One Sure-Sign Signal You Can Trust

About Latest Posts Bruce JacksonBruce co-founded The Motley Fool UK in 1997. Now back in his native Australia, Bruce is …

a woman

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We've been saying it for a while…we think interest rates are going nowhere fast.

It was more hunch than science, more a gut feel for the economy than by looking at raw numbers and statistics.

Speaking of numbers, we recently received an email from David…

"Just wondering if you have any evidence for your assertion that movements in the sharemarket influence the RBA's decisions on interest rates?  It's easy to think up a plausible connection…but showing that there is in fact a connection would make it much easier to take what you are saying seriously."

The short answer is no. We didn't have any evidence. We just have our gut. Sorry. Perhaps we can implore you to take us seriously anyway? It's worth a try.

The cab economy

That said, we do now, finally, have incontrovertible evidence of the dire state of the economy…

"It's been my slowest week for years", said the taxi driver as he drove us to Melbourne Airport. "Last night I went home at 7pm. There are too many cabs and not enough passengers."

Taxi drivers are at the very heart of the economy. When they tell you the economy's bad, you know it's struggling.

In good times, people think nothing of blowing $60 on a convenient later-night cab ride home from the office, or the office's local drinking establishment.

Let the good times fall

The good times are coming to an end. The local share market has known it for a while – it has gone precisely nowhere over the past 12 months.

Some larger companies, like Harvey Norman (ASX: HVN), Platinum Asset Management (ASX: PTM) and Perpetual (ASX: PPT), have fared worse, down 29%, 24% and 20% respectively over the same period. Ouch. Before dividends, you'd have been far better sticking your cash in the bank.

The cab business is one of the best measures of the state of the underlying economy. It is simply impossible for one hard-working cabbie to do better than other similarly hard-working drivers. One down, all down. Cab drivers and competitive advantage are as far apart as Lleyton Hewitt and Rafael Nadal.

Charlie Aitken of Southern Cross Equities calls it the East Coast recession. Certain parts of the east coast are likely copping it worse than others, with the Gold Coast leading the way of the major cities.

There, unemployment is running at 10%, house prices have fallen 10% or more, construction has virtually stopped, tourist numbers are down, crime is up, and it's hard to see a light at the end of the tunnel, especially when the area's largest employer is the local Council, hardly a growth industry.

Rates on hold

"Rate rise unlikely for months" says the Australian Financial Review, reporting how the "Westpac-Melbourne Institute Leading index, a gauge of the likely pace of economic activity in three to nine month's time, slowed in April…pointing to a slower gross domestic product later in the year…"

Thankfully for the struggling east coast economies, even Glenn Stevens and his Reserve Bank of Australia (RBA) cohorts are finally getting the picture too. Although their latest minutes said there would likely be a need for interest rates to rise at some point, they said there was no "added urgency" to do so.

Perhaps the RBA have been chatting to some taxi drivers. Mind you, Glenn Stevens could afford to catch the odd cab or two home, seeing as he takes home a salary of over $1 million, well ahead of Julia Gillard's 'mere' $350,000. It must be tough out there on Struggle Street.

RBA in the Poor Farm

We wonder how Mr Stevens would fare as an investor? He seems to change his mind quite regularly as to when interest rates might need to rise.

As we've said before, the RBA seems to swing with the stock market (although we have no evidence…sorry David). If they were an investor, I'd suggest they'd be buyers at the top of the market and sellers at the bottom, a strategy more likely to see you in the Poor Farm than Millionaire's Row.

Perhaps we're being harsh. After all, the RBA's job is to keep inflation under control whilst maintaining full employment, the result hopefully being "the economic prosperity and welfare of the people of Australia." Chance would be a fine thing.

Envy of the world

That said, we can't complain. As a country, we're doing pretty well. Treasurer Wayne Swan recently said on Bloomberg, "Our economic scorecard remains the envy of the developed world."

He's right. We don't know how good we've got it, and this is despite us currently living through the most depressing and dire political landscape known to mankind. We should sack the lot of them, from all sides of politics, and start afresh. The People's Plebiscite, we'll call it…

Compare Australia to the USA, UK, Spain and indeed most of Europe. For all the grief Greece is getting right now, we wouldn't wish youth unemployment of 40% on anyone. Riots don't fix anything, but at the same time, it's not their fault there are simply not enough jobs to go around.

Has the curse of the Olympic Games struck again? Sydney went into a decade long struggle after the 2000 games. Athens is bust. Good luck London from 2013 onwards. And as for the Gold Coast "bidding" for the 2018 Commonwealth Games…why?

We'll leave the final words to the Australian Financial Review

"Strong dollar good for ex-wives, botox"

As headlines go, it simply doesn't get any better. We're off to the Gold Coast.

Bruce Jackson doesn't have an interest in any of the companies mentioned above. The Motley Fool has what we think is an enviable disclosure policy.

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