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RBA not helping stocks

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by Peter Switzer

Central banks here and in the USA are in the spotlight with the latest Fed minutes suggesting that further money supply expansion is less likely, while again our own Reserve Bank (RBA) delayed the inevitable rate cut, which is overdue and is hurting both the economy and our stock prices.

On Wall Street, the investor reaction was slightly negative because more money in the economy helps stocks. However, if the US economy doesn’t need more quantitative easing, then it’s a good sign about the strength of the recovery.

This is why the Dow only lost 64.94 points, or 0.49 per cent, to end at 13,199.55, which was higher than the worst levels of the trading day. The S&P 500 dropped 5.66 points, or 0.4 per cent, to finish at 1413.38.

Russian roulette

But let’s concentrate on the local story and, yep, they’ve done it again — the good old RBA played Russian roulette with people's jobs and people's businesses gambling that the economy isn’t as slow as most of the economic data is telling economists and the country’s business leaders.

Don't be confused – most economists surveyed on what they think the RBA will do each month are saying exactly that – they are guessing what they think the RBA will do. Many well-known and respected economists think the Bank is wrong, but it’s a law unto itself and if they’re proven wrong as I suspect they will be, Glenn Stevens will come up with some inane economist's defence for his mistakes.

I’m an economist and I’ve seen my colleagues try this stunt before and in the past, I might have tried this trick but at least I feel the guilt!

This bad decision coincides with weak retail numbers where the national figures were up a poor 0.2 per cent in February but in NSW retail sales fell 0.6 per cent and in Victoria they dropped 0.4 per cent. So in the country's biggest states, retail is shrinking.

And all of this happens as the Treasurer, Wayne Swan, is promising to turn a $37.1 billion deficit into a surplus in one year!

Macquarie economist Richard Gibbs says this will cut growth by 1.5 per cent and combined with the current interest rate policy, I think it may well tip the non-mining part of the economy into recession.

Jobs concern

Boy I hope I’m wrong but these dumb policies partly explain why our stocks have lagged a long way behind Wall Street. I must admit, however, I’m more worried about what all of this stupidity will do to jobs.

In simple terms, if the RBA cut rates two or three times, the currency would fall and our stocks would start to play catch-up with Wall Street. And this would be nice timing, with Matthew Kidman, the author of Bulls, Bears and a Croupier Who Stopped Gambling and Made Millions, tipping 2013 will be a great year for stocks and so we’re looking at a buying opportunity if he’s right.

Meanwhile, legendary market strategist Byron Wien thinks the US bull market will continue this year and he’s tipping the S&P 500 to beat 1500 in 2012. Let’s hope he is on the money.

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.

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Published on: Wednesday, April 04, 2012

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