What a surprise! (Not…)
The Reserve Bank of Australia (RBA) will leave interest rates alone…for now. Tuesday’s meeting saw the cash rate stay at a record-low 2.25%. And now it’s hard to tell who’s the greater fool…
Is it the ‘masters of the universe’ who think they control the bond markets? Here is one of the oldest clichés in finance: ‘Bond traders predict the future better than stock investors.’ Well, the collective wisdom of the bond markets called an interest rate cut yesterday a 72% chance. We’re not sure we’d trust too many bond market rock stars with that kind of judgement.
Or is the greater fool a maniac of a different colour? We’re talking about the bureaucrats at the RBA with a similar God complex…the men and women who think they can boost economic growth with interest rate cuts alone.
We could criticise both groups all day. But that won’t change the fact that they run the show. They’re in the driver’s seat of Australia’s economy.
And if you get wise to their game plan now, you can avoid winding up as economic roadkill…
If you’re an avid reader of Money Morning, you’ll know that we’ve been warning interest rates would grind lower for some time now. We weren’t surprised when the RBA cut the cash rate to an all-time low in February. But this week, we stood with, we suspect, most common-sense investors in expecting no change to rates.
You see, the RBA has just one-and-a-half tools in its shed. They have the interest rate lever and Governor Glenn Stevens’ jawbone. We figured the RBA would prefer to keep a little powder dry this month for future rate cuts…because at 0.25% a pop, it might not be long before we follow Europe into negative interest rate territory.
So what of the ‘half-tool’, the jawbone? Investors pore over the comments Glenn adds to the RBA’s interest rate decisions. If you read yesterday’s statement carefully, you can spot some strong hints about where to invest. And when the man with his foot on the throat of Australia’s economy shows you the next pressure point he’ll target, you’d better pay attention…
The RBA is barely even bothering to keep secret its plans to push interest rates lower. It admitted as much yesterday when it said ‘further easing of policy may be appropriate over the period ahead’.
That means interest rates should continue their downward spiral as the geniuses at the helm seek asset price growth at all costs. ‘But rates have to go up one day!’ you may cry. Yes, maybe — but with each passing month, that day is looking as far away as ever.
Lower returns on low-risk assets have been the overwhelming dynamic in the market for several years now. It’s a trend that shows no signs of slowing down.
This environment gives banks all the excuses they need to slash the returns they offer on bank deposits, term deposits and other low-risk or ‘no-risk’ products (if such a thing exists).
Now is a terrible time for savers and people who rely on predictable yield to fund their lifestyle.
If you hold the bulk of your wealth in cash, the RBA is — in the immortal words of former Prime Minister P. J. Keating — going to ‘do you slowly’.
But all is not lost — because Glenn Stevens’ jawbone revealed two ways that you could dodge the bullet of falling income.
Share price lifeblood
Here’s the key point you may have missed in Tuesday’s RBA statement. The bank remarked that lending to businesses has been strengthening recently. This is important because banks have been terrified of lending money to large and small businesses alike since 2008.
In February, Australian private sector credit growth rose to its highest level in six years — up 6.2% from a year earlier. Business lending grew 5.6% — its fastest pace for six years.
Credit is the lifeblood of business and share price expansion. When the big banks loosen their purse strings, the smallest firms typically enjoy the biggest boost to their prospects. That makes the latest business lending data particularly interesting for small-cap speculators.
If these lending trends continue, certain small-caps could be set for a breakout year in 2015. And if you have the right tolerance for risk, these stocks could help boost your wealth far beyond anything on offer with the big banks. You’ll hear about the most exciting small-cap stocks here, in Australian Small-Cap Investigator.
If your risk appetite doesn’t run to small-caps, that’s fine. Our Income Specialist, Matt Hibbard, has just revealed six simple share market investments that could shore up your income needs for years to come. If you’re sick of interest rate cuts, go here to find out how you can fight back.
Editor, Australian Small-Cap Investigator
Editor’s Note: This article originally appeared in Money Morning.