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Budget day is a sideshow

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by Peter Switzer

I know Budget day is important to the Gillard Government, which looks like a dead party walking, or maybe crawling to an eventual electoral defeat. And it’s important to the media who always hype it up and there will be some Aussies happy and unhappy with the Treasurer’s decisions, but in the big scheme of things, it’s only of minor consequences.

The big issues affecting our lives are happening in Europe, the USA and China and if these economic powerhouses get it wrong over the next six months, we could see a GFC rerun. Mind you, I don’t think this is on but other Aussies do and that’s why they’re over-saving, under-borrowing, investing in term deposits and running away from the stock market.

More rate cuts

Fortunately the Reserve Bank (RBA) has come to its senses and cut rates by 50 basis points and smart guys like David Murray — ex-CBA boss and ex-chairman of the Future Fund — can see 100 basis points more to come! Now that will kick off some economic activity, lower the dollar and help stock prices.

So in that context, the Government’s commitment to turning the deficit into a surplus — minus $40 billion to plus $1.5 billion, which is too fast — has at least helped the RBA make the overdue wise decision to cut rates.

A great sign for stocks this year was Wall Street shrugging off the Greek and French elections with the S&P 500 index and the Nasdaq actually heading up overnight! This tells me that the stock market dips may be a lot shallower this year compared to last year and that reflects a gradual belief in the long run value of holding great businesses, as Warren Buffett always advises.

For the record, the Dow ended down 29.74 points or 0.23 per cent to 13,008.53, while the S&P 500 was up a weak 0.48 points or 0.04 per cent to 1369.58 but at least it was up and that’s a good omen for bulls.

Election results

Ironically, I think the French election result might be OK as the socialists, which are basically a Labor Party, will spend money and reduce the contraction effect of German-conceived austerity, which always looked excessive.

The Greek issue is less of a worry as the European Central Bank has backed the banks of Europe but I’m hoping that a sensible coalition results, which might be less committed to austerity but still comes up with a debt repayment plan linked to some kind of fiscal responsibility.

Positives and negatives

I think Australia is heading in the right direction now and stocks will eventually show it, while Europe still worries me, though less than last year.

The Budget out tonight will have some pluses and negatives for various individuals but the important things like whether you have a job, a profitable business or an accumulating portfolio of assets will be determined by Europe, the USA, China and the RBA’s rate decisions.

It’s a sideshow to the big determinants of our economic future.

Important information:This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. For this reason, any individual should, before acting, consider the appropriateness of the information, having regard to the individual’s objectives, financial situation and needs and, if necessary, seek appropriate professional advice.

Watch more from Peter on SWITZER TV.

Published on: Tuesday, May 08, 2012

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