Hedge Clippings | Friday 31 May, 2019
 

Last week we thought it "more likely than ever" that next Tuesday's RBA meeting would result in a rate cut. According to the markets, and it seems 100% of the economists, that's now not only a certainty, but some are predicting a 50 BP cut, while others (or maybe the same ones) are suggesting official rates will be as low as 0.5% by this time next year.

While Hedge Clippings is not prepared to put money on the chance that every noted (and other) economist is wrong, particularly given the messages coming from the RBA itself, we certainly hope they are not correct, simply because of the implications for the economy, and various sections of it, and the community if they are (correct).

Firstly, it was only 12 months or so ago that all and sundry were lamenting the property boom, and housing affordability. Whilst part of that was caused by overseas buyers, particularly from China, and some by lax lending standards or approval processes from the banks, a significant part of it was historically low interest rates. We may have seen the boom times disappear, but property prices are still way above where they were 5 years ago, and re-kindling the fire under them again will cause further issues down the track when (maybe that should be "if") rates rise again.

Overall debt levels in Australia - and the US and elsewhere if it comes to that - are at record levels, both at a consumer and corporate perspective. In the US in particular the level of sub investment grade corporate debt is a worry - as so-called Zombie companies pile up the debt such that all their cashflow is directed towards paying the interest, leaving nothing for investment or expansion.

Next, anyone relying on bank deposits for their income is struggling as it is. Their income is going to be trimmed further - although this will support equity markets. But supporting equity markets by lowering rates only makes equities look reasonably priced on a relative basis. If an investor's choice is 1% or less keeping their money in the bank, or 3 or 4% or more from putting it into the ASX it's pretty easy to see what's going to happen. However, when (sorry "if") inflation ever kicks in again, and rates rise, the opposite will happen, resulting in a capital loss on equities, and tears before bedtime for some.

Thirdly, depending on what happens to rates in the US, where the Donald is doing everything that he can to talk or Tweet the FED into lowering rates, lower rates here are likely to see further weakness in the Aussie dollar. This of course is a double-edged sword, making imports more expansive, and exports more competitive. But at 0.5% (if we get there) the A$ will lower significantly, unless the US$ weakens in line.

Had Bill "it wasn't my fault" Shorten been elected PM then it might have been necessary to cut rates as business confidence, and thus consumer confidence, would have taken a hit. The market, and business, has spoken about the benefits of Sco-Mo's re-election, as unlikely as it might have seemed a fortnight ago. We'd like to see the newly elected government - having been given a clear mandate - give the economy a clear kick through their tax cuts, business investment and infrastructure. 

And while they're at it, simplify superannuation and redefine its original purpose of encouraging workers to save for their own retirement, thereby taking them off the public payroll when they get there.