A Candid Chat With RBA Boss, Glenn Stevens

There were no real surprises on the interest rate front yesterday. RBA boss Glenn Stevens put his finger in his mouth, stuck it out the window to see which way the wind was blowing, and decided that conditions were conducive to ‘no change’. The price of overnight credit remained at 2.5%.

The statement that accompanied the decision is an interesting one — once you decipher it — so in today’s Markets and Money we’ll provide you with a version of what we think Glen Stevens was really thinking when he penned the media release.

GLEN STEVENS: ‘Recent information is consistent with global growth running a bit below average this year, with reasonable prospects of a pick-up next year.’

TRANSLATION: Despite unprecedented monetary stimulus from our mates around the world, global economic growth is STILL running below average. But surely things will get better next year. Anyway, next year is far enough away to be able to make optimistic statements about it…without getting into too much detail.

GLEN STEVENS: ‘Commodity prices have declined from their peaks, but generally remain at high levels by historical standards. Inflation in most countries is well contained.’

TRANSLATION: ‘Commodity prices’ are code for iron ore prices, but we’re not getting into that today. To be honest, we can see that most other commodity producers are struggling out there. Despite what looks like decent nominal prices, inflation in the sector must be out of control. That is, costs are rising faster than prices, meaning all but the lowest cost producers are struggling to turn a profit. So much for high prices, huh?

It looks like the derivatives market has really screwed with the sector’s prices signals. What a nightmare. I hope I’m back in the Shire by the time that beast blows up.

Although I can’t say I’m sad to see the gold companies struggling. They think they’re producing a precious metal! Ha! They don’t realise the derivatives market has commoditised their ‘precious metal’ too…and that they may as well be digging for tin. Idiots. We’ve managed to pull off reverse alchemy and these clowns don’t even realise what we’ve done to them!

Despite all this, inflation — as we measure and report — remains bang on target.

GLEN STEVENS: ‘In Australia, the economy has been growing a bit below trend over the past year and the unemployment rate has edged higher. This is likely to persist in the near term, as the economy adjusts to lower levels of mining investment.’

TRANSLATION: I’m putting that nicely. There’s a big bloody investment cliff coming up and unless I can replace it with something quick smart then we’re in all-sorts. China is helping out with their endless stimulus iterations, but they have played that card too many times. Something’s gonna give over there soon and I’m just hoping it’s next year at the earliest. By then, hopefully something will have come up.

GLEN STEVENS: ‘Further ahead, private demand outside the mining sector is expected to increase at a faster pace, though considerable uncertainty surrounds this outlook.’

TRANSLATION: I’ve done all I can, really. I’ve lowered interest rates to historic lows. I’ve set off another damn housing boom, which is good cover for a while but is going to end in tears. What I need is for businesses to start investing. Loosen the purse strings. Get some confidence. All I can do now is hope, as I’m uncertain whether it will work out.

GLEN STEVENS: ‘There has been an improvement in indicators of household and business sentiment recently, but it is still too soon to judge how persistent this will be. Public spending is forecast to be quite weak.’

TRANSLATION: There seems to have been an increase in ‘sentiment’ once those clowns got voted out a few months ago. But it’s not translating into anything yet. And big business isn’t making things any easier. All I’m hearing from them in their latest announcements is how the election didn’t change anything in terms of consumer spending. ‘Things are still flat…waiting for a pickup.’

And the government isn’t going to help me out. Right when the Australian economy really needs some additional spending the Lib’s are going all austerity like. But big Joe did raise the debt ceiling to $500 billion…hopefully he’s got something in the pipeline. God knows we’ll need it.

GLEN STEVENS: ‘The easing in monetary policy that has already occurred since late 2011 has supported interest-sensitive spending and asset values. The full effects of these decisions are still coming through, and will be for a while yet.’

TRANSLATION: I’ve managed to unleash another boom in house prices and bank stocks. Are they interest rate sensitive or what?! But I need the rest of the Australian economy to join in. I’ve probably got another six months or so to see how this experiment works.

I thought the wealth effect would’ve started working by now. If it is, it’s taking its time. Having had a good think about it though, I’m now concerned I’ve just facilitated a transfer of wealth and an increase in indebtedness across the Australian economy. So while some people may feel wealthier from the boom, others will feel poorer. Oh man, I’ve got a bad feeling about this…

(As an aside, if you’re loaded with bank stocks AND investment properties, have a good think about it…you ARE Mr or Mrs interest rate sensitive.)

GLEN STEVENS: ‘The pace of borrowing has remained relatively subdued overall to date, though recently there have been signs of increased demand for finance by households.’

TRANSLATION: I’m understating things here a bit. Households are gearing up to buy houses big time…and banks are letting just about anyone in the door. I think APRA is going to have a word with them soon. The banks will get around it though…they always do.

GLEN STEVENS: ‘There is also continuing evidence of a shift in savers’ behaviour in response to declining returns on low-risk assets. Housing and equity markets have strengthened further, trends which should in time be supportive of investment.’

TRANSLATION: I’m really going out on a limb here in hoping for an increase in investment. Let me break it down for you…

We’ve successfully lowered the return on cash to such an extent that the punters are getting out of it and getting into riskier assets. This pushes the price of these risk assets up and I’m hoping that these higher prices will encourage greater investment. I’m going to ignore the fact that artificially induced high prices are not normally conducive to attracting additional investment, and just hope that it all works out the way one of our blokes modelled it on an awesomely detailed spreadsheet that takes just about everything into account except human nature, which we find difficult to model.

The funny thing about lowering the cash rate is that we actually put MORE cash into the Australian economy to do so! Then the media helpfully write that ‘people are getting out of cash and into the market’. But they don’t realise that someone else is getting INTO cash at the same time. Actually, more people are in cash now than before, because we created more of it!

Having said that, I wonder who’s holding cash now?

Anyway, look for greater investment down the track. It will take over the mining cliff stuff and we’ll all be sweet. I’m feeling good about this plan now.

GLEN STEVENS: ‘The Australian dollar, while below its level earlier in the year, is still uncomfortably high. A lower level of the exchange rate is likely to be needed to achieve balanced growth in the economy.’

TRANSLATION: Would anyone care to tell me just who is buying the Australian dollar here? I’ve heard all the ‘relative strength’ arguments but our economy is not that strong. We’ve been coasting along on China’s strength for years and our wealth consists of swapping houses with each other at higher prices.

As I mentioned, I’m a tad concerned about China and what that means for us. I hope in a way they do have some problems because that would get the dollar much lower. Right now my ‘jawboning’ attempts aren’t having much success. And the Fed’s $85 billion per month debt monetisation program isn’t helping me.

A lower dollar would be great for me. I’d get the increased investment I’m looking for and balanced economic growth. I’d be a legend.

Wait, what about inflation? Inflation is the wildcard. I just hope that a lower dollar doesn’t come with higher imported inflation. That would really screw my plan up.

Because higher inflation means I might have to raise rates and the game would be over. Now I’m starting to get nervous. When is my stint here over?

Greg Canavan+
for Markets and Money

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Greg Canavan is a Contributing Editor at Markets & Money and Head of Research at Port Phillip Publishing. He advocates a counter-intuitive investment philosophy based on the old adage that ‘ignorance is bliss’. Greg says that investing in the ‘Information Age’ means you now have all the information you need. But is it really useful? Much of it is noise, and serves to confuse rather than inform investors. And, through the process of confirmation bias, you tend to sift the information that you agree with. As a result, you reinforce your biases. This gives you the impression that you know what is going on. But really, you don’t know. No one does. The world is far too complex to understand. When you accept this, your newfound ignorance becomes a formidable investment weapon. That’s because you’re not a slave to your emotions and biases. Greg puts this philosophy into action as the Editor of Crisis & Opportunity. He sees opportunities in crises. To find the opportunities, he uses a process called the ‘Fusion Method’, which combines charting analysis with more conventional valuation analysis. Charting is important because it contains no opinions or emotions. Combine that with traditional stock analysis, and you have a robust stock selection strategy. With Greg’s help, you can implement a long-term wealth-building strategy into your financial planning, be better prepared for the financial challenges ahead, and stop making the same mistakes that most private investors do every time they buy a stock. To find out more about Greg’s investing style and his financial worldview, take out a free subscription to Markets & Money here. And to discover more about Greg’s ‘ignorance is bliss’ investment strategy and the Fusion Method of investing, take out a 30-day trial to his value investing service Crisis & Opportunity here. Official websites and financial e-letters Greg writes for:


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