The RBA’s Interest Rate Bait Isn’t Attracting Many Bites

The ABC reports that, despite the recent interest rate cuts by the RBA, it’s having little effect on borrowing:

‘Official figures show Australians are taking out home loans at the slowest annual pace recorded, indicating the property downturn may be far from over.

‘Figures from the Reserve Bank show total lending to the private sector grew 0.4 per cent in December, with the amount Australians borrowed rising by only 3.6 per cent last year.

‘The data shows housing credit remains the most consistently robust category of borrowing, with a 4.5 per cent rise over the past year.

‘However, that annual growth rate is the slowest in the Reserve Bank figures which go back to 1977.

‘Home lending growth of 0.3 per cent in December is also one of slowest monthly increases recorded.’

Is this really surprising though? As much as the RBA wants to generate another housing boom to replace the quickly expiring mining boom, people aren’t quite that gullible. Not everyone, anyway.

When interest rates start scraping the bottom of the barrel, the creation of credit happens not through central bank determination, but rather through the credit worthiness of borrowers. Judging from the latest borrowing statistics, most credit-worthy borrowers have already passed through the banks’ gilded doors during Australia’s long residential property boom.

Those few who haven’t can smell the RBA’s bait and don’t want a bar of it. And you can hardly blame them… 30 years of debt servitude to own what is essentially a depreciating asset. Only the land appreciates in value and it’s appreciation in recent decades is all out of line with economic fundamentals.

A credit boom in Australia started the run, and a credit boom in China (which pushes up our national income, which increases our borrowing capacity) is prolonging it.

Not for much longer, we say…again.

Which should make the upcoming Federal Election an interesting one. It’s still more than 8 months away, but that’s plenty of time for China’s latest credit surge to turn ugly. If that’s the case, it will be a very difficult election for Labor to win.

They’ll have a mining tax that’s not generating any tax (but they’ve spent the proceeds anyway) and a carbon tax that’s hurting ‘working families’ and not making a bit of difference to the overall carbon emissions, not on a global scale anyway.

Abbott’s pitch/bribe of abandoning these taxes will be very compelling.

Just why Labor decided to go for such a long term campaign we have no idea. We’ve read nothing about it, mind you. We think political watching is one of life’s great time-wasting activities.

But we do think it just heaps another layer of uncertainty on Aussie investors. Especially as the pollies will be coming out of the woodwork with plans, ideas, bribes and fixes to win an electorate over by September.

We’re one month down so far this year…and it’s been a very good one for punters. A positive January usually portends a positive year. But genuine investing is all about risk and reward. And to get a reward in this type of market, you have to take an inordinate amount of risk.

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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