FYI | May 17 2006
I had a good chuckle a few weeks ago when I saw Reserve Bank of Australia Governor Ian Macfarlane appearing on the front cover of one of Australia’s leading newspapers stating Australians were too informed about economics and finance, up to a point where it was all getting too confusing for them.
Mind you, this is the same Governor who grabs every opportunity with both hands to defend why the minutes of RBA board meetings have to remain secret. No doubt it would confuse the Australian audience too much when they learn who has been voting for and against the recent decision to raise interest rates only a few days before the federal government was to present its latest budget for the nation – and why.
It made me laugh, because are these not the same Australians who fell for the story that a new Coaltion government would keep interest rates low, with some pamphlets from the Liberal press warning that if Labor would win the elections interest rates could go up as high as 15%?
It still amazes me that an unquantifiable amount of Australians actually fell for it. Stories going around the usual barbecue chats and at quiet parties have overly convinced me: provide people with the opportunity to own their own properties, and possibly a bit more, and all they seem to think about is minimising all potential risks to their properties and their financial situation.
Don’t worry, I am not going into politics this week. But I feel obliged to ask the question: if Australians are over-informed, how come they don’t make better judgments in matters when they easily should now better?
In fact, as we all should know, the RBA makes its own judgment and the recent decision on interest rates may well have been the quintessential proof of that. How many analyses have we read it would not happen, not now, because of the obvious political complications?
The jury is still out whether the RBA made the right judgment, or not, and whether the next move is down again, or further up. The market seems to lean to the last scenario at the moment and that cannot be a surprise because globally interest rates are definitely on the rise.
Yes, it is that time again: fear and greed, but above all fear. Not everyone will have read the series of feature analyses Greg has written over the past few weeks on the basis of GaveKal’s outstanding outside the box analysis of today’s changing world. For those who haven’t I can highly recommend reading them.
One of the most compelling arguments in the book, called Brave New World, is that global interest rates have remained unusually low over the past few years because of the growing economic importance of China, where labour costs remain low and business margins often paper thin.
At a time when investors are nervously looking around for any sign inflation is picking up, they should be worried about US pressure on the Chinese to revalue their currency. A more expensive renminbi will push up the prices of Chinese exports and thus reduce the deflationary effects from the past few years.
Add higher oil prices and very high prices for commodities and it is easy to see where the sudden concerns stem from. If today’s prophecy from the likes of Marc Faber and Jim Rogers turns into reality tomorrow we will all be seeing price increases for our daily food and drinks in a not too distant future and where will that leave inflation?
A few weeks ago I wrote that while a correction seemed to be on the cards, I wasn’t worried. Today’s share markets seem to have potential to move up further north still. That’s because in the ten years (it’s been more, but let’s keep it to ten, it’s a nice round figure) that I have been reporting and analysing business and finance I have learnt to appreciate the weight of money.
Yes, central banks globally are now clamping down on the massive liquidity they have created over the past few years, but the process is gradual and thus by definition slow. There’s still a large amount of money sitting around looking for a destination.
One of the prime examples is Warren Buffett’s Berkshire Hathaway which reportedly has US$40bn in the bank, doing nothing but generating a low return. As you all could have read through our stories Buffett is actively looking into better ways to park this money.
And what do you know, he might even end up investing some of it in Australia! (Although one could argue how much of the tag "Australian" applies to Rinker (RIN) whose prime territory is the North American building markets). Buffett going to Japan, however, seems to make a whole lot of sense.
Instead of paying too much attention to some illusory Buffett-Rinker speculation, I am of the opinion that investors should start paying attention to the hordes of Chinese investors who are traveling around this country, looking for attractive assets to buy.
It was only a few months ago that I received a phone call from a local businessman who told me there was already more going on between Chinese entrepreneurs and Australian businesses than the majority of Australians was aware of. Nobody has picked this up yet, the man told me, but the Chinese are already very active negotiating deals and it won’t be long before we see some major deals coming through.
We have seen a few announcements coming through since then but there is a whole lot more to come, I am sure. Mark my words, the days are not far off that we will get used to Australians selling assets to and doing business with Chinese investors and entrepreneurs.
What surprises me is that a lot of Australians think they can easily outsmart the Chinese who seem to have a local reputation for "buying anything". I already know a few people who thought they had a good thing going, only to find out they had been brutally used by their Chinese business partner. Guess who was laughing in the end?
The real test whether Australia wants to become a genuine part of the Asian revolution is yet to come.
Your prophet for this week,
Rudi Filapek-Vandyck
(with ongoing support from the Magnificent Three: Greg, Chris and Rob)