Kuta Beach

Kuta Beach

Friday, 5 November 2010

Australian Economy Powers Ahead

There is a guy on YouTube named George. In a video above, he talks about the difficulties of living in the United States as it stills suffers from the aftermath of the GFC.

The US dollar continues to fall, the Fed continues to print money, and official unemployment flirts the 10 per cent mark (while actual unemployment that includes discouraged jobseekers may actually be 20 per cent).

President Obama is facing a backlash as his promise of hope and change have not materialized and American citizens see nothing but the same old stuff. Many of the problems that led to the GFC in America were the result of a house price bubble that slowly grew during the presidency of George W. Bush, and when the bubble burst, Obama inherited the mess.

But here in Australia, all is good! It is true that the GFC hit Australia, but the country has rebounded back. Unemployment is around 5 per cent rather than 10 per cent. The Australian dollar is now at parity with the US dollar, which is unprecedented. Since Australia is a major exporter of natural resources and minerals, a combination of demand from emerging markets like China as well, as strong investor demands for safe-haven assets like gold, have seen mining profits explode, which increase the value of the Australian dollar. Australian house prices are one of the most expensive in the world and continue to increase.

Some executive in America who commented on malinvestments immediately prior to GFC said the following: "You cannot stop dancing while the music is playing."

Here in Australia, it seems like everyone is dancing and everyone expects the music to continue to play forever.

I am worried about the possibility of something going wrong with the Australian economy, which is why I am hoping for the best but starting to prepare for the worst. About 30 per cent of my wealth is in cash, ready to buy dirt-cheap shares if there is a post-1990 Nikkei-225-style double dip, which may lead to a full-blown depression, resulting in a lost decade or two. The Fed chairman seems willing to prevent deflation at all costs, so maybe worries of deflation are unfounded. If you believe the Americans will simply flood their economy with cash to jump-start it, then it is best that investor get out of cash and go into anything else, shares, gold, silver, platinum--anything but cash. Even the cash of countries other than America can be dangerous as a currency war may see multiple countries printing money to devalue their currencies and benefit their exporters even though it is means higher prices for everything.

The bottom line is you should be careful. I recommend being mostly in shares but keep a significant amount of cash ready just in case there is a deflationary collapse. Furthermore, for Australians, I believe now is a good time to start selling Australian dollars and going into foreign currency. Today I just purchased some ETFs that invest in global multinational corporations (see the iShares Global 100 ETF). In my opinion, now is not the time to buy real estate. Interest rates are so high that you will find the value of your assets being dwarfed by the value of your debts. There is no guarantee--and it is highly unlikely--that the Australian residential real estate market can sustain the kinds of growth rates needed for you to just break even considering the immensely high mortgage rates currently offered by Australian banks (around 7.5 per cent).

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