Multiple news wires are reporting that the U.S's largest investment bank, JP Morgan, is turning increasingly gloomy on the outlook for the Australian economy.
In fact JPM has made the outlandish call that the Reserve Bank of Australia will cut official interest rates by 1% to just 0.5% by the middle of 2020.
JPM believes a full one percentage point will need to be lopped off rates in order to reduce unemployment and stoke inflation, which are of course two of the RBA's key mandates in setting monetary policy.
If JPM's call is accurate it would mean Australia almost assuming the emergency virtual zero interest rate policy (ZIRP) adopted by the ECB, UK, US, and Japan in response to the GFC of 2008/09.
These ultra-low-interest rate settings were deemed necessary in 2009 to flood markets with liquidity in order to resuscitate credit markets, while all-but-bust banks were also bailed out with the toxic asset relief plan (TARP) in the U.S and copycat programs worldwide.
Moreover, with rates as low as 0.5% the RBA would be introducing virtual quantitive easing (possibly without the debt buying) to the economy due to the flood of liquidity rates at this level would create.
If Australia were to adopt such a policy despite a stable financial system backed up by the post-GFC Basel capital adequacy requirements and low GDP growth it would be unprecedented and likely to have uncertain effects on its capital markets.
For share market investors there are a couple of outcomes more likely than not though.
First up, it's likely that the Australian dollar could sink at least another 10% versus the U.S. dollar to make the U.S. dollar profits earned by companies overseas worth significantly more to local investors.
I've mentioned leading healthcare names such as Cochlear Ltd (ASX: COH), CSL Limited (ASX: CSL) and ResMed Inc. (ASX: RMD) as good investment opportunities if the RBA does cut rates faster than expected.
High-paying dividend shares are also likely to become increasingly attractive whether they frank dividends or not, which could be a positive for the REIT sector or traditional favourites like the Commonwealth Bank of Australia (ASX: CBA).
While another obvious outcome if the RBA opts for a liquidity flood is a return to rising house prices as borrowing limits rise and the liquidity flows into asset prices.
In theory lower rates should also encourage more borrowing by property investors and be a positive for the banks, but I still expect on a net basis the ultra-low-lending-rate environment will be a negative for bank profits. After all the more banks can lend at higher rates the greater their potential profitability.
Unsurprisingly a couple of leading bank CEOs have already publicly come out to warn that lower rates will not help them or the local economy.
