Australian Economy Hits it Peak but Stock Market Crash is Looming

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Interest rates in Australia and America are headed in opposite directions. The Fed could cut twice by Christmas. The Reserve Bank may raise twice by Christmas.

What’s that under the Christmas tree we see? It’s parity.

In fact, on this side of the planet, you begin to wonder if the economy hasn’t reached its absolute peak. The dollar is at a 23-year high. And it will be summer soon, meaning we can start working on our base tan here at the Old Hat Factory. Is this as good as it gets?

“Australia is riding the wave of the most propitious world economic conditions in half a century, with jobs and business investment booming, personal wealth at record levels, tax coffers overflowing and the global and domestic crises that dominated so many elections from the 1970s seemingly quite distant,” according to Steve Burrell in the Sydney Morning Herald.

It does make you wonder, though. Let’s say we reach parity. Let’s say someone, anyone, wins the Federal election, and spends around AU$34 billion. Oil prices rise. Food prices rise. Employment remains tight and the economy runs at full capacity. Where does the Australian stock market go from there?

Your guess is as good as ours. All we have here is our knowledge of history and market cycles. We seem to be at the apogee of a great growth cycle. But if you look around in the two main engines of that cycle—China and the US—you begin to see evidence that the cycle is at its limit. A great contraction is in order. Or even a crash.

“Crash is coming, warns top investor,” write Jason Dowling and Peter Weekes in the Age. The gentlemen have spoken with Leo de Bever, the chief investment officer of the Victorian Funds Management corporation. He thinks that when things can’t get any better, they don’t.

“The man responsible for investing AU$41 billion of the State’s money has warned mum-and-dad investors to prepare for a massive sharemarket crash. He says a dramatic downturn is inevitable as the rapid rate of investment is unsustainable, and the repercussions of the US$300 billion subprime lending crisis in the US are yet to be felt fully.”

Who are you tipping for the Melbourne Cup? Just wondering…

In geopolitical news, what the heck is going on in Pakistan? President Pervez Musharraf has declared a state of emergency and begun arresting political opponents. Pakistan has nuclear weapons.

Dan Denning
The Daily Reckoning Australia

Dan Denning
Dan Denning examines the geopolitical and economic events that can affect your investments domestically. He raises the questions you need to answer, in order to survive financially in these turbulent times.
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8 Comments on "Australian Economy Hits it Peak but Stock Market Crash is Looming"

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Brian Wheatley
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It is not a case of IF but WHEN the correction comes.

With $400 Billion of sub-prime loans to be reset over the next 12 months, it isn’t over by a long shot.

The only question for me is ‘When do I sell?’

unbiased
Guest

If there’s more ups than downs and the ups are bigger than the downs, then why sell?

Buy and hold. When it corrects invest more.

The question is, why do you sell?

Pete
Guest

What about mining stocks? Won’t those resources still be in demand in a crash?

What are the most crash resistant stock types? Im guessing that can’t be answered…

Damn you doom sayers, ha.

rutts
Guest

Its always interesing to look back in hindsight. Well, the crash is here, as predicted by a handful….

Greg Atkinson
Guest
Someone has been predicting a crash every year during the last bull market, eventually somebody has to be right. Of course few people put an actual number on the size of the crash and that gives them plenty of room to claim bonus points for any bear market hit. I believe over the last 20 years in Australia the market has taken hits greater than 20% around seven times, so if you predict the market will suffer a significant hit you will eventually be right! I think many people thought (including me) that 2008 would be tough, but I do… Read more »
Coffee Addict
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Greg. I like your Shareswatch Blog. The conditions for a global crash were around for at least 18 months before the Bear Sterns spark finally ignited. Once Bear Sterns happened it was easy to realise that the contagion would spread to the equities markets within 12 months. The “doomers” argue that high inflation is inevitable because of money printing and that that a return to a bull market cannot happen any time soon because of central banks fiscal meddling. They would argue that saying that the best thing to do is nothing and that recovery can coly happen after losses… Read more »
"disaster" "recovery"
Guest
"disaster" "recovery"

..on a recent trip to London the family and me passed by the Tate Modern to brush up on some culture, they have an excellent book shop as I discovered. By chance I picked up a prescient gem ‘The Shock Doctrine’ by Naomi Klein. Given the state the world and it’s economy is in, this book is a vision into past, present and future manipulation of the ‘system’ that is supposedly collapsing around us.. Who and how can anyone save us from ‘the powers that be’ – good luck to the world and hello to the ‘Chicago Boys’..

Greg Atkinson
Guest
Coffee Addict, glad you liked the blog. To be honest I am not sure what we need to see the markets recover, however I do have confidence that eventually we will see another bull market. Of course, the next bull market will end in another crash as we tend to forget all about market bubbles when things are good. (I recall for example that the U.S financial system was supposed to be “fixed” after the Savings and Loan Crisis) My concern at the moment is that governments and central banks will go too far in trying to encourage growth and… Read more »
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