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Interest rates will stay low for at least another 20 years to keep house prices propped up; This is exactly why we’re so bullish on the stock market
Topic Started: 28 Jul 2014, 05:54 PM (9,603 Views)
Kris Sayce
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Oh shit...Oh shit...Oh shit

http://www.moneymorning.com.au/20140728/evidence-back-low-interest-rate-forecast.html

More Evidence to Back Our Low Interest Rate Forecast

Written on 28 July 2014 by Kris Sayce

For some time we’ve tried to convince you that interest rates are staying low.

In fact, there’s a good chance interest rates could go lower.

It’s not a popular view.

Most people seem to think that interest rates must go higher one day.

And they will. But that day won’t be tomorrow, or next year. It won’t be five years from now either, or 10 years.

Our bet is that interest rates will stay low for at least another 20 years.

And thanks to news out last week, we figure the evidence is lining up on our side…

Last week the big four Aussie banks cut interest rates on fixed rate loans.

The mainstream press said it signalled a price war due to competition.

Not surprisingly, the mainstream has gotten it wrong…again.

The idea that there’s competition in the Aussie banking sector is laughable.

The big four banks control 84% of the Aussie mortgage market. The Aussie banking sector has favoured status. It has the gift of oligopoly from the Aussie government.

In short, it’s a legalised cartel. The banks don’t compete. They don’t have to. They know that for every customer they lose to a ‘competitor’, they gain one back from one of their ‘competitors’.

It’s the ultimate revolving door as punters go from one bank to the next. Little do they realise that each big four bank is just as good/bad as the other.

So don’t fall for the junk that competition is pushing down home loan costs. That has nothing to do with it. Here’s the real reason that banks are cutting interest rates.
Two reasons banks are cutting rates

Actually, there are two reasons for this move.

The first is that the banks know what we’ve known for the past three years — that interest rates are staying low for the foreseeable future.

By foreseeable future, we’re talking 20-plus years.

A report in The Australian quotes Clive van Horen, head of mortgage lending at NAB:

‘This is not about me or somebody else predicting what interest rates will do. It’s more about what the financial markets are saying. The market is saying that rates are going to be lower for longer.’

Lower for longer.

Don’t fall for the bank’s coyness. It is the banks’ job to predict what interest rates will do.

If the bank can anticipate what the market or the Reserve Bank of Australia will do next, it could result in billions added to the top and bottom line.

So by cutting fixed interest rates, the bank hopes to entice borrowers into taking out fixed rate mortgages. If borrowers fall for it, the bank will get a nice profit boost if — as we expect — interest rates fall further over the next two years.

But as we said, there’s a second reason for the banks to cut interest rates.

The Australian report refers to it:

‘The price war has erupted just as concerns were starting to emerge that the boom in house prices — they are up 11 per cent on average over the past 12 months, according to Australian Property Monitors — poses risks for borrowers.’

Unlike elsewhere in the world, Aussie house prices didn’t fall when economies collapsed in 2008.

Sure, highly leveraged and speculative markets such as the Gold Coast and parts of Perth suffered, but there wasn’t a widespread downturn.

Now, with Aussie house prices gaining 11% over the past year, the banks are no doubt worried what could happen if prices fall and if fewer people borrow to buy a home.

After all, if house prices rise, it means borrowers need to borrow more money. If incomes don’t keep pace with rising prices, it makes it harder to borrow. So, what’s the solution?

That’s right, a lower interest rate means lower repayments — or that borrowers can borrow more money and help support high house prices.
The solution to low interest rates is lower interest rates

That’s why the banks are really in a hurry to cut interest rates.

Don’t fall for the idea that it’s all about competition. That’s the last thing they have to worry about.

But whatever it means, the most important thing for you to know is that this market is playing out almost exactly as we predicted.

When interest rates stay low for an extended period, it’s important that they continue to remain low. Yes, we know that will create all kinds of problems. Low interest rates tend to result in bad investments and the misallocation of resources.

But that doesn’t really bother central banks and governments. They just want to make sure the world’s economy doesn’t go through a repeat of 2008. The one way they can ensure that is by keeping interest rates low.

Do you remember how central banks and governments responded to the problem of too much debt? That’s right, they created even more debt. It only makes sense that their solution for too-low interest rates will be to cut interest rates even lower.

This is exactly why we’re so bullish on the stock market. We’re not saying this will be sustainable forever. That’s why we don’t recommend you put all your money in stocks.

But until we see a sign that the markets have had enough of low rates and that investors are genuinely worried about the long term consequences of these policies, we’re staying the course.

Stocks are still a buy, and the Aussie blue-chip index is still on course to hit 7,000 points by early next year.

Cheers,

Kris+
Money Morning Australia
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Black Panther
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Really. Geez I have been saying that for at least 2 years. Bears banking on high rates have already lost ...
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cokatoo56
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Interesting insight, thanks for sharing. That shows well we are in a bubble logic IMO. With unemployment figures looking bad, the next thing is to manipulate those to convince investors/speculators that locals can pay their mortgage loans and that it is still safe to spend in property in aus.
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Wisebear
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Nobody knows where interest rates will go in the future.

Bond markets are forecasting a depression.

If they’re right then Stock Markets and Property will fall.

If they’re wrong then then interest rates will rise and Stock Markets and Property will fall.

In other words: Bubble markets always crash.

While we wait to see who is correct and which path the crash takes speculators ignore the warning signs, borrow cheap money and blow the bubble bigger.

Crazy times.
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Chris
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Black Panther
28 Jul 2014, 07:34 PM
Really. Geez I have been saying that for at least 2 years. Bears banking on high rates have already lost ...
BP, it's not hard to see is it?! Name me one nation that has gone to emergency low rates and have been able to raise them again??

Look at Japan FFS, it is the kiss of death administered over time. What I mean is the term emergency lows should be as it sounds, a brief period of time until the imminent danger has passed then they are raised immediately after. The problem is no one wants to appear as though there is a problem, government, RBA, business and vested interests all sing from the same hymn book. Everyone preaches that low rates are not a sign of a bad economy or a struggling economy when that is EXACTLY what it represents.

Then we are bombarded with the ideal that we can borrow cheaper and be wealthier with no concerns. The RBA lower rates to loosen up money to allow more spending on consumables but thus isn't happening. What is happening is IP's, bigger more expensive homes, new cars, personal loans etc. it's a debt binge that binds the RBA because now they face strangling the economy if they raise them.

Ppl have stretched themselves in emergency low conditions, and not just a few here and there, I would say the majority have got as much 'bang for the banks cheap buck' as they could.

I agree, as long as there is no appetite for a devastating recession then interest rates will not rise and may even fall in the future. The only problem is though if they fall then we get buried deeper as more and more rush to take advantage of the cheaper credit.
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A Lurker
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Chris
5 Aug 2014, 01:47 PM
Name me one nation that has gone to emergency low rates and have been able to raise them again??

New Zealand
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Dr Watson
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I am, you are, we are all Japanese ...
The trouble with the world is that the stupid are cocksure and the intelligent are full of doubt — Bertrand Russell
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Count du Monet
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The big issue is what the FED and the ECB do, Aus is simply a sideshow.
The next trick of our glorious banks will be to charge us a fee for using net bank!!!
You are no longer customer, you are property!!!

Don't be SAUCY with me Bernaisse
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Wisebear
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Count du Monet
5 Aug 2014, 02:17 PM
The big issue is what the FED and the ECB do, Aus is simply a sideshow.
The really big issue is what the markets do.

The FED and ECB have much less power than most think.
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newjez
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Dr Watson
5 Aug 2014, 02:03 PM
I am, you are, we are all Japanese ...
I'm turning Japanese, I really think so...
Whenever you have an argument with someone, there comes a moment where you must ask yourself, whatever your political persuasion, 'am I the Nazi?'
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