The big question for 2014 is whether the Australian dollar will keep trending lower with perhaps a secondary question about whether Australian property will continue to boom.
My answers are: yes, and yes, probably… for the simple reason that that’s where the momentum lies (the qualifier is only there because nothing in life is certain).
The US dollar has begun a long-term uptrend, especially against commodity currencies like the Australian dollar, because the Fed’s monetary policy cycle has started to turn, and because the fortunes of the US and Chinese economies have flipped.
Chinese costs are rising as it deals with pollution and reform, while the US is benefiting from cost deflation – due to lower energy prices, cheap labour because of high unemployment and rampant innovation.
Interestingly, both the US and Chinese currencies are rising, but for different reasons: the renminbi because China is increasing demand for it by making it more convertible for capital transactions and the US dollar because the Fed is stepping back from having the world’s easiest monetary policy. It’s all good for the Aussie (to fall).
And despite all the complaints that Australian house prices are too high for first home buyers, or just too high full stop, the potential is clearly there for more rises in 2014.
Interest rates are going nowhere (neither up nor down, probably for 12 months), incomes and wealth are rising and the emergence of strong investment buying from self-managed super funds and Chinese cash exporters looks to have only just begun.
More importantly, 2013 was the first year of solid gains after three years of flat prices. In fact prices have only been rising for nine months, and mainly in Sydney, which saw an extraordinary 15 per cent rise in the median house price between March and December.
That sort of pace in Sydney probably won’t continue (it slowed to an annual rate of 9.6 per cent in December) but other cities that were left out of last year’s boom (Canberra, Darwin, Brisbane) could take over and produce another 10 per cent year for the national average.
What’s the risk? Well, globally it’s deflation, although I’m not sure it would be all that bad if overall prices did start to fall.
The Industrial Revolution caused prices in England to halve during the 19th century while industrial output increased seven fold. As prices fell, demand rose and innovation allowed output to meet it.
The same thing would be happening again now because of the Digital Revolution and the huge spurt in innovation we are seeing, except for two things:
1. Central banks, led by the Federal Reserve, are desperately using zero interest rates and money printing to create inflation in order to protect the world’s debtors, which include their owners, the world’s governments.
2. As well as a revolution in digital technology, we are also seeing a revolution in medicine, with new treatments and drugs coming out virtually every day to prolong our lives and improve our health. As a result, rising healthcare costs are offsetting falling commodity and gadget prices.
Nevertheless, it’s possible that the world – mainly the US, Europe and Japan – tips into deflation this year and while the 19th century showed that this doesn’t have to result in a fall in GDP (i.e., recession) debtor governments and banks will struggle without inflation.
Of course there will be a stockmarket correction – it might have already started, although Wall Street recovered pretty firmly last night.
But that’s not risk; it’s simply an inevitability after a 30 per cent straight line rise in global equities in two years (more the US).
Most of all 2014 should be Quite Interesting.