Despite a decade-long resources boom, Australia has been running a current account deficit; it has one of the few credit and housing bubbles in the world still left to pop properly; and on top of that, a banking system that analysts refer to as “capital light”. It is all, GMO’s James Montier told me at the London Value Investor Conference this week, “an accident waiting to happen.” That’s something the Reserve Bank of Australia (RBA) is clearly aware of: when it cut rates last year it said publicly that the plan was to boost housing and business investment as mining investment peaked.
That hasn’t happened, hence the rate cut. This time, the RBA is presumably hoping not just to boost housing but to push the currency down enough to give the manufacturing sector a fighting chance of survival. And “this time” is unlikely to be the last time.
While I was with Montier – someone considered something of a guru by diehard value investors – I asked what we should do with our money at a time when there are no safe havens left and when almost every country in the world is relying on the doomed-to-failure strategy of currency debauchment to save their economies. His answer was far too honest: he doesn’t know. This, he says, is “the hardest market to be an asset allocator in” he has seen in his career.
The best investors can do, given the range of possible outcomes from here, is to avoid low-yield sovereign bonds because with yields this low the best-case scenario is that you make a minute amount of money on them. The worst is that you lose a great deal, something that could happen if any central banks abruptly stopped buying their own country’s bonds via their quantitative easing programmes.