Aussie Monetary Policy a Forecast for the USA

By: Greg Silberman | Wed, Mar 12, 2008
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A fundamental question we get asked a lot is whether forecasting is of any use whatsoever? We think it is, and offer up an intriguing comparison between Australia's current economic situation and the road the US is going down -- to its detriment.

Is forecasting any use whatsoever?

Let's face it, it's hard enough knowing what mood your kids will wake up in in the morning, let alone the machinations of a wild beast called the market.

Be that as it may, the fact that the future is unknowable has not deterred us (or millions like us) from trying to forecast it. The reason, it's so damn interesting and if you get it right, rewarding.

Take the markets for example; nobody gets it right all the time - its just impossible. But for those who get it right just 51% of the time, employ sound discipline and money management techniques, fabulous wealth awaits!

In fact, 51% is generally the house odds at most large Casinos. 51% that's it! Those kind of odds built gambling Mecca's in the desert!

The great thing about the future is that it is an extension of the present. And it is in the present that we constantly look for signs and clues to tip us off about the future. Here's one we've been watching with increased fascination: -

You want to know the future of America?

Take a look at a mini America. A smaller more incubated and isolated version. Now I know many a reader will be hopping mad when we say this, but the comparison and similarities are fascinating, we see a lot of America's future in the current situation in Australia.

Australia like America went through a tremendous real estate boom. Australia's boom was a little earlier than the US and lasted from late 2000 to about 2004.

To get a sense of the boom, in more expensive areas such as Sydney's Eastern Suburbs, a 3 bedroom free standing house with 1 bathroom in need of some renovation (a 'reno') would start at around $1 million Aussie Dollars today. That's up around 100 - 150% from the late 90s (200 - 300% in US Dollars).

The point being that in late 2004 when Australia's property boom was losing steam, a bottom was placed under property prices through the great liquidity pump. Low interest rates permeated the planet in 2004 compliments of Alan Greenspan. The Reserve Bank of Australia (RBA) followed suit thus delaying an inevitable deflation in Aussie real estate.

Around the same time we entered into a massive commodity boom brought about by Asia's insatiable desire for raw materials. Those raw materials were used to manufacture goods for US consumers on a refi shopping binge.

Now, regardless of whether such growth was real or artificial, the effect was to keep the RBA pumping out even more cheap money to keep its currency low and raw materials competitive.

So once again, easy credit came calling to every Australian's door and property prices, instead of correcting, continued rising into nose bleed territory. The difference, it should be said, is that there was never an over-supply of properties as in the US compliments of Australian Government (mis)planning.

The net result is that life is very expensive in Australia today. It is virtually impossible for a family to own a home. Rentals have gone through the roof due to a lack of supply. After tax incomes are severely lagging the cost of living. Australia is one of if not the highest geared nation in the world.

In our own experience from living there, inflation is running amock. Price levels are generally higher than most OECD countries due to monopolies, Government taxes and inflation. We recently came across an article in the Sydney Morning Herald that explains succinctly the position of hopelessness that millions find themselves in Skipping meals to pay rent.

But as we were taught in Econo101, gearing / leverage cuts both ways. And now that credit has suddenly become harder to come by, the extent of financially engineered profits (as opposed to profits from making stuff) is becoming very evident Hard landing ahead for financial engineers.

A further consequence is that Australian Stocks have become highly leveraged due to margin buying. And since that excess is under pressure, the ASX has undergone a rough correction and stands on the precipes of a further 20%+ correction if it closes under 5600.

Chart 1 - Aussie All Ords precariously close to another 20%+ drop (technical target on a break below 5600)

This is the effect of de-leveraging and its most acute in that isolated economy.

And as to the future?

The RBA like the Fed will fight any asset deflation tooth and nail through unlimited money supply expansion.

Will they be successful in overcoming the current credit crisis?

We think they will, given enough money!

But that's just the point, more money will go on to create yet another horrendous bubble (probably in commodities) and yet another collapse. All the while raising prices through paper currency erosion and edging us ever closer to what we determine is an inevitable hyperinflationary collapse!

Zimbabwe's 100,000 Percent inflation.

Nah, could never happen here!

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Author: Greg Silberman

Greg Silberman CA(SA), CFA

Greg Silberman

Profession: Research Analyst and Newsletter Editor
Company: Ritterband Investment Management LLC

Career Brief: Greg qualified as the youngest Chartered Accountant and Chartered Financial Analyst (CFA) in South Africa in 1998 at 25 years old. After completing his traineeship with Grant Thornton he moved to London where he worked for JP Morgan Chase in their Fixed Income Swaps Division. Sick of the grey skies and cold weather Greg relocated to Atlanta, Georgia where he spent the next 4 years freelancing as a management consultant. His targeted clients were fast growing mid size US based companies and he worked across many industries including credit cards, health insurance and energy trading. Greg has recently returned from Sydney Australia where he spent the last 2½ years working in Equity Derivative Structuring for Perpetual investments a major Australian Asset Management Company.

Greg has a passion for the markets and has been writing Greg's market newsletter for 2-years. A newsletter focused on metal and energy stocks and recently non-resource small caps listed in the US and Internationally.

This article is intended solely for information purposes. The opinions are those of the author only. Please conduct further research and consult your financial advisor before making any investment/trading decision. No responsibility can be accepted for losses that may result as a consequence of trading on the basis of this analysis.

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