Is our debt really one of the highest in the world?

The Australian recently printed a headline that our debt really was one of the highest in the world, higher in fact than 17 other countries*.  These ‘rich’ countries include Sweden, the US, France and even our cousins across the pond, New Zealand.   It was reported that since the GFC, our debt burden has tripled, compared to most other countries that have less than doubled. Without getting at all political, debt rose by some $667 billion under the Rudd/Gillard years, but, is that any need for panic?  Who do we trust when we read something like that? What sort of influence should it have?

Add to such headlines the myriad of bank reports that we receive, from banks domiciled here and overseas (most of whom report different forecasts) and you wonder what to believe.  Once you can get through the myriad of graphs, tables and data there is just a few lines at the bottom dedicated to what any economist really thinks is going to happen. You can see some of the bank reports we receive on our Home Page.

For example, some pick interest rates as likely to stay stable, others as likely to move up…before moving down again, while others pick further cuts.  The RBA is often no different, possibly due, like the Fed in the US, to its vested interest.  Banks business is lending money, hence why the Fed is so insistent on pumping trillions into the US economy; drying up demand or supply will cripple banks, who believe that the world simply could not survive without their influence on the worlds credit supply.  Newspapers certainly have their biases as well, though in the case here, it is fairly factual – Australia has high debt.

Who do you believe with all of this?

Much of our business is based on understanding market fundamentals, in particular interest rates and money supply, all of which affect either positively or negatively, currency and market movements.  We use a mix of both fundamental and technical analysis in our trading. Contrary to so many in the business, we don’t simply put a few squiggly lines on charts and buy when it’s above, and sell when it’s below. So, how do we decide what to listen to?

Like everyone, we have our favourites.  In fact in some instances we actively trade against one particular bank forecast, with considerable success too!  Usually though, we read a lot and get a picture of the themes we think are important at the time.  Consider the example of housing for the moment; our sentiment is that housing is most often driven by confidence in a market.  When people are confident about their job, their security, their business – basically their income, they will be ready to invest into housing.  There are one or two ‘confidence indexes’ around that we watch carefully, as confidence affects many different things in business, not just housing.

We also look at past experience: again, using the example of housing, when I grew up in London, banks had a standard of lending 3x a person’s income, and it rarely fluctuated.  During the ‘90s that changed, and banks began to lend 3.5x, then 4x and finally, they would lend 5x a person’s income.  When you are leveraged that highly in any market, any slight change in conditions has the potential to significantly change the outcome.  It did, and in the early ‘90s there was a property collapse of such proportions, that nearly 75% of all homeowners in the UK had negative equity in their homes.  It was something that was supposed to never be able to happen.

So, we look for similar things that are happening now.  Not just in housing by the way, but in every area of the economy, and certainly high debt is one of them.  It’s not so much the debt, but the fact that both Federal and State seems to be in debt, and the debt has risen with such speed over the past few years.  Debt has to be paid for by a country, just as it does with us.

When our credit cards are too high, we have to divert spending away from other things to meet our debt obligations.  Well, countries have to do the same.  Don’t they…?  Well, actually yes, they do.  Spending cannot go on forever.  Just look at what happened to Detroit, after four decades of out of control spending by successive governments, as in the comment from an article below:

Its residents also bear a bigger tax burden as a percentage of income than those in other large U.S. cities even as the city struggles to stay fiscally afloat.

“They get a lot of money on a per capita basis. They just can’t control their spending,” said Bettie Buss, the council’s senior research associate and the report’s author.**

It’s not exactly where Australia would like to end up.  But coming back to the original point of this, who can you trust if you are looking for information to base your decisions on?  Well, it’s not always black and white, especially with so many vested interests (incl the Governments) in the market.  We speak to many seasoned investors, and one of the factors that come into play is their own hunch.  After years of dealing in a particular market, many good investors develop a sixth sense into where a market may be headed, and with their years of experience, they may be the most accurate.

Certainly we rely on this to some degree in our own trading.  When we look at charts for hours every day, we get a good feeling for where a market is going.  Is that enough on its own though?  No.

Our suggestion is to read as much as you can at this stage, until you begin to find out what you like and what you don’t like.  Some reports, newspapers, websites, journals etc gel with you, others you will reject. Combine this with good technical analysis, and you will be on the way to making some strong financial decisions.

But, here is the last thing, and possibly the most important.  When we’re long in a market (that means we’ve bought it) we will look for every indication that tells us we are right.  The overriding factor we need to consider though is what happens if I am wrong?  In our opinion, it is what sorts out the professionals from the amateurs.  Much of what we do is based on our forecasting, but we never get so hung up on our forecasts that we can’t be wrong. In fact, we are often wrong. Forecasting on its own never made anyone any money. Only the ability to act on your forecasts did.

The number of people we speak to who are wrong in a market, and refuse to get out, but instead cling onto their own pride that they just cannot be wrong.  It’s inevitable what happens. So, interpretation of what you see, as well as your ability to act both when you are right and wrong is what makes an excellent trader or investor.  That goes for any market, not just ours.

Reading, fundamentals, and gathering of good information is vital, but other factors; our instinct, our interpretation is just as important.  But none of it is as important as being able to put aside the emotions, and act on what is before us.

For a useful bank report on the current state of the economy, try Westpac’s here.

Bear in mind that Westpac is one of the major mortgage lenders in the country, and so their forecasts tend to support their own business view.

We also load bank reports of interest up on our website as we find them; some are more technical than others, particularly in the area of currency and derivative products.

* The Australian, 17 May



       Michael Butler