INVESTING IN VOLATILE TIMES

Some of my readers have suggested that I am a "Contrarian". This may well have been technically true in the past, but it is obvious that the themes developed in these blogs are now becoming widely held views. Perhaps that is why there is exponential growth in the number of visitations to this site from some 15 countries.

From an Australian perspective, it is well worth reading the lastest article from Michael Knox, Chief Economist at RBS Morgans and someone I have enormous respect for. He writes on the fiscal consolidation occurring at most levels of government in Australia, and the need for the Australian Reserve Bank to reduce official interest rates by at least the amount implied by reductions in Australian GDP derived from fiscal consolidation. In practice, this could amount to further official interest rate reductions of 0.5-1.00%. ("An IMF View of the AustralianBudget:Cuts in the budget deficit mean interest rates have to fall further" April 22nd 2013)

From an international perspective, it is also well worth reading an article published in Money Morning (www.moneymorning.com.au) entitled "Uncle Ben has a problem". This deals not with the price of money but its velocity of circulation. The impact of declining velocity of circulation is similar to a credit squeeze: there is less economic activity per printed dollar and less tax revenue for governments. This is US data but its impacts are twofold: it is likely that the velocity of circulation of Australian dollars is also falling and, since the US is an international reserve currency its behaviour affects all non-autarkic economies.

The result clearly is, and is going to be: deflation. The demand for money of itself is high, the demand for spending it is low. This deflationary environment is yet to reach Australian shores in a big way, but it could.

Basically, the velocity of circulation of US dollars is approaching levels last seen in the recessions of 1983 and 1991.

What does this mean for investment? Well, there are always opportunities in volatile times, and great corporations have been founded in such times. It also means that the wealth creation strategies of the past decades may not repeat themselves.