[Editor's Note: Due to a technical issue, I can’t send you today's Money Morning newsletter. I’m sorry for the inconvenience. Full service will resume tomorrow].
In today’s Money Morning, we’ll show a chart that could give you a sneak peek into the future.
When we showed it to our old pal, Sound Money. Sound Investments editor, Greg Canavan, he said, ‘That’s what outright deflation looks like. Savers’ purchasing power grows in terms of financial assets.’
In other words, the value of money rises as asset prices fall.
That’s deflation: The friend of prudent savers. The foe of over-leveraged borrowers…and banks.
In short, when deflation hits, make sure you’re a saver, not an over-leveraged borrower.
Deflation – A Sign of the Future
This chart is of the Athens Stock Exchange General Index. Based on yesterday’s close, the index is down 89.7% from the October 2007 peak.
It’s a clear warning sign of what can happen when investors lose faith in an economy. And when investors lose faith, they stop investing. When they stop investing, asset prices can take a big hit.
But what does this have to do with Australia and Aussie investors?
Well, perhaps investors have already stopped investing. Certainly Aussie mining giant, BHP Billiton [ASX: BHP] has had second thoughts. This from Bloomberg News:
‘BHP Billiton Ltd. (BHP), the world’s biggest mining company, will fall short of its $80 billion spending target for building mines and expanding assets over the next five years as it sees commodity prices declining.’
BHP – A Sign of Asset Price Deflation for Aussie Stocks?
Over the past year, BHP shares have fallen 25%, mainly due to investor concern about Chinese demand.
If BHP does ditch plans to spend $80 billion on new projects, it indicates investors were right to sell BHP.
So much for the resources boom that’s supposed to last another 50 years!
(By the way, although he’s too modest to say it, Slipstream Trader, Murray Dawes picked this market crash like a peach. For a flashback to see and hear why Murray saw this crash coming, check out the free weekly video update that was first broadcast last week. You can view the stock market update here…)
So if companies are cutting back on investments in their business, why should individual investors bother investing? Why wouldn’t they just keep most of their money in the bank?
That’s the problem. And so the deflationary cycle begins.
As we’ve said before, deflation isn’t a bad thing. It’s good for savers, and it’s good for wage earners. It’s just that in an over-leveraged economy that has gotten used to debt spurring growth, deflation can cause a whole bunch of problems…especially for banks.
But it’s not the Aussie banking sector that draws foreign investors. Australia is a very lopsided economy. Foreign investors come to Australia to invest in one thing…Aussie resources firms.
But they’ll only do that if they believe there’s a strong growth in demand for resources. So when the world’s biggest mining company says it won’t invest a planned $80 billion, investors take note and they withhold their dollars.
And without mining sector growth, that spells a lot of trouble for the entire Aussie economy. Especially those firms (and governments) that have banked on big spending from the miners and increased tax receipts.
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Written by Kris Sayce
Kris Sayce is Editor in Chief of Australia’s biggest circulation daily financial email — Money Morning. (You can subscribe to Money Morning for free here).
Kris is also editor of Australian Small-Cap Investigator, his small-cap stock research service, where he provides detailed analysis on some the brightest, smallest listed companies on the ASX.
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