A Sign of a Booming Economy, Right? Wrong

A Sign of a Booming Economy, Right? Wrong

You probably saw the glossy headlines last week.

The Aussie economy expanded 1% in the first quarter, bringing annual growth to 3.1%.

A sign of a booming economy, right?

On the surface, yes.

This latest round of economic data means that Australia has entered into its 27th year without recession.

That’s 27 years of consecutive economic growth — an entire generation that has never experienced an economic downturn.

Except there’s one small problem.

The majority of Australia’s growth came on the back of government — not private — spending.

That won’t surprise you.

Wage growth in Australia is stagnant, trudging along at 2.1% per year, almost exactly in line with the inflation rate.

Meanwhile, the savings rate is dismal. Two years ago, the Australian household savings ratio was at 8%. Now it’s down to 2.1%.

On top of this, consumer spending is barely growing.

That’s in spite of the Reserve Bank of Australia keeping the cash rate at 1.5% for nearly two years — with no sign there’ll be any rate rises before 2020.

Our economic position isn’t as solid as you’re led to believe.

If anything, it’s rapidly careening down a creek, and we are at risk of losing our paddles.

The economic numbers on paper may look good, but everyday Australians aren’t feeling wealthy. The low savings rate, lack of wage growth and lack of consumer spending suggests as much.

The reality is, Australians are behaving like the economy is in recession.

If the Aussie economy fell into recession next quarter, would you be prepared?

If you’re like most Aussies, probably not.

Who is prepared to lose money?

Here’s the one thing no one tells you in a market crash: Everyone should always heed the possibility that they could lose money.

It’s no secret that when stock markets fall, people lose money.

For too long, investors have had it drummed into them that they should buy shares for the ‘long haul’. Or build a portfolio that they can ‘set and forget’.

Well, that may in fact be the quickest way to lose money in a market crash.

The ‘good news’ is that how much you lose is up to you.

The first step is psychological. Investors need to accept that they will lose some money.

But they can mitigate that.

There’s no point watching share prices tick down every day, eating into your portfolio. So it’s best to decide on a stop-loss with any stock investment and stick to it.

Blue-chip stocks are often much harder-hit in a market crash than people realise. So investors are wise to set tight stop-losses on blue chips.

However, there’s an upside to this: Selling shares for a minimal loss leaves investors some cash to invest. After all, not all shares fall in tandem. Even in a falling stock market, there are typically always stocks that are going up.

A case for inverse ETFs

Here is controversial idea: Some investors may want to consider inverse exchange traded funds (ETFs).

Inverse ETFs are designed to go up when a stock market crashes. Think of inverse ETFs as a way of shorting the market using shares rather than derivatives.

They are highly risky, often use leverage, and are generally highly illiquid. But they can be a potentially useful hedge in a falling market.

However, they should be used sparingly during volatile market periods, and only for a short time.

ETFs aren’t for everyone. For anyone moving some cash into an ETF, they’re better off keeping it small (no more than 5% of total capital) and moving early.

Investors also shouldn’t be afraid of cashing out before the peak, either. If an inverse ETF rises 50% in a week, investors may want to think about selling.

A case for gold

The barbarous relic.

The useless hunk of metal from a bygone era.

Gold is the one investment that historically maintains its value through thick and thin.

People have used gold as a medium of exchange for over 3,000 years. And it’s been a store of wealth since medieval times.

Empires and modern-day states have risen to power on the back of gold and bullion holdings.

But gold also protects personal wealth too, as you know.

Think of it like this:

A US$100 note in 1974 is worth about US$20 today. In that time, the face value of the $100 note hasn’t changed, but its purchasing power has. That same note buys far less today than it did 40 years ago.

Whereas one ounce of gold — worth US$100 per ounce in 1974 — is valued at US$1,300 today.

No matter what happens in markets, and no matter what governments do, the value of gold is enduring.

Kind regards,

Shae Russell Signature

Shae Russell,
Editor, The Daily Reckoning Australia