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What will happen to Australian asset prices?

Low interest rates that are unlikely to increase any time soon and property as well as equity markets that are growing strongly, both in Australia and overseas, create the basis for gearing up and taking high levels of risk. People ask me – as an economist – how it will all end. I confidently predict it will end in tears with many people losing everything and margin calls driving asset prices to levels where those few smarties with plenty of cash will make a killing. This matters a lot for older people who are either retired or about to retire and for whom a 20-year wait for market values to be restored would be a disastrous possible outcome.

What I don’t know is when the disaster will impact. Selling out now might leave investors missing good gains. My best advice however is to cut back gearing and not to overextend. Indeed holding a fair bit in cash or short-term bonds makes sense – even if, as Christopher Joye points out, after-tax returns on these assets are negative at present.  The fear is that if another crash occurs soon it will be a doozy.  Of course I may be wrong or suggesting precaution too early in which case investors will forego gain. There are no guarantees despite what the spivs currently flogging red hot property deals all over town are suggesting – indeed their raucous noises make me less confident about the future rather than more.  But this strategy does provide insurance against a real possible asset market meltdown short-term.

Please don’t take any of this as financial advice but don’t consult your paid financial advisor either.  I don’t know but they don’t know either and, like Socrates, I am superior at least to the extent that I know I don’t know.

 

2 comments to What will happen to Australian asset prices?

  • Henry Haszler

    G’Day Harry

    I agree totally with everything in your post. I would add that [1] the recent increase in the unemployment rate [2] the very low level of business confidence, apparently now lower than at any time during the Rudd/Gillard years [3] the fact the mining boom is off the boil right now at least as far as iron ore and coal [I think] prices are concerned and [4] the feeling I’ve had for quite a while now that there are lot of sales about I see as all supporting our consensus.

  • derrida derider

    “I confidently predict it will end in tears with many people losing everything and margin calls driving asset prices to levels where those few smarties with plenty of cash will make a killing.”

    Of course you can be perfectly confident that this will happen sooner or later – as they say, economists have predicted in advance seven out of the last three recessions. The tricky question is how big and how long the intervening good times will be – if you’re in a position to take some modest risks (and of course not everyone is) then missing out on these good times may cost you a lot of money.

    I’ve been gloomier than most in the last few years, and my gloom has been justified by outcomes. On the long term I’m still gloomy – google “secular stagnation – but I think we are actually now past the bottom of this cycle. The labour market is notoriously a lagging indicator. In the shorter term my prediction is for things to pleasantly surprise us.

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