Yesterday's market sell-off wasn't part of the plan…
Source: The Age
By 'plan' I'm talking about RBA chief Glenn Stevens' grand plan to get money out of term deposits and into the economy; by borrowing, spending and investing.
I'm not one for borrowing, the exception being a mortgage on the house you live in… as long as you can afford the repayments even when interest rates are back up to more normal levels, like 8%.
I'm not one for spending, remembering my late mother, on her deathbed, saying her belongings were "just possessions". More shoes, jewellery, gadgets, cars, clothes… they are just possessions. As the old saying goes, you can't take them with you.
By jove, Glenn, the plan just could work after all…
I am one for investing.
And as someone who is already invested in the market, and ready, willing and able to invest more, I am delighted when the market moves lower.
Many investors despair when markets fall.
Newspapers rejoice. They are in the business of reporting doom and gloom, and save an airline crash or natural disaster, there are few better staple headlines than the good old "$xx billion wiped off the share market."
In June this year, bank deposits stood at $1,783 billion. By contrast, in July 2007, just as the S&P/ASX 200 was peaking at 6,750, bank deposits totalled $975 billion.
It shouldn't be surprising that Aussie investors were long stocks and short cash right at the top of the market. Investors have a depressing knack of buying high and selling low.
What is surprising however is the Aussie investors are long cash today, at a time when the RBA cash rate has just crashed to its lowest level since 1959.
The long slow death of term deposits… it's only a matter of time
It's simply a matter of time before investors get sick of earning after tax returns on their term deposits of around 1.5%. That's less than the rate of inflation, meaning term deposits for many will effectively be earning a negative real rate of return.
Might as well set fire to your money, huh?
Source: terrydean.org
It's never quite that bad, of course, but you get the picture.
As reported in The Age, Bell Potter analyst Charlie Aitken is calling the billions in term deposits a cash bubble, saying this bubble, like all others, is going to burst.
In the worldwide central banker race to the interest rate bottom, Australia has been a relative laggard.
But we're catching up fast.
And the way things are going, with the U.S. and now even the European economies starting to recover, just as the Australian economy goes into reverse, we could soon be the world leader in low interest rates.
Will the Aussie dollar crash to 60 US cents?
Imagine what that would do to the falling Aussie dollar? Could it indeed hit 60 US cents, as Professor Ross Garnaut suggested just a couple of months ago?
In the same The Age article mentioned above, Charlie Aitken was quoted as saying…
"When the fear of no investment income meets the fear of missing out, you get big risk asset price moves."
The indisputable pathway to ASX 6,000
Aitken is very bullish on the ASX, saying it could rise to 6,000 in the next 12-18 months. His thesis is investors moving out of term deposits and into equities, especially the big four banks, will push markets higher. These things happen when demand (buyers of equities) exceeds supply (sellers of equities).
Now if everyone could STOP SELLING SHARES… markets would be sure to shoot considerably higher, to 6,000 and beyond.
We're not ones for making such predictions, happily leaving that to others.
But what is indisputable is the relative attractiveness of dividend paying ASX stocks, particularly those of the fully franked variety, to term deposits.
I hate to disappoint, but Aitken's cash bubble isn't going to burst quickly.
Unlike equities, the nominal value of term deposits don't change on a day to day basis, and they don't crash, like the stock market does every so often.
The silent killer of term deposits
The silent killer of term deposits is inflation.
In any interest rate environment, term deposits are a poor long term investment. It's just many don't realise it.
But in these unchartered waters of ultra-low interest rates — and they are likely to go lower still, perhaps as low as 2% — the silent killer suddenly gets louder, and louder and louder… until you realise the spending power of your cash is being eroded before your very eyes.
As I said yesterday, I'm actively looking to add more ASX stocks to my portfolio
The Australian Financial Review says "good quality Australian shares that have a long history of paying dividends are a real alternative to a term deposit." Get "3 Stocks for the Great Dividend Boom" in our special FREE report. Click here now to find out the names, stock symbols, and full research for our three favourite income ideas, all completely free!
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