In today’s Money Morning…five days of trading to end up back where we started…Australia’s high debt levels are a problem, but the sun is shining for now, so ‘make hay’…did Sam’s ‘ASX 6000’ prediction come just a little too early?…and more…
In last Saturday’s article, I wondered whether Sam Volkering’s bold prediction for the ASX to hit 6000 points this week would prove correct.
The ASX All Ords opened Monday morning at 5889.40 points. At the time of writing, at 2:20pm Friday, it’s at 5887 points.
So I guess that question is answered. End of story, right?
Well, not really. Sam’s bold call (along with Greg’s more cautious optimism) wasn’t fully vindicated this week. But doom and gloom predictions for a collapse of the Aussie market also haven’t come about. In the last five days’ trading, we’ve just ground sideways. A lot of up and down movement, with no conclusive results. As you can see below:
It was a similar story from the Reserve Bank on Tuesday, with interest rates remaining on hold. No surprises there. As you’ll see below, Greg wrote this week about the trap that the RBA has put itself in. They know that they’ve created a problem and are making it worse, but there’s no way to change course without risk of triggering a crisis. So nothing changes, and everyone keeps holding their breath to see where things will go from here.
Is Sam right that the ASX is just gathering its breath before bursting upward from here? Is Greg correct to recommend you ‘make hay while the sun shines’, because the RBA is doing everything in its power to stave off significant falls in the housing and share markets? Read on for your editors’ takes this week, and decide for yourself…
Australia’s housing debate continues to rage on, so Greg opened this week with an explanation of why the boom isn’t going anywhere for a while. While regulators may fiddle with the details, interest rates are still the overwhelming factor behind Australia’s red-hot housing sector — and behind our ballooning private debt levels.
With so much debt in Aussie households, the RBA simply can’t raise rates. Not without touching off a crisis, and potentially ending Australia’s record run without a recession. Australia’s fragile economy and sky-high debt levels may be a reason to be worried. But they’re also the reasons why rates have to stay down. And while interest rates are low, house prices won’t fall. In fact, our highly leveraged economy is actually working in our favour as commodity prices rally. You can read why in Monday’s article, here.
So the economy and especially the banks are a house of cards built on land prices. But that house of cards isn’t likely to fall soon, because the RBA won’t let it. On Tuesday, Greg argued that it was ‘blindingly obvious’ the RBA wouldn’t raise rates — even if it was equally obvious they should. For all the imbalances and malinvestments that low rates are inflicting on Australia’s economy, the RBA is backed into a corner. You can read why here.
But there’s another aspect to the interest rate story. While debt is cheaper than ever, savers are suffering. Especially those retirees who are dependent on the income from their savings to live. And with ridiculously low rates punishing thrift, the temptation — or, for some, inescapable necessity — to load up on debt is overwhelming. But taking on debt to buy real estate can and often does lead to households spending much less elsewhere the economy. The RBA’s engineered housing boom has become a weight on consumer spending, rather than increasing it.
In Wednesday’s Money Morning Greg looked at the dangers that sustained low interest rates are building into our economy. He argues that you should profit from rising markets while you can. When it all comes undone, it won’t be pretty.
Sam returned to his ‘ASX 6000’ prediction in Thursday’s Money Morning. The market failed to oblige him by hitting big numbers this week, grinding sideways instead. But Sam isn’t discouraged. He believes that the market trading sideways, rather than falling in this environment of pessimism, is a sign that the fear is beginning to fade. They say to buy during times of fear, and sell during times of greed. Sam argues that your opportunity to buy during a time of fear is running out. To read why, you can find his Thursday article here.
On Friday Sam looked at the difference between professional traders and private investors. To the average person trying to build a retirement pot, competing with the big institutions and their career traders can seem impossible. But, as Sam explained, you don’t have to be on their level to achieve great results. With the right opportunities, anyone can have a chance at investment success. You can read why here.
Which brings to an end a ‘week of nothing’ on the Aussie market. Next week we’ll see if the ASX can break out of this sideways pattern — and whether your Money Morning editors are right that it’s more likely to do so to the upside than down!
Editor, Money Weekend
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Numbers of Interest, as of Friday
Aussie Dollar to US Dollar: 75.22
Gold: US$1,264.60 (AU$1,681.16) per troy ounce
Silver: US$18.50 (AU$24.59) per troy ounce
Bitcoin: US$1,181.46 (AU$1,570.40)
West Texas Intermediate Crude Oil: US$52.35 per barrel
ASX 200: 5,862.50