Saturday 15 November - ABC Radio material
The Four Factors Weighing on Share Markets
Factor 1: The Credit Crisis - (or the debt crisis) - borrowing rates in key debt markets continue to ease. This is a positive sign: although we should always keep in mind that it has taken significant Government intervention to make this happen. Kevin Rudd, Malcolm Turnbull and Lindsay Tanner have all make tentative comments that the worse of the credit crisis may be behind us.
Factor 2: Recession Fears - a recession is two negative quarters of economic growth. The
In Australian forecast growth rates have been cut to between 1% to 2% for next year. A business confidence survey out this week was very negative; a consumer confidence survey reasonably positive. Let's face it - 6 months ago all consumers wanted was lower interest rates and lower fuel prices.......
Employment figures were OK, with an increase in part time jobs offsetting full time jobs - however job adds as leading indicators of employment have fallen.
The interest rate cuts (200 basis points thus far) and the December stimulus policy are the policy maker's attempts to keep
Factor 3: Forced Selling/Fear Selling - Suggestion from a hedge fund manager (reported on CNN Money in the
Factor 4 'wildcard' -
The political agenda of recent times has focused on the mantra that low interest rates are good interest rates.
However that may not be the full story.
Interest rates are like the brake or accelerator that the Reserve Bank tries to use to keep the economy growing nicely - and the prices of goods and services rising slowly, but not to slowly (between 2% and 3% a year is the target).
Higher interest rates are often reported as being a negative - creating higher mortgage costs for home owners. However, there are many people who have cash and term deposit investments, who receive a higher return on their investments when interest rates are high.
It is worth comparing
As the Reserve Bank decreases interest rates money becomes cheaper for households and businesses to borrow - so they are more inclined to borrow and spend (or invest). Also, households with debts (for example a mortgage) spend less money for the interest on their loan, and have more money to spend on other items.
Markets look likely to close the year below that range.
Interestingly, the highest forecast is the forecaster from Lehman Brothers - so not only is he the most wrong, he is out of a job now that his firm has collapsed.
Currency forecasts for the end of 2008 were for a currency between 77 cents to 95 cents: average 90 cents. Again, everyone is looking like they will be wrong.
The lesson (I think) is not to be too focused on forecasts; and certainly not to follow them blindly.
When these forecasts were made, we knew about the 'sub prime crisis' - it's just that none of these forecasters got the extent of the crisis correct.