It Couldn’t Happen Here, Could It?

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Overnight, the Dow Jones Industrial Average gained 13.08 points, or 0.07%.

The S&P 500 index added 3.91 points, or 0.19%.

In Europe, the Euro Stoxx 50 index (comprised of companies such as Unilever, BNP Paribas, Siemens, and ING Group) closed up 3.67 points, or 0.12%.

The FTSE 100 index added 0.38%, while the German DAX index fell 0.34%.

In Asian markets, the Nikkei 225 index is down 83.1 points today, or 0.48%, while Hong Kong’s Hang Seng index is down 0.28%.

China’s Shanghai Composite index is 0.03% higher, while the Aussie S&P/ASX 200 index is up 23.46 points, or 0.43%.

Across commodities markets, West Texas Intermediate crude oil is trading at US$44.46 per barrel. Gold is trading for US$1,242 per ounce.

The Aussie dollar is worth 76.4 US cents.

Australian deflation

The Financial Times reports:

Consumer price inflation Down Under — or rather the lack of it — is leaving the central bank plenty of room to ease should it want to resume that course, with some underlying measures of inflation rising the slowest levels in almost two decades.

Quarter-on-quarter headline inflation contracted 0.2 per cent, below the 0.2 per cent rise economists were looking for and down from a 0.4 per cent rise the previous quarter. This was the first step into deflationary territory since the end of 2008.

In yesterday’s Daily Reckoning, Greg Canavan wrote about interest rates, inflation, and commodity prices.

For those who argue that official statistics indicate that inflation is low (or that we now have deflation), Greg says that rising commodity prices are inflation, and that, if it hasn’t already, this inflation will seep through to the economy.

In reply, subscriber Michael writes:

Hey Greg…ask your wife about price inflation in the supermarket if you are really interested.

The doctored statistics will not tell you about real inflation. The increase in food prices has been unreal. And then there are all manner of manufactured goods albeit these come from overseas and have a forex component.

Come, come, Michael, it’s not just the wives who do the shopping. Until recently, your editor would trudge around Woolworths at Frankston’s Bayside Shopping Centre doing the grocery shopping.

I say until recently, because we now take advantage of the home delivery system. And who now places the order online? [Blushes] The missus.

Regardless, we know that there has been a big increase in prices. Six years ago, we could comfortably buy groceries for our family of four and pay $200–$250 per week.

Today, with a shopping list that’s not too dissimilar as it was then, it’s a struggle to end up with a shopping bill lower than $350.

And if you were to peek inside our cupboards and fridge, I can assure you that you wouldn’t find anything more extravagant than a jar of Dijon mustard.

So, please, forgive us, but we find it hard to take seriously the idea that Australia is experiencing deflation.

The unfortunate thing is that most people who are gainfully employed don’t notice inflation. That’s what makes it so dangerous.

How many people stop to think about why they don’t feel any better off, even though they’ve received 2.5% per year pay rises for the past 10 years?

After all, if the cost of living wasn’t going up, those pay rises should be clear ‘profit’ in the bank for a wage earner.

The reason, of course, is that prices are rising in line, or ahead of, wage rises. You don’t feel wealthier because, in real terms, you aren’t.

In fact, there’s a reasonable chance that you’re actually poorer in real terms. That’s because, even if your employer gives you a wage increase based on the CPI (consumer price index), that’s a backward looking number.

Any wage increase therefore only makes up for price increases that have already happened. It doesn’t account for price increases that will happen in the future.

So, as always, the average consumer is left behind.

And, if you’re not gainfully employed for a significant period, it’s even worse. Because, odds are, you won’t even get the benefit of a CPI increase.

It’s easy for the well-paid bureaucrats, central bankers, and wealthy Collins Street types to say that you should fear deflation more than inflation. That’s because it’s in their interests to promote inflation.

That’s especially true for governments. Governments love inflation because it allows them to pay off ‘old debt’ with ‘new money’. The more new money they can create, the easier it is to pay off those old debts…and then go further into debt with new debt…which they’ll pay off in the future with newer money.

Get it? The cycle continues, and the Aussie government is doing a pretty good job of it at the moment. As the Australian Office of Financial Management (AOFM) website shows today, total Federal government debt now exceeds $423 billion:

chart image

Source: Source: AOFM
Click to enlarge

The result of all this? The supposed appearance of deflation and higher government debt. That’s right, as Bloomberg reports:

The Australian dollar’s days as one of the best-performing developed-market currencies are ending.

The Aussie is set to extend declines after tumbling Wednesday as pressure grows on Reserve Bank of Australia Governor Glenn Stevens to cut interest rates following weaker-than-expected inflation data, according to Macquarie Bank Ltd. and Royal Bank of Scotland Group Plc.

Australia’s already record-low interest rates of 2% look set to go lower. As the chart below shows, the chances of the Reserve Bank of Australia (RBA) cutting interest rates from 2%, to 1.75%, just shot up from a less than 20% chance, to the current 53.1% chance:

chart image

Source: Source: Bloomberg
Click to enlarge

Just when savers thought it couldn’t get any worse…turns out, it could.

Surely, it couldn’t happen here

But just how bad could it get?

Of the 19 Eurozone countries (countries that use the euro as their currency), Bloomberg monitors the bond yields of 15 of them.

Of those 15, 13 of them currently have negative interest rates for two-year government bonds.

Three of those 13 include the ‘PIIGS’ of Ireland, Italy, and Spain. Only Portugal and Greece currently have positive interest rates for two-year bonds, at 0.6% and 9.4% respectively.

Considering where these countries were even five years ago, and the problems they still face, it’s astounding that investors would actually pay the government for the privilege of looking after their money.

In that case, is it really that improbable that Australian interest rates could fall into negative territory?

Australian two-year government bonds currently yield 1.93%.

Funnily enough, Spain’s two-year bonds yielded 2% as recently as January 2014. Today, they yield minus 0.03%.

Happy investing!

Conference update

I want you to keep a close eye on your inbox the week beginning 9 May. Sometime during that week, we’ll release details of our 2016 investment conference.

You’ll discover the dates, the venue, the speakers, the content, the pricing, and more.

If this turns out to be anything like the last conference, we could sell-out of tickets during the ‘early bird’ offer.

So I’m serious when I say that you should watch your inbox closely.

If you’ve got any interest in seeing world renowned speakers, and our own rabble of contrarians, trouble-makers, and tip-top analysts, make sure you’ve got access to a computer, tablet, or smartphone during that week so you can be among the first in line to grab a ticket.

I’ll keep you posted over the next week or so, and explain how you can guarantee your seat at the best investment conference in Australia this year.




End of day market data

If you have any ideas about what you would like us to include in our end of day market data drop us a line at, and type ‘Market data’ in the subject line.

52-week highs: 29 stocks, including Aconex Ltd [ASX:ACX], Appen Ltd [ASX:APX], Clinuvel Pharmaceuticals Ltd [ASX:CUV], Perseus Mining Ltd [ASX:PRU], and SeaLink Travel Group Ltd [ASX:SLK].

52-week lows: 17 stocks, including 3P Learning Ltd [ASX:3PL], MZI Resources Ltd [ASX:MZI], and Spring FG Ltd [ASX:SFL].

Note: The stocks listed above are stocks that hit an intra-day 52-week high or low during today’s trading. The stocks didn’t necessarily close at the 52-week high or low.