1% Aussie Interest Rate Cut?

Here we go again. Where to this week?

The RBA meets tomorrow. The TD Securities-Melbourne inflation gauge apparently fell 0.6% in November. Falling petrol prices brought everything else down.

Does this mean the RBA can cut Aussie interest rates one full percent or 75 basis points, as economists expect? Who knows? And will it matter anyway? That is, is a rate cut the sort of thing that’s going to prevent the Australian economy from suffering a globally-induced recession?

Don’t count on it.

The credit crisis is constricting around the neck of at least two Aussie firms. Babcock and Brown is trying to talk two European banks out of $200 million. It would give Babcock time to unload more assets. The stock remains in suspended trading, sort of like being on life-support until someone pulls the plug.

The other patient in intensive care is Oz Minerals (ASX:OZL). The company put itself in a trading halt last week. It came after an unexpected problem in refinancing an $856 million loan. Despite governments doing their best to expand credit, banks are getting tighter and tighter.

At the consumer end, taking out debt remains easy. You get offers in the mail for it every day. It’s saving money that’s hard. There’s no incentive for it. Rates are low. And even some “safe” vehicles like money markets have found themselves tied up in risky securities.

It looks plain old cash it the simplest investment to make these days. Cash is a choice. The penalty for staying in cash is your direct exposure to inflation. The benefit, these days, is that even if cash is not keeping up with inflation, it’s falling less fast than other asset classes.

Hang on, though. Wasn’t the ASX/200 up 9.5% last week? And wasn’t that its biggest gain since the indexes inception in 1992? Yes, it was!

The rally lacked real conviction though, at least from a technical perspective. You can’t really tell if stocks have made a long-term bottom and fully discounted a recession, or whether they are just pausing before resuming their march to new lows.

If this cycle works like previous cycles, it means Baby Boomers are falling out of love with stocks. It’s a messy divorce. They’ll be fighting over the children (house prices and stock prices) and gradually liquidating investments to live off of in the coming years. The “weight of money” argument that stock market inflows will drive the market higher over time is bending.

But while stocks fall out of favour (and present good value for investors with much longer time horizons) the Boomers are going to shift from capital appreciation to capital preservation and thrift. Finding new ways to save money will be trendy, and necessary. It’s already on some reader’s minds.

Hi Dan,

I have an idea that I would like to discuss about a regular article I would like to get published about making do. It is called “Waste Not Want Not.” I reckon I could write a book on this subject and have spent my life recycling, growing food and saving just about everything I can.

My mother used to harp on when I was a kid with this saying and then went on to the war and living in air raid shelters then moved on to the Great Depression. So now must be a once in a life time opportunity to make something of it all. Your thoughts and guidance will be most welcome.

Ivor E.

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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Greg Atkinson

I would guess our friends at the RBA will cut rates too far just as they raised them too far in the first place. On the plus side the Australian Peso is now so cheap that Australian companies earning USD,JPY and Euro are going to enjoy getting a nice little boost to their earnings.

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