Get some assets overseas.
I told you this once before – a couple of years ago – and I’m telling you again.
If you are reluctant because you hark back to the days when our dollar was buying $US1, stop living in dreamland. It’s not going back there anytime soon – at least not for the next decade.
You may have to wait a generation to see it even close to that.
All the fundamentals point to a fall in the Aussie dollar, even from here. On balance, if you weigh up the risks of the dollar rising – or falling – you have to come to the conclusion it is more likely to fall.
The mounting government and national debt gives you a hint there is not enough money coming into the country to help balance the budget.
The vulnerabilities are rising. But government debt is just one form of foreign debt the country incurs.
The bigger whack is the $1.5 trillion needed to fund our home mortgage book (just recently owner-occupier loans topped $1 trillion for the first time) and for business lending. And Australia, collectively, has to pay for all that interest.
Going all the way back to 1986, then treasurer Paul Keating warned Australia it would become the banana republic of the South Pacific if it did not make significant change for the betterment of the nation. It’s worth remembering the economic context – and why he said it – because there are very real parallels with today.
At the time, Australia had a very real balance of payments problem (the balance of money leaving the country compared with money coming into it). That figure had just been released – a deficit in April 1986 of $1.47 billion.
The cause was very low commodity prices. Keating said they were as low in real terms as they had been since the Great Depression.
Keating went on John Laws’s top-rating radio program the next morning and said several things – though the banana republic comments are most remembered. “We must let Australians know truthfully, honestly, earnestly, just what sort of an international hole Australia is in.”
He went on: “If this government can’t get the adjustment, get manufacturing going again and keep moderate wage outcomes and a sensible economic policy, then Australia is done for. We will end up being a third-rate economy.”
Those comments prompted the dollar to fall US3¢ on the spot to less than US70¢. Within weeks it touched a low of US59.59¢ before rebounding over the next two years in the aftermath of the 1987 stockmarket collapse, which trashed the US dollar.
Keating also said about cutting government spending: “The problems are more intractable. This is our fourth year in office. This is our fourth budget. We have got to cut government outlays and every time you do it, it gets that much harder.”
Keating’s message at the time was largely about Australia’s current account balance, under pressure again now, with rising government and corporate debt (foreign debt is now more than $1 trillion). It makes the investment risk inside Australia greater and makes our currency vulnerable.
Now, the Australia of 2016 is different from the Australia of 1986. Where we are more fortunate today is that the mining boom created increased capacity in coal, iron ore and liquefied natural gas. Though prices for these commodities are much, much lower than during the boom period that ended four years ago, high volumes are still leaving the country (albeit at those lower prices). Still, the latest quarterly numbers show the trade deficit at $20.8 billion – the fifth worst on record.
If the public and government or cross-bench senators do not – or refuse to – understand the need to cut government spending and debts keep mounting, the dollar’s vulnerability grows even greater.
I don’t want you to take complete fright, and flight, at these suggestions. But to my mind the markets can see already see the rising risks – here and overseas. In the past month, the yield of the so-called safest investment in the country – the 10-year government bond – has fallen to 2.05%, the lowest on record.
That says investors are hunting for safety. At the same time, gold (when expressed in Australian dollars) is close to an all-time high. A higher gold price suggests that investors are spooked by the risks of holding paper currency and government bonds.
The final point is where to head if you are to invest overseas. This is perhaps the toughest question of all. The US is the obvious choice, though interest rate rises there will most likely snuff out stockmarket growth pretty quickly. Growth in Europe will continue to be very slow and many parts of Asia will be vulnerable to any downturn in China.
The US will be the natural home for most people because of the depth of its stockmarket and the ability to find value that others have overlooked. But do understand that leaving your money at home will not necessarily be the highest-growth strategy in the medium term.