The Reserve Bank continues to hold the official cash rate at 1.5%. What’s going on? Is this as good as it gets for the Aussie economy?
The US dollar rally has barely paused for breath since getting underway in February. Late last week, it took its toll on commodities. Oil fell nearly 3%. Iron ore fell 3.7%, while aluminium declined 0.7%. What will happen next?
Thought about buying a house recently? Or even selling? If you’ve been looking into the real estate market, or simply watching the news over the past decade, you’ll have noticed that housing prices have soared. It also would have been quite difficult for you to miss the housing crisis currently spreading throughout the country.
Right now in Australia, we’re getting low nominal wage growth and increased costs in about everything. That means many Australians are experiencing a reduction in REAL wages. Inflation is coming. It may not hit next month, this year, or even the next. But it’s coming. Which brings me to gold. When the market realises that governments and central banks will put up with higher than expected levels of inflation, it will start moving ‘insurance capital’ into the precious metal.
Clearly, there has been too much cash in asset markets over the past few years…especially in fixed income markets. But now, the Fed is concerned that this excess cash will show up in consumer price inflation — which is, apparently, a lot worse than asset price inflation. The bond market will feel the biggest impact of this tightening.
As US bond prices collapsed, so too did bond prices in most developed countries. The rise in yields not only devastated bond portfolios, it encouraged thousands of investors to jump out of stock and into high yielding bonds. It caused the All Ordinaries (the 500 largest Aussie stocks) to fall more than 22% from its high in 1994. Question is, could we see a similar situation play out in 2018?
The Dow Jones dropped 1,175 points on Monday — the largest single-day point drop in history —erasing all profits made so far this year. The 4.6% decline is the biggest percentage loss the Dow has suffered since 2011, when we saw a drop of 1,089 points on 24 August.
The further away from ‘normal’ a prediction is, the less our brain is inclined to believe it. That anchoring mechanism is then backed up by a second survival trait. The tendency to stay in the safety of the herd. The result?
There’s still a shaky feeling around the global economy, as people worry what years of money printing and low interest rates have done. But that’s precisely why interest rates have to rise. And soon…
It’s OK to be wrong in the market. After all, we’re trying to predict the future here. But, it’s not OK to keep being wrong in the face of overwhelming evidence to the contrary.