Hi Strannik,
OK, I'll answer your question directly as best I can based on my own experience and perceptions.
The financial crisis at present hasn't spread to Main Street in Austalia. Its still just a financial crisis. Our banks are well capitalised and our government is in surplus. The RBA has the rates setting quite high and can ease readily. I state all these obvious facts just to give your question context. So what is likely to happen?
1. I think the RBA is going to continue to ease aggressively. I picked 200bp or more in
this thread as explained in
this post. We'll definately be on an expansionary setting before this easing cycle is over. Expect the RBA rate to be cut to at least 4.5% odd before they're done. I won a bottle of nice single malt scotch off another poster for being right on that call of >100bp in cuts.
2. The government is going to spend its surplus, and some of the future fund, and probably even go into debt to spend more. They'll spend all that cash trying to prop up the economy and stop the financial crisis turning into a recession. The UK are doing this, but from a much weaker starting point than where we are at in Australia.
3. The government also knows that the Aussie consumer has a stretched balance sheet at present. They're also accutely aware of the wealth effect on consumption patterns and the fact that most of Aussie wealth is tied up in our house prices. They won't want to see house prices crash for fear of this having a severe adverse wealth effect impact on consumer spending patterns. That would definately see us rush towards recession. So, they'll do everything they can to prop up house prices with things like increasing FHOG, cutting section 94 contributions, easing stamp duties and land tax etc. I expect a concerted suite of initiatives to be forthcoming that will be favourable to property owners and developers.
The net impact of these initiatives is what you need to consider when making decisions today about where best to hold your cash/debt.
My personal opinion, and the one I am banking on is as follows:
In the short term interest rates are set to crash. So, debt is good, cash in the bank is bad. On top of this, the stimulatory actions of cutting rates and pumping investment into the economy will re-assert inflation in the medium term. I think hard assets like properties will benefit from this. And, debt will be deflated in real terms as inflation re-asserts.
My personal opinion, as the crap hits the fan as at present: Hold your hard assets which benefit from inflation, hold your debt which benefits from easing rates and inflation. Limit your exposure to cash as this deflates to nothing.
The cash part of the cycle is historically the shortest lived of the three. No question we were in cash for the last 12 months, but I think it might be starting to turn back to equities soon, then property thereafter. I think we might just about have seen the bottom of the ASX at 3700, and should see a significant bounce from here. Property will become the asset of choice from 2010-ish onwards, or even mid-2009 when the RBA has eased rates another 100-150bp.
Anyone else still keen on placing any bets that the RBA won't ease 200bp in this easing cycle? There was a lot of SSers betting 100bp was too optimistic and that was hit with a single cut.
All just my humble opinion, but that's what you asked for right?
Cheers,
Michael
