EMAIL #121 - 23RD MAY 2021 - "THE STATE OF THE ECONOMY???
Right now is a fascinating time to be in business and to be looking for investment opportunities. I have been keenly following 3 or 4 economic commentators for the last 6 months and it appears that Australia, and most of the western world, is currently experiencing a set of very unique economic conditions, which are.
- Record low interest rates, that are likely to remain low for several years.
- Rapid economic recovery from last year’s Covid recession.
- No international travel for the foreseeable future.
- Record growth in real estate prices.
- Looming inflation and a growing imbalance between supply and demand in many sectors of the economy.
This combination of economic conditions has rarely, if ever, been experienced before; other than the period directly after the second world war, (when the world was a very different place). The biggest economic unknown looking forward is the combined effect of both super low interest rates and rising inflation.
Historically the government’s main lever for controlling inflation is increasing interest rates to reduce demand and to slow down spending. However, the Reserve bank (i.e., the government) has stated numerous times that they have no intention of raising interest rates for at least the next 2 years. But unfortunately, it’s not that simple, and three of the four big banks have independently started to increase their fixed term loan interest rates. So, the next year or so may prove to be very interesting and something of an economic experiment?
“Trying to slow the economy down by raising interest rates is like a doctor saying you're in great health, so we have to make you sick a little bit.” Steve Forbes
These economic conditions are predicted to be particularly challenging for passive investment; (i.e. low risk, long term investing, such as fixed term bank deposits or superannuation funds). Superannuation makes up by far the largest group of investment funds in Australia, which has a huge impact on economic stability, the investment landscape, as well as the security and wellbeing of millions of retirees.
“Risk is what keeps us young.” Jordan Belfort (aka Leonardo DiCaprio – "The Wolf of Wall Street")
Low interest rates are generally good for borrowers but bad for investors and if you add in rising inflation a lot of passive investments start to go backwards, (meaning, the investment returns fall below the rate of inflation). Unfortunately, most methods of safeguarding your investments during a period of inflation involve exposure to slightly higher risk, which can become scary and stressful for unsophisticated investors (i.e. most of us!).
As famously stated by Gorgon Gekko (Michael Douglas in the movie “Wall Street”)
“money never sleeps”, and the only way to be confidently in charge of your own financial future, is to be financially intelligent and able to make the right decisions at the right time. So, next week I will explore the pros and cons of saving and investing in the current economic landscape.
Thanks for reading,
Stay safe and stay in charge,