Talk about jumping on the bandwagon…
For months I've felt like the lone wolf, suggesting the next move in interest rates could be down.
After yesterday's dismal national accounts confirmed Australia is indeed in an "income recession," economists have been falling over themselves to predict an interest rate cut.
Goldman Sachs chief economist Tim Toohey is predicting two interest rate cuts next year, the first in March followed by another in August.
Term deposit holders look away now…
On the bright side, and not surprisingly, the S&P/ASX 200 Index has jumped higher today, adding another 33 points to yesterday's very solid gains.
This may be stating the obvious, but lower interest rates make equities, especially the dividend paying variety, look comparatively a whole lot more attractive.
The party may be just starting…
I'm no rocket scientist, clearly. But the case for lower interest rates has long been staring me in the face…
- High, and rising, unemployment.
- The plunging iron ore price.
- The stubbornly high Aussie dollar.
- The lack of consumer confidence.
- Low inflation.
Houston, we have a problem…
The solution?
Let's see.
Praying to the iron ore gods is unlikely to work.
The government's likely not much help either, given it has backed itself into a corner.
- It won't spend its way out of the problem, as that will mean an even bigger blow out in the budget deficit.
- It won't raise taxes any more than it already has, for fear of an even greater backlash from the electorate.
- It's trying to cost-save its way out of the problem, but the Senate is blocking most of its big ticket items, and in any case, cutting costs takes even more growth out of the economy, and it's really only tinkering around the edges.
Never fear though.
Cigar chomping Treasurer, Smokin' Joe Hockey, has a plan.
Source: news.com.au
In the AFR, under the headline of "Hockey warns living standards could fall," Joe outlines his two pronged strategy to fix the government's predicament…
1) A lower Aussie dollar.
2) Blame Labor.
Genius.
Desperate times call for desperate measures.
Someone better get RBA Governor Glenn Stevens' mobile phone number to Christopher Pyne.
Mr Pyne, an experienced text sender, can fire off six or seven quick SMS messages to Mr Stevens, gently urging him to cut interest rates, and to do so quickly.
The text messages might go something like this…
"Dear Glenn. It's Chris. Christopher Pyne. I'm from the government. Any chance you could cut short your summer break and cut interest rates before Christmas? The nation would love you, as would we all here in Canberra too. Thx so much Glenn. You're a true gentleman. Best, Chris."
"Glenn? Did you get my first text? Sorry to chase you, but if you could just give us a quarter per cent now, before Christmas, that would be simply smashing. Love your work. Your mate, Chris xxx."
"Hi Glenn. Chris again. Is this the right number? Just checking, as it has been 3 minutes since I sent you the last text. Just 25 basis points. One for the team… Yours truly, Chris."
"Glenn. Chris here. Could you give me a quick call to discuss? I've got Joe here. He's looking for a little help with the hole in his budget. Didn't see the iron ore price falling as much as it has. He needs a lower Aussie dollar and reckons you're the man for the job. Keep up the great work. Call me please. Thx, CP"
"Glenn. This is getting urgent. I've got Tony here now too. We don't have to call it an emergency interest rate cut. We can say Tuesday's decision to keep interest rates on hold was a rhetorical flourish, mumble something about having every confidence in the economy, and lop 25 basis points off the cash rate, just in time for Christmas. Sound good? Thanks Glenn. Love you long time. CP."
"Glenn. Just a quarter of one per cent. NOW. What a great Christmas present for all Australians. The stock market will love you too. Can't wait to talk about your pay review early next year. Your friend and fellow Australian, Christopher. P.S. Together we're stronger. Hope the family are well and looking forward to the holiday."
"Glenn. Please. For Australia. Glenn? Pls call. Thx, CP"
"GLENN. I'VE JUST POPPED INTO THE LOCAL WOOLIES AND IT'S DESERTED. EMERGENCY. CUT. NOW. YOU CAN DO IT. CALL ME. CHRIS. P.S. WE DON'T HAVE TO CALL IT AN EMERGENCY CUT. TONY SAYS YOU CAN CALL IT A SLIGHT MODERATION. HE'S GOOD AT THIS SH1T."
"For flip's sake Glenn. We're done. It's over. I hope it rains every day on your long summer holiday. I hope you feel you've earned your wage this year, seeing as you've not moved interest rates once. Thanks for nothing. CP. P.S. Don't tell the press. Our little secret. Pay review in new year. Speak to Peta."
Back in the real world, and overnight, U.S. stocks closed at yet another record high.
The U.S. economy continues to add jobs, inflation continues to stay in check, and interest rates are still at zero per cent. As Jim Paulsen said on Bloomberg…
"… you have real growth without inflation. That's a recipe for a melt-up in the stock market."
In case there's any confusion, a melt-up is the opposite of a melt-down. Standby for the Santa Claus rally.
Locally, now it's finally catching on in the mainstream press that the next move in Australian interest rates is likely down, the stage is set for our own share market melt-up.
Heck, it may even have started yesterday, right after the dismal national account numbers were released.
Don't look now, but the ASX is now back in positive territory for the year to date. Not by much, mind you, but we'll take it.
What's next? Who knows? At the rate we're going, with a decent tailwind, ASX 5,500 before the year is out looks a distinct possibility.
Speaking of tailwinds, shares in G8 Education Ltd (ASX:GEM) are out of their trading halt, and have jumped 6% higher today after the company announced profits would be above market expectations, and that it would lift its fully franked dividend by 20%.
Given the company is an active buy recommendation for Motley Fool Share Advisor members, the news, and the share price jump, was well received by them, and by Scott Phillips, our ace stock picker.
Here are just a couple of specially selected comments from the vibrant G8 Education members-only discussion board…
"I'm a happy camper!"
"Personally I was not expecting a dividend increase this time so more than happy."
Good old dividends.
With interest rates low, and almost certainly going lower, investors more than ever are going to be focusing on dividends, and dividend paying stocks.
And just to be clear, I'm not just talking about the usual dividend suspects — the banks, the supermarkets, and Telstra Corporation Ltd (ASX:TLS).
I'm talking about companies with the ability to substantially grow their dividends.
Take G8 Education, for example, and the 20% hike in dividend just announced by the company. The stock now trades on a fully franked dividend yield of 5.3%.
Not bad at all for a growth stock.
No wonder the G8 Education shares jumped higher today, and that at least one Motley Fool Share Advisor member is a happy camper, especially given the 40% jump in the share price since Scott first tapped it for members.
A rising dividend. A rising share price. A juicy fully franked dividend yield.
It's the best of ALL worlds.
