Why Lower Interest Rates Won’t Boost Confidence in the Aussie economy

The monthly ‘non-farm payrolls’ circus came to town in the US on Friday. It’s the piece of data that markets love to trade on. That’s because it provides a guide to the state of employment in the US economy, and employment provides a guide to the Fed’s interest rate deliberations.

The numbers were strong. According to Bloomberg:

A 257,000 January increase in employment capped the biggest three-month advance in 17 years and delivered the strongest wage gain since 2008, figures from the Labor Department showed Friday in Washington. The unemployment rate rose to 5.7 percent from 5.6 percent as the prospect of finding work lured hundreds of thousands into the labor force.

In response, the stock market was a little weaker while US treasury bonds slumped on expectations the Fed would start its tightening cycle sooner rather than later. Gold fell a large 2.3%, correcting lower from a recent strong run.

Closer to home, it’s all about politics this morning. Tony Abbott faced a ‘spill’ — a party vote to determine his future as the leader of the Liberal party — at 9am today.

He survived, but now it’s just a question of how long. The secret ballot revealed Abbott won the vote 61 to 39, meaning that 39 people voted against him. That’s not a picture of a party united behind its leader.

So it’s not the end of this saga. Remember, Julia Gillard won her first party vote before losing the leadership a short time later.

Abbott is a dead man walking. The only thing that can keep him in power is a reluctance for anyone else to take the helm. With the outlook for the economy worsening, and this realisation now dawning on politicians, the leadership position isn’t looking too attractive right now.

None of this is good for the nation’s confidence, that amorphous and elusive quality that, if we only had more of it, would see our economy on the road to recovery.

At least that’s what Glenn Stevens, head of the RBA, seems to think. He’s made many references to ‘confidence’ being the missing ingredient in Australia’s economic recovery. Business confidence, household confidence…it doesn’t matter.

‘I’ve lowered interest rates’, he thinks. ‘Now only if people and businesses had greater confidence they would borrow and spend more.’

That’s partly true. But this thinking doesn’t take into account the root cause of ‘confidence’ or the lack of it. Poor confidence is a symptom of a rotten system, not one of the causes of it.

People have reduced confidence when their debt levels are high. They have low confidence when they have job insecurity. And when they see ineffectual leaders and no clear policy direction, that doesn’t help matters either.

Lowering interest rates isn’t going to miraculously boost the economy. It does nothing for confidence. Arguably, as we go deeper into ‘record low’ interest rate territory, confidence will diminish further as people realise that something is not quite right.

Australia needs genuine political leadership right now, not a bunch of squabbling conservatives putting ideology over the nation’s interest. We need a leader to understand that we face genuine economic threats that can only be overcome by facing painful reforms head on.

Instead we have gutless ignoramuses…too afraid to tell the electorate how it is and what needs to be done to slowly improve the country’s long-term fortunes.

 

Regards,

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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