Aussie economy in peril whether we change leaders or not

Aussie economy in peril whether we change leaders or not

All it takes is one deep dive into analysis and I miss out on so much in the meantime.

China added US$60 billion in tariffs to goods coming in from the US…

…and the Aussie market threw a wobbly and dropped 1.4% on Tuesday morning.

Both sides of government have come out with essentially an Aussie version of subprime lending.

Unemployment rose a little…

Wage prices didn’t really increase…

The Aussie dollar was in the ‘danger zone’…

The price of gold rallied to the psychologically important level of US$1,300.

That’s a lot for an analyst to catch up on.

So where did I start? Let me show you…

What did I miss?

Spend three days in a data hole and you feel a little out of touch.

And it’s amazing how all these headlines can have you spinning around, wondering what to look at first. Or next. And then next after that.

It’s an awful lot of information to absorb in a short space of time.

And do you know how I caught up on all of it?

I didn’t.

Simple.

We are 24 hours out from a federal election, and everything I read had some sort of Labor- or Liberal-leaning bias.

After getting past a headline, nothing was particularly useful. I’d get three sentences in and realise it was just another piece validating the writer’s own political views.

Meaning most editorial is useless right now.

Making investment decisions based on headlines can often lead to disastrous outcomes.

So, what did I learn after three days of ignoring the news?

Well, just how irrelevant it is…and how you should focus on the long term.

Nothing. I missed nothing

I’ll admit it’s a sad conclusion to come to.

I took a self-imposed news ban only days out from a federal election.

And yet, I feel it couldn’t have come at a better time.

As I said, once I started playing catch-up, I realised that none of it was useful to investors.

If anything, the biased pieces I was catching up on made me feel less informed than before.

What it did do, however, was remind me just how much ‘noise’ distracts from the big picture.

Because under all the noise and damn-near propaganda pieces, the Aussie economy is still fragile.

But neither major political party is prepared to admit just how fragile it is.

Structural problems run deep

You see, the Reserve Bank of Australia is on the precipice of cutting rates. Whether it happens in June or the month after, reducing interest rates isn’t a good sign.

Reducing rates from a historically low 1.5% to a ‘new’ historical low sends a serious signal about how damaged the Aussie economy is.

Central banks only lower rates when things aren’t going well.

No amount of editorial or political spin can dress this up.

And central banks only lower rates in the hope that people will consume more.

The idea is that if credit is cheap, people are more likely to spend money.

In fact, the whole premise of the Australian economy is built on the idea of continuous credit consumption.

When the supply – and uptake – of bank credit falls, Australian economic growth is more likely to go backwards.

Central bankers will feel like they need to step in and ‘do’ something to promote economic growth.

Will it work?

It will have a minimal impact.

The problem is that the Aussie economy is now facing the law of diminishing returns.

That is, each rate cut over this year and next will have less and less impact on economic growth.

What the rate cuts will do, however, is destroy the value of the Aussie dollar.

And that, dear reader, will have a direct impact on you.

Every decision to lower the interest rate will reduce the value of the Aussie dollar.

This will make all those things we buy from overseas vastly more expensive.

Furthermore, lower interest rates mean your cash at the bank earns less interest.

It doesn’t matter which political party is in government.

Regardless of whichever party forms government tomorrow, they’re stuck with an economy that’s about to go backwards.

Do they have a plan? Probably a harebrained, feel-good policy that does little but produce more debt, either for you or the government.

After my three days with no news, it was a timely reminder that the big picture matters, not the headline. 

But most of all, as you queue up tomorrow to cast your vote, I hope you enjoy your democracy sausage.

Until next time,

Shae Russell Signature

Shae Russell,
Editor, The Daily Reckoning Australia

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