‘The plunge in the Australian dollar to the mid-US60c level would come about if the Reserve Bank keeps interest rates on hold until 2016, if the US lifts its rates by mid-2015 and if the United States’ dollar continues to strengthen, Deutsche Bank’s chief economist for Australia Adam Boyton said.‘
Sydney Morning Herald
Hmm. And if my uncle had wheels he’d be a bicycle!
There are a lot of ‘ifs’ in that statement. Any one of them may or may not happen.
That kind of forecasting is so wishy-washy and contingent on circumstance that it doesn’t actually help any investor make a decision. What does it mean? Should you buy stocks or sell stocks?
It’s impossible to say. The trick to forecasting future events is to do your homework, check the lay of the land, and then make a clear cut, unambiguous forecast of what your analysis says will happen next.
That’s what we did with our forecast of the S&P/ASX 200 hitting 15,000 points within the next five years. That’s advice you can act on – now…
The finance sector in general is about as wishy-washy as it gets when it comes to giving advice.
We remember back to our broking days. Clients would phone in to ask their broker for advice on a particular stock. The first question the broker would ask is, ‘What do you think?’
Invariably the client would say they like it. After all, who goes to the bother of phoning a broker to ask their opinion on a stock they don’t like?
Of course, what the clients should have said is, ‘I want your opinion, that’s why I’m paying you 2% commission.’ But most investors don’t have the guts to do that.
So they tell their broker why they like the stock. The broker asks, ‘Well, how much do you want to put into it?’ The client replies, ‘The usual.’ And that’s it. Commission booked, a few niceties about the weekend, and the client hangs up without realising that they’ve paid for the privilege of giving their broker advice!
If you’re older than 35 you may recognise that scenario. If you’re younger than 35 you’re probably wondering, ‘What’s a broker?’ That’s not a surprise; they’re a dying breed. And no wonder, with the flimflam they offer up as financial advice.
Avoid ‘Cover-your-backside’ Advice
We’re not sure if there’s a more indecisive profession than the financial services sector. We know GPs and car mechanics get bad press. But nothing beats finance.
But in a way we don’t blame them. The regulatory environment is so tough in financial services that we wonder why anyone would bother going into the profession offering personal advice.
It’s reached the extent that many financial advisors are too afraid to give advice for fear of getting into trouble if something goes wrong.
It’s that kind of cover-your-backside approach that leads to the ‘ifs’ and ‘buts’ analysis that we showed you at the top of this letter.
That’s where we try to fill the gap by providing you with direct and actionable advice in paid publications such as Australian Small-Cap Investigator.
So, let’s look at the analysis from Deutsche Bank to see if we can eke anything of any value from it to help you make an investing decision. The upshot is that the Aussie dollar could fall if a bunch of things happen, mostly related to interest rates.
However, elsewhere the article refers to that big economic behemoth, China. The worry is that if China’s economic growth slows this will have a negative impact on commodity prices. And because the Aussie dollar is a ‘commodity currency’, it will have a negative impact on the Aussie dollar.
Let’s get one thing straight that the mainstream press has consistently ignored – China’s economy is set to double within the next 10 years even if growth slows to just 7% from today’s level of 7.7%.
Stocks and Currencies Don’t Always Move Together
We agree that the growth rate could decline to some degree. It’s hard for any economy to grow as fast as China has grown over the past 10 years.
But you should also know that you’re living through one of the key economic growth events of the past 120 years.
China has grown fast, but it’s not over. The US growth rate didn’t stop once it became the world’s biggest economy in the early 20th century. And Japan didn’t stop growing in the 1960s once it had become established as a leader in technological innovation.
Also remember that China is still a long way from becoming the world’s largest economy. It will get there one day, but not until it has consumed a heck of a lot more of Australia’s natural resources.
‘But the Aussie dollar Kris, the Aussie dollar,’ we hear folks cry.
We get that currency movements play a part. But we also know that investors shouldn’t pay too much attention to currency movements as a way to pick the movement of Aussie stocks.
As the following chart shows, it’s hard to argue that there is a consistently strong and lasting relationship between the two:
If you look at the period from 2005 to the beginning of 2007 the Aussie dollar (blue line) was mostly flat. At the same time the Aussie market gained nearly 60%. From 2007 to 2008 the stock market still went up as the Aussie dollar gained.
And over the past year the Aussie dollar has fallen 13.1% while the Aussie stock market has gained 8.4%.
So, we’ll leave others to play around with currency movements and interest rates. We’ll stick to what we know. And we know that, regardless of what the mainstream would have you believe, there is a strong fundamental argument for stocks to rise over the next five years as China and the rest of Asia continues to grow.
That’s not even taking into account improvements in the US, Europe, and Australia.
Contrary to the mainstream commentary, the outlook isn’t half bad. And that’s why we’re making the clear-cut forecast for the Aussie stock market to hit 7,000 points by early next year, and 15,000 points well before the end of this decade. That would be 175% higher than today.
Cheers,
Kris+
PS: You can quiz me on my bullish stock market views in person at the upcoming World War D conference in Melbourne at the end of next month. I’ll be on the stage with global finance gurus Dr Marc Faber, Jim Rickards, and Satyajit Das. You can find out more here about what I consider to be the best money and finance conference in Australia this year. Click here for the revealing trailer…
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