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Turning interest rate pain into your share market gain

Happy Friday.

Or is it?

Economy enters danger zone” screams the front page of today’s Australian Financial Review.

According to the story, the Australian economy faces a painful downturn in 2015 as a property crisis in China accelerates the biggest hit to Australia’s export income in more than two decades.

Uh oh…

You can’t say it wasn’t coming. I’ve long been suggesting the next move in Australian interest rates could be down. A struggling economy and a stubbornly high Aussie dollar certainly puts paid to any rise in interest rates, and brings a cut firmly into play.

The only stick in the ointment is the house price bubble, something firmly in the sights of the Reserve Bank of Australia. Earlier this week, RBA governor Glenn Stevens warned the baby boomer generation’s love of investment property could end in tears.

The warning’s better late than never, I guess. We’ve been on this wagon for quite some time.

I mean to say, why put yourself through the hassle of being a landlord for the paltry yield of 3.5%? Especially when you can buy high quality ASX shares that are trading on full franked dividend yields of 5% and above.

You can see the game Glenn Stevens is playing…

He’s desperately trying to jawbone the Aussie dollar lower.

He’s berating corporate Australia for being too risk averse, urging them to spend growth capital than return money to shareholders in the form of higher dividends.

(I’m happy to take the dividends, thanks anyway Glenn.)

And now he’s desperately trying to take the air out of the over-inflated property market, hoping the bubble will slowly deflate rather than burst.

Sorry Glenn, but none of it is working.

To the foreign investor, in comparison to many parts of the world, Australia looks incredibly attractive. We don’t have recessions. House prices never fall. Our interest rates are relatively high, believe it or not.

They don’t look at, or care about, falling iron ore prices. Or rising unemployment. Or that, writing in the AFR, Deloitte Access Economics’ Chris Richardson said about Australia…

“A golden age of living standards is now passing… the glory days are well and truly over.”

In other words, the easy money has already been made. From now on, we’re going to have to work harder, and smarter. Or rely on an interest rate free kick from our mate Glenn Stevens.

What about that housing bubble? From these elevated levels, perhaps, just perhaps, no matter if interest rates do go lower, property investors will come to their senses and not chase house prices any higher.

And if that doesn’t work, as flagged today in the AFR by RBA board member John Edwards, Australian regulators could eventually limit lending to Australians to stem the rise in property prices.

Admittedly, Mr Edwards says “we are a very long way from having to think about that possibility,” but whichever way you look at the statement, it’s more jawboning from the RBA.

Except, the jawboning is not working! Actions speak louder than words. Soon, it seems the RBA will have no choice but to act.

Speaking of actions, overnight the European Central Bank (ECB) cut its main refinancing rate from 0.15% to just 0.05%, and drove the overnight deposit rate deeper into negative territory, now charging banks 0.20% to park funds with the central bank.

Yes, Foolish readers. There’s a new .05 in town.

TS 5 Sept 2014

Interest rates like .05% could do some serious damage to your term deposits.

Not surprisingly, European shares rose overnight. In London, the FTSE 100 index briefly hit a 14-1/2 year high, now within touching distance of its all time high, reached on December 31st 1999.

These ultra-low interest rates are giving European, and US stock market investors a free kick.

It’s not rocket science — with interest rates like that, money simply has no place to go but the stock market.

No such free kick so far here in Australia. But, it looks increasingly likely it’s coming, courtesy of the RBA… and I’m getting in ahead of the curve.

Unlike the UK and US, the S&P/ASX 200 Index is trading a long way off its all time high. Prepare for take-off, Foolish investors.

I’m playing these markets three ways…

1) Buying, and holding growth stocks, particularly in the tech sector. One of my largest holdings is an ASX tech stock that’s already up 165% for Motley Fool Share Advisor subscribers. The big gains could still be ahead…

2) Buying, and holding ASX dividend paying stocks. One such example is Contango MicroCap Limited (ASX: CTN), a stock I’ve mentioned a number of times in these pages. The listed investment company trades on a trailing dividend yield of around 7%.

With plenty of companies on the Motley Fool Share Advisor scorecard trading on fully franked dividend yields above 5%, by comparison to term deposits, they look very attractive. Subscribers should check out the recent Motley Fool Share Advisor Income Extra feature.

3) Buying, and holding US-quoted stocks. Apple is one such holding, but by no means my largest. With the Aussie dollar inexplicably still riding high, buying US-quoted shares now is like getting a free kick from currency traders. The only way for the Aussie dollar is down. When it does fall, their pain will be your gain.

Scott Phillips and I have recently released our latest US-quoted stock pick to Motley Fool Share Advisor subscribers. No guarantees, of course, but one of our US-quoted stock tips is up an amazing 702.2%.

Finally, speaking of Apple, the iPhone 6 will be announced next week.

I’m a buyer of the phone, and a happy holder of Apple shares, despite their 4% fall on Wednesday. Zoom out a little, and Apple shares are up 40% over the past 12 months. Not bad for a company capitalised at almost $US600 billion.

Elephants can gallop. Term deposits, by comparison, are stuck in the quicksand.

Where to invest $1,000 right now

When investing expert Scott Phillips has a stock tip, it can pay to listen. After all, the flagship Motley Fool Share Advisor newsletter he has run for more than eight years has provided thousands of paying members with stock picks that have doubled, tripled or even more.*

Scott just revealed what he believes are the five best ASX stocks for investors to buy right now. These stocks are trading at dirt-cheap prices and Scott thinks they are great buys right now.

*Returns as of June 30th

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