     
  2. 02bsure

    02bsure Well-Known Member

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    'The big question then would be how much they would ease. With world oil prices falling sharply and global financial markets likely to settle down eventually, the National Australia Bank's chief economist, Alan Oster, predicts rates could fall quite a lot in 2009'

    _____________________________________________________

    Rates will ease but mortgage rates won't. Furthermore, with all the non bank lenders gone or going there will only be banks to borrow from in the future and you can be sure they will not be loaning recklessly in an asset deflating environment.

    The name of the game is now de-leverage. Its the end of a very long era where all one needed to do was leverage one self to the eye balls and wait.
    This has been the way since the end of WWII.

    This is now over as the system quite simply cannot absorb more leverage on top of the mountain of debt that already exists. The easy money days are over. The future means working to earn a buck ...how sad ...for those who didn't manage to make out like bandits and remember to leave the party before the clock struck 12.
     
  3. Billv

    Billv Getting there

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    o2bsure
    so what do you suggest we invest in?
    Cheers
     
  4. 02bsure

    02bsure Well-Known Member

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    Bill, I'm of the opinion that we're now entering a period where simply maintaining what you have will be a challenge (ie capital preservation) let alone any form of non ultra conservative speculation.

    Right now I would start by exiting AUD and buying CHF or perhaps Yen as the carry trade continues to unwind. I would short basic materials and miners.

    Apart from that I would wait until markets have been stomped on and buy for a 6mth bounce but thats a very difficult timing issue. I wouldn't touch the ASX at more than 3000 ...so theres still quite some waiting to be done there.

    Gold is a difficult one. I get the feeling it may tank before it rallies again.
     
  5. Billv

    Billv Getting there

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    o2bsure,

    Thanks for your interesting post.
    I agree it's now getting increasingly difficult to find somewhere safe to put our money in.

    However, I think Gold much like Property it somewhat safer than other investments and I am not convinced that we will see Gold as well as other investments all come down at the same time.

    I am also optimistic about the future of the Australian property market.
    I believe that we will survive a big correction because unemployment is low, we have a severe under-supply of residential property and because interest rates will undoubtedly come down later in the year.

    In regards to share markets, I think that it is possible to see the ASX come down to 4000 but not to 3000.
    I say this because there is a lot of turbulance and sideways movement around and IMHO markets will have stabilised and started to turn around well before the 3000 point level has been reached.

    I have been looking at share market activity recently and it's funny to see how people think in a falling market.
    When there is bad news in the finance sector people sell bank stocks
    and then use those funds to buy resource stocks.
    When commodity prices come down the opposite happens
    People sell their resource stocks and then use those funds to buy Bank stocks.
    It's fun to watch...:)

    Cheers
     
  6. Tropo

    Tropo Well-Known Member

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    "People sell their resource stocks and then use those funds to buy Bank stocks.
    It's fun to watch..."



    How do you know that those who sell resource stocks buy bank's stocks? :eek:

    It may be fun for some... For others it is another day in the office.
    Simply, big guys are buying and selling (often short) anything which is moving in the right direction (up and/or down).
    That is what traders do for a living. ;)
    Majority of regular investors have nothing to do with a market right now. :p
     
  7. Billv

    Billv Getting there

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    Tropo

    It was a guess because of the increased activity in particular sectors

    Cheers