The Single Biggest Reason Interest Rates are Staying Low

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It has been the main story of the past 18 months.

It has been the single biggest story to keep a cap on stock prices.

The mainstream assured you that it would happen soon…perhaps sooner than most investors thought.

Except, nothing has happened.

We’ve said all along that there was no chance of it happening. And now we have the proof.

We’re talking about interest rates. They’re low, and they’re staying low…the survival of Australia’s economy depends on it…

We’re sure you remember the days. It wasn’t that long ago.

All the talk was about the need for the Reserve Bank of Australia (RBA) to raise interest rates.

The trouble was, if the RBA raised interest rates it would cause the Aussie dollar to rise. The RBA didn’t want that, as it would harm Aussie exports.

Things have changed. Now, the RBA can’t possibly increase interest rates, even if it wanted to. This report from The Age explains why:

Australian households have been coping well with record high household debt but this could swiftly change should the Reserve Bank hike interest rates higher than anticipated by the end of 2016, ANZ economists have predicted.

Although household debt is out-stripping household income by 1.7 times, record-low interest rates, as well as growth in household income and cautious household behaviour, have made it manageable, ANZ economists David Cannington and Katie Hill said.

Despite a slowing Aussie economy, household debt is increasing faster than household income. That doesn’t sound like a positive development. And things would only get worse if the RBA tries to increase interest rates while the economy is in a rut.

Fragile, but still profitable

This is exactly why interest rates aren’t going anywhere.

It’s one thing for the RBA to try to talk down house prices, and talk up the prospects of raising interest rates…but it’s something else for them to actually do it.

They’ll never do it, because the consequences scare them.

So, if households are in a fragile state, what will that mean for the investment markets, especially stock markets?

In a normal economy, there wouldn’t be much to cheer.

But as you know by now, this isn’t a normal economy.

A normal economy doesn’t relish the prospect of bad news. Because a normal economy wouldn’t expect the central bank to print hundreds of billions of dollars in fresh money…just so it could buy government bonds.

But that’s the way it is right now in Europe. The European Central Bank will tonight reveal its plan for supposedly supporting an economic recovery in Europe — it will print the equivalent of nearly AU$1 trillion.

You’ve seen what similar money printing programs have done in the past. It’s fair to say the US market wouldn’t have boomed so much without the US Federal Reserve’s money printing.

Neither would the UK’s economy have, if it wasn’t for the Bank of England’s money printing. Not to mention the booms in China and Japan, thanks to their respective central bank’s money printing programs.

Now it’s the turn of Europe to give it a whirl. If history is any indication, the positive impacts of money printing should filter through to markets worldwide…including the Aussie market.

RBA to start money printing soon

Just so you’re sure, we’re not saying we agree with the central banks’ money printing policies.

In fact, we directly oppose them. Over the long term these policies only succeed in devaluing wages and savings.

But in the short term, we’ve seen what it does to the stock markets. It causes stock prices to rise. And when that happens, you want to make sure you’re on board for the action.

Yes, even when the fundamentals of the economy aren’t strong, it can still result in a rising stock market.

For proof of that, just check out the US and Japan’s economies. The US had an unemployment rate above 9% in early 2009. Japan has been fighting against an economic slowdown for nearly 30 years.

And yet in both cases (whether you agree with the policies or not) the fact is that a big dose of money printing was a big boost for stocks and investors.

Now, the RBA hasn’t yet gone down the path of money printing. But odds are it will.

For the moment, Aussie stocks will simply benefit from the money printing of other central banks.

And the RBA knows that it has to keep a lid on interest rates. They aren’t going up anytime soon. And if the low interest rates don’t achieve the economic recovery that the RBA is after, it will only be a matter of time before they follow the lead of the Fed, the Bank of England, the Bank of Japan, and now the European Central Bank.

Forget all the talk of rising interest rates. Interest rates are staying exactly where they are. Once the markets get that, you can expect the money to flow back into stocks. All stocks, especially stocks that pay a handsome dividend yield.

Many have tried to say this is the top of the market. Don’t believe it. This boom has plenty further to run.


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Kris Sayce
Kris Sayce, dubbed the ‘Jeremy Clarkson of Australian finance’, began as a London finance broker specialising in small-cap stock analysis on London’s Alternative Investment Market (AIM). Kris then spent several years at one of Australia's leading wealth management firms. A fully accredited advisor in shares, options, warrants and foreign-exchange investments, Kris was instrumental in helping to establish the Australian version of the Daily Reckoning e-newsletter in 2005. He is currently the Publisher, Investment Director and Editor in Chief of Australia's most outspoken financial news service — Money Morning.

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1 year 9 months ago

It is in the interests of vested interests in Australia to keep the property bubble going. Kicking the can down the road is all well and good but at some point though a price will have to be paid and the collapse when it comes will be interesting to say the least.

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