What has happened to inflation?

Unprecedented printing of money by central banks over the last several years was expected to result in inflation.  But inflation has not occurred and not only is inflation falling, there is the fear of deflation across the developed world economy.  In the European Union and in the United States inflation has been suppressed by high unemployment, so there have been no wage demands and prices of goods and services continue to fall.   In Australia there is a lower but rising unemployment and a high Australian dollar which have depressed inflationary tendencies here.

The unexpected low inflation is in large part driven… Continue reading

It really is different this time!

This time it really is different.  We now have historically low interest rates and central banks are printing money at unprecedented rates.  It was assumed when central banks adopted quantitative easing that very high inflation would be inevitable.  But while equity markets have certainly climbed to the point of a bubble, consumer prices have not followed and there is now some trepidation that the developed economies are now entering a period of very low inflation with even the threat of deflation.

The trend is particularly noticeable in the European Union where where annual inflation dropped from a low of 1.1% in September to 0.7% in October.  This compares to a year ago when the inflation rate was 2.5%.  Last week the ECB halved its interest rate to 0.25%.   In the United States inflation is well below the Federal Reserve’s 2% target. Taking a… Continue reading

Interest rates, the Australian dollar and inflation

Interest rates are of critical interest to the investor, particularly those with investments in fixed interest securities.  With a slowing economy, rising unemployment and a low inflation rate the Reserve Bank of Australia (RBA) is likely to continue to reduce interest rates over the next year.  This means that the return on cash and term deposits will be increasingly unattractive and more investors will turn to the share market.

One problem for the Australian economy is the very high Australian dollar which makes our export industries non competitive on world markets and so is an impediment to the growth of the Australian economy.  Normally the RBA would be able to control the value of the Australian dollar by lowering the interest rate.  The problem is that Australia has one of the highest interest rates in the world which encourages the carry trade, with a resultant flow… Continue reading

Measuring Investment Performance

 Do investors understand the need to measure investment performance?

There is no doubt that investors who do not measure their performance regularly and objectively are often deluded into thinking that their performance is good while in truth it is not adequate to meet long term retirement needs.

I have been investing for many years but only really started to critically measure my investment performance about 12 years ago and it is fair to say that from that time my investment performance really improved and continues to improve.

How does an investor measure performance?
The obvious benchmark for an Australian investor who invests mainly in stocks is to use the index and I use the ASX200. That’s fine but there is a danger if you only use the index as a base line. For example in years such as 2008 the index lost some 40% of… Continue reading

Inflation or deflation?

With uncertainties prevailing in world markets there seems to be ongoing confusion about the potential for inflation.

Although there is a need to stimulate growth with lower interest rates, understandably those few central banks that still have the option of lowering interest rates are very cautious about doing so because of the potential for increasing inflation.  But what are the realities of inflation?  With severe economic problems in Europe and significant problems in the US economy it is very likely that we will see deflation and not inflation in the foreseeable future.

The reasons for this are that the developed world is now in a stage of low growth and falling commodity prices due to falling demand for commodities.  This deflationary phase is now being  driven by high unemployment, high debt, and increasingly limited access to bank credit.  In this low growth environment we… Continue reading

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