Global Financial Crisis
“Global Financial Crisis” ; “Recession” ; “Credit Crisis” ; “Bail Out”
These are all very strong words that have dominated the media in recent times. The media has done a great job of convincing us that we are headed for hard times, and in the process sold a great many newspapers. As a result of the gloomy forecasts, most people are looking to tighten their belts. If we do find ourselves in recession, it will be unfortunate for the media because people will cut back on discretionary spending, including buying the daily newspaper.
Human behaviour is an interesting thing, if we told enough times that something is going to happen then it often does. I recall a story told to me recently. A group of employees had an all day workshop to do some business planning and as a practical joke it was decided to tell John (not his real name) that he wasn’t looking well and ask him if he was feeling alright. By the end of the day John’s seat was empty as he had go home because he wasn’t feeling well. Suggestion is a powerful motivator of human behaviour. Best to look at the facts.
At Northstar, we deal with a lot of small business clients and one of the first questions I ask them is “how is business going?” Most report that they are doing quite well, some as busy as ever. At some point they may slow down a bit, but the level slow down is in some ways being offset by the backlog of work in the economy. Another plus is the fact that going into this slow down we had record low levels of unemployment.
Over the past 12 months, the share market (which reflects human behaviour) has reacted very negatively, and everyone is wondering can it go any lower? We don’t know because we can’t predict human behaviour. What can be predicted however is company earnings, and even in this environment a lot of companies will continue to make money. Once things pick up again the more cyclical stocks eg. BHP, will also see their earnings grow or return.
At this point in time the valuations on number asset classes look cheap, but what do we mean by cheap? Normally we want a return on our investment over and above the basic bank interest rates. This ‘risk free rate’ used to be the RBA cash rate but now it is whatever rate you can get from a bank as the government has guaranteed their deposits. Hence we have seen a flight into cash deposits of recent times.
Going forward the RBA may need to push the cash lower than it has before for two reasons:
- Stimulate the economy to insulate us from a global slow down
- Bring down the risk free rate as quick as possible because so many people are now affected by the share market they need to restore confidence.
That’s why we saw another 1 percentage point interest rate cut this week.
As cash goes lower and if there are signs that the economy is resilient, we may be in for a significant upward movement in the share market. History has shown us that the bulk of this movement normally occurs within 12 months of reaching the bottom. With the levels of government stimulus being pumped into the economies of the world, I do believe that we will come through this period but it may take a bit of time and Australia will hopefully get through this better than most.