I’m bullish again for stocks next year and one of the reasons is that so many wise guys are telling me that the cash rate is going down to 2%! There are other reasons, but this is a huge one.
Sure, I know there is the usual list of Doomsday merchants out there tipping economic and market Armageddon or ‘Apocalypse Dow’, but I think 2013 will be good for risk assets – a point the Australian Financial Review’s Christopher Joye made on my Switzer program this week on the Sky News Business channel.
And remember, Joye is generally a ‘bond’ guy (given the fund he has put together with Mark Bouris at Yellow Brick Road) and bond’s aren’t considered ‘risk’ assets.
But there are other reasons for my bullishness.
First; I expect the fiscal cliff to be dealt with and I really hope the solution is as soft as it can be because a plan that’s too austere will hurt US growth and then stocks.
Second; the likes of Bank of America Merrill Lynch have tipped a 10% rise in stocks next year and others are in the same ballpark. JPMorgan Chase thinks the Yanks are in a secular bull market that kicked off in March 2009 and has a few years to run. They have the S&P 500 heading up 13% next year to 1,580.
Third; US Federal Reserve boss Ben Bernanke has said he will keep interest rates low until unemployment hits 6.5%, but that would only be the start of the tightening cycle. At other times he has said rates will remain low until 2014.
Fourth; the Fed plans to keep buying Treasuries and mortgage-backed bonds, which will keep long-term interest rates down and in turn keep the housing recovery going.
Fifth; China’s economy isn’t heading for a hard landing as the Doomsday merchants wrongly predicted.
Sixth; Europe’s bond yields for governments such as Spain and Italy have fallen to acceptable levels.
Seventh; ASEAN economies are to head back to pre-GFC growth rates.
Eighth; US companies have really good balance sheets, little debt and plenty of cash to invest and so all they need is a better set of local and overseas circumstances to see investment take off to offset tougher fiscal settings and create more jobs.
Ninth; the internet and globalisation will keep inflation in check for some time, which will keep interest rates low and this has to be good for stocks. And even when inflation rises, it will hurt the bond market, which in turn will make stocks look more attractive.
Tenth; a number of serious economists are telling me that the local cash rate is going to fall to 2%! If this happens, the dollar will fall, consumers will start spending, business investment will restart and local companies will see profits pick up – which will help stocks.
Also, the more the term deposit rate falls, the more investors will make a beeline for the stock market and dividend stocks will be the target.
How low will rates go?
I’m not sure if I believe the 2% story but it wouldn’t worry me because I believe inflation is now in a lower zone. Terry McCrann in The Weekend Australian last week argued that a 3% cash rate is the “new 4%” because the banks haven’t been passing on the full rate cuts.
Ordinarily I would worry about a 2% or 3% cash rate, but if inflation is going lower for longer, then it’s a new paradigm.
Downwards pressure on prices is evident. Just overnight Ruslan Kogan announced a plan to slash mobile phone charges. This is the guy who sells TVs and other electricals online, but he is only one in millions of businesses around the world lowering prices via the internet.
This globalised price competition will increase unemployment in countries like Australia, reducing wage cost pressure and then inflation.
We are even seeing Liquefied Natural Gas projects put downward pressure on oil prices and the Yanks are going to be heading towards self-sufficiency for energy requirements – this will help other business worldwide, which should see costs fall. Again this works against inflation.
I hope good sense prevails on Capitol Hill so there is no early January fiscal-cliff curve ball to deal with because I see 2013 as a great year waiting to happen provided global politicians can get it right and overcome their self-interest.
Unfortunately, as we have seen in Italy with Silvio Berlusconi’s comeback and Mario Monti’s resignation, politicians have trouble dealing with ‘self-interest’.
As Paul Keating once observed: ”In the race of life, always back self-interest – at least you know it’s trying!”
Important information: This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. Anyone should consider the appropriateness of the information in regards to their circumstances.
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- JP Goldman: The US market is due for a burst
- Rudi Filapek-Vandyck: Special feature: CBA still the most reliable bank
- Paul Rickard: Question of the week: buying property for retirement