TRAIN WRECK

The world economy is like a slow motion train crash.  People at the front of the train (in the USA, China, India) are experiencing the horror.  Those further back in the train (Europe, Australia) can hear the crash, but continue dining, thinking that they are on a different train.

Some months ago, before Bear Stern, I wrote that the US Fed had a problem.  Lower interest rates too much, and suffer inflation, lower interest rates not enough, and you get recession/deflation.   It looks as though the Fed got it wrong, or that the problem was insoluble.

In Australia the Reserve bank takes the place of the Fed.  The RB has a hard choice: raise interest rates and exacerbate the currently mild recession but (hopefully) stop inflation, or keep them low and see inflation head for double digits.

If the RB raises interest rates, Barvennon predicts that real estate will retreat, unemployment will continue to rise (a trend begun, as predicted on these pages, by the repeal of “work choices”.) the stock market will continue to retreat, the dollar will rise and inflation will rise slightly and stabilize.  OTOH, if interest rates do not rise, inflation will accelerate towards double digits, and then the four horsemen (unemployment, falling production, failing corporations and civil unrest) will ride again.

Financial advice for the individual?  FWIW, for the moment, put cash into the safest bank you can see.  In Australia that is probably Wespac or the Commonwealth.  If local interest rates do not rise within a couple of months and inflation continues upwards, then look to purchase cheap (mortgagee sale) real estate, or invest in selected stocks (suggest pharmaceuticals, chemicals, communications, competitive retailers.  Avoid banking, property, transport, media, heavy engineering.  Mining is probably overvalued, including energy minerals (oil, coal, gas).  OTOH if interest rates rise, buy selected equities (suggest communications, chemicals, pharma, retail) but mostly keep cash in the safest institution (even under the bed) until inflation stabilizes, then look to purchase real estate and equities.

STATE POLITICS

NSW Premier Ioemma urgently wants to sell off the state owned power stations, and who can blame him?  As the inevitable result of the oil price rise & the greenies success in imposing carbon taxes we can anticipate that power bills to rise drastically.  What politician wants to bear the brunt of owning a power provider in a rising energy market?  Unfortunately, the unions pwnt (own) the power industry, and do not fancy losing their featherbed jobs.

Barvennon is of the opinion that IGUANAGATE (in which a labour state minister and his wife, a federal labour politician were accused of bullying waiters at Iguana's restaurant near Sydney) is probably a conspiracy by the power unions.  Of course politicians are mostly obstreperous pricks.  It requires a confluence of normally disparate interests to expose that fact to public view.

As predicted on 3rd January..

So what is my near term prediction? A lot of ALP promises will turn out to be “non core promises”. Inflation will rise, unemployment will rise, there will be an increase in union industrial action, and economic conditions will worsen. The ALP will blame their predecessors for those problems. That will not sit well because Rudd has endorsed most LCP policies. 

Rudd repealed work choices at the end of March.  Unemployment has already been reported as rising.