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What if?

Discussion in 'Investing Strategies' started by masterjunko, 15th Jan, 2007.

  1. masterjunko

    masterjunko Member

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    I know I might be a bit of pessimistic here. But what if we are to experience a recession? With high interest rate and all the other bad things associated with a recession, which asset class would hold their value? Or maybe even give a positive return after inflation?
     
  2. Glebe

    Glebe Well-Known Member

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    A recession can be nothing to fear.

    A negative economic growth for 2 quarters (or more) is a recession. I bet we'd hardly notice a thing if the economy didn't grow for half a year. It's pretty much been happening on the Eastern seaboard (excluding SE Queensland) for the last couple of years. The show goes on.

    However if we have out of control inflation, as well as no economic growth, then we have a big problem. Fortunately since the last recession in the early 90's we have an independent reserve bank whose job it is to keep a lid on inflation, regardless of the consequences.

    Nonetheless, if interest rates are high (as in your scenario), the mortgage suburbs would get hit hard so property so watch out western Sydney etc.

    Furthermore, there would be a move from the sharemarket to fixed interest securities (like term deposits and bonds) which will chase the high interest yields. So Aussie shares will lose value. That doesn't mean their profits will drop though, so it might represent a buying opportunity.

    In a true, nowhere to hide style recession, things like gold, rare coins, paintings etc become a good investment because they appear safe despite the fact that they don't generate earnings, so they don't put food on the table.
     
  3. masterjunko

    masterjunko Member

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    Okay, I think I am talking about a recession like the one "we had to have". A recession that last a year or two with high unemployment, inflation and interest rate.

    However I like the idea of buying opportunity. :cool:
     
  4. Glebe

    Glebe Well-Known Member

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  5. masterjunko

    masterjunko Member

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    Thank you for the link Glebe, I will surely have an interesting reading now.

    My point is not whether we are going to have one now but rather what should we do if we were to have one.

    I am sure the government and RBA have learnt alot from past experiences but that doesn't make them unfailable. There is always something new the next time around that will derail the economy. Who knows what it will be this time? Maybe the excessive liquidity?
     
  6. -T-

    -T- Well-Known Member

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    If we went into a recession, rates wouldn't stay high for too long. As far as I know, rates go up to slow growth, not increase it. I assume the response to a recession would be to decrease rates, which should increase spending until growth gets back on track. Completely oversimplified, but I think they're the fundamentals.

    Apparently those high rates can't really happen again; something to do with a fully floating currency now (opposed to pegged or floating peg), better access to global money, etc.

    I don't know what coupon bond rates where when mortgage rates were 20+%, but maybe they were high enough to offset the pain of property. The real killer is the inflation though. I think (again not sure) that inflation is much more of a worry than a recession.

    A recession would be great for buying opportunities. :)
     
  7. Glebe

    Glebe Well-Known Member

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    I guess you can have increasing inflation, and hence increasing interest rates in a recession if there are supply-side constraints leading to the increasing inflation.

    eg another oil price shock.

    Oil goes to say $100 a barrel, increasing inflation. The Reserve Bank increases interest rates to stop inflation, but then OPEC decides to cut production further, so oil goes to $150 a barrel. Inflation continues to rise.. that kinda scenario.

    Can't see it happening though...
     
  8. masterjunko

    masterjunko Member

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    We are almost in a supply side crisis if the unemployment rate stay at current level. Wage pressure -> inflation up -> interest rate up
     
  9. -T-

    -T- Well-Known Member

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    That sounds like it would be a nasty situation; inflation going up in a recession and rates going up to quell inflation but making the recession worse. Is that what happened in the 80s too? The oil shock was in the 70s wasn't it? I'll check it out anyway.
     
  10. Glebe

    Glebe Well-Known Member

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    - T -,

    Check out a term called "stagflation". Nasty stuff!
     
  11. masterjunko

    masterjunko Member

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    Let's hope we won't get to that... :(

    It's just I have being very concerned(paranoid??) about the way our economy is going. Just gut feeling, no real proof.

    I don't see any safe place to be apart from bank deposit. Maybe we won't come to that. I hope not anyway.
     
  12. Glebe

    Glebe Well-Known Member

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    Bank deposits are poor in high inflation environments unless your interest rates are high too.

    Buy a farm, some cows and some guns :eek: ;)
     
  13. -T-

    -T- Well-Known Member

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    Say the average online saver account rate is 6%, take away 40% or so for tax. That leaves 3.6%. Take away roughly 3.25% inflation and you're left with 0.35%. Although that seems odd, I've never understood cash management accounts either; even lower rates. At 5% you'd be losing money with it in a bank account and the same tax/inflation.

    Isn't gold/silver/etc a safe-haven for $ in economically difficult times.


    PS. I checked out stagflation. It's interesting to read what the potential responses are to it; nothing that sounds remotely convincing. That would be really bad for investors hey; now I see where you guys are coming from. :)