Skip to main content

Has anything changed?

Please let me start this Blog topic by declaring that by no means am I a qualified economist. But I feel compelled to add my two cents worth on a recent email doing the rounds that originated from Ross Greenwood. The numbers and statistics quoted in the email below are staggering and you have to question the level of federal government borrowing, especially when put into context with historical levels. Whilst I am concerned with the effect excessive government borrowing will have on each of us as tax payers for years to come, I am less concerned with the effect it could have on the market. Personally I class this type of information, in general, as ‘noise’. The market will do what it will do. Government borrowing is merely one variable amongst millions of other variables that will affect the market. None of us have the wherewithal to determine what weighting of negative or positive affect any one variable, or group of variables, will have on the market.

By Ross Greenwood of Money News:

“What Chairman Rudd has been saying about, what he calls, these temporary borrowings.

Remember those words … temporary deficit. But the total Government debt could end up around $200 billion.
So here’s a very basic calculation … I used a home loan calculator to work it out … it’s that simple.

$200 billion is $200,000 million. The current 10 year Government bond rate is 4.67 per cent.

I worked the loan out over a period of 20 years.

Now here’s where it gets scary … really scary.

The repayments on $200 billion come to more than one and a quarter billion dollars – every month – for 20 years.

It works out we – as taxpayers – will be repaying $15.4 billion in interest and principal every year.

That’s … $733 for every man woman and child – every year.

The total interest bill over the 20 years is – get this – $108 billion.

And remember, this is a Government that just 18 months ago had NO debt.

NO debt. In fact it had enough money to create the Future Fund to pay the future liabilities of public servants’ superannuation.”

If we were to concern ourselves with these types of opinions, theories and conjecture we would find it difficult to take positive action to buy shares when it appears as though, from an economic perspective, that we are on the brink of ruin! Despite these observations and postulations, the share market has had a rather significant rally starting from early March 2009. There were some wonderful opportunities to participate in this rally and generate profits, especially from March to October 2009.

And it looks like we are about to have another positive run with the recent breakout above 5000 by the ALL-ORDS. The point is that if we based our trading and investing decisions on the views of economists and other market commentators with various opinions on the existing or future state of the economy we would struggle to take decisive action. Think back to March 2009 and all the negative news that abounded our news screens. Noise limits our ability to generate profits from our share market activities because we have a natural tendency to magnify bad news and discount good news.

We need to be able to react to market price action when the need arises and be prepared to have an “anything can happen”, good or bad, approach to the market.

For those buy and hold type investors I encourage you to develop or obtain a strategy that works on market timing. By having a system that allows you to time the market it will allow you to increase your portfolio exposure in a rising market and decrease your exposure in a falling market. These principles are fundamental for any strategy and will allow you to sleep well at night.

The numbers and statistics quoted in the above document highlights the need to use a system or strategy that removes all market ‘noise’ and concentrates instead on engaging the market with rules and processes. Whilst the numbers being quoted in this article are quite profound and may be of great interest to economists and analysts, they should have little or no impact on the decisions made by traders and active investors who listen solely to the market for direction.

The current economic climate may be summarised well in the quote below. Whether it be fictional Cicero or truly one of his pearlers, it highlights the fact that perhaps not much, if anything, has changed or been learned over a 2000 year period?

“The budget should be balanced, the Treasury should be refilled, public
debt should be reduced, the arrogance of officialdom should be tempered
and controlled, and the assistance to foreign lands should be curtailed
lest Rome become bankrupt. People must again learn to work, instead of
living on public assistance.”

Cicero , 55 BC


  • BILLYBOY says:

    I do have a business degree and I can see a ton of flaws in Ross Greenwoods spill. Firstly pricipal repayment is IRRELEVENT since it is not a cost of borrowing. Only interest is relevent. The value of priiciple is reduced by inflation over time and Ross Greenwood ignores this very important fact.

    Also the original email says annual interest and principal is 154 billion not 15.4 billion. Whether it is a deliberate mistake or not I do not know but it is certinly misleading.

    Also he FAILS to make mention of automatic stabilisers etc and fails to mention that previous Government budgets leveraged government revenues to company profits and spending measured against nominal GDP, which was inflated by booming commodity prices. Even JOE HOCKEY and PETER COSTELLO criticised Howard for this approach as it meant the steep personal tax cuts given could not be justified.

    The ANZ Budget commentary stated that even without extra Government there wold have been a cash deficit of 26b in 2009/2010 and 38b in 2010/2011 coutesy of Howards tax cuts.

  • John Leeuwis says:

    I don’t think the market worries much about debt, in fact it loves it. (unless of course there is a danger that the debtor may not be able to pay the interest on that debt , see Greece) Any attempt to reign in excessive spending by higher interest rates is viewed with horror. So, on that basis, the more debt we take on personally, or our governments on our behalf, the happier the market will be and stockprices will keep going up ( at least until the buble bursts, which it always does eventually). As long as human nature doesn’t change, which is very unlikely, we’ll keep on going on the same old merry go round , wether we like it or not..

  • Chuck says:

    The massive stimulus was not necessary here in Australia. Unemployment was never going to be a massive issue and our banks were under no real threat. This is the real irony that makes the debt so damaging and unpalatable. The technical definition of recessions is a very weak determinent of ecomonic circumstances and the fact that we avoided this seems to be the sole justification that the Government stands by.

  • john beckman says:

    interesting observation

  • Jim Weatherhead says:

    Cicero got it right – again!

  • GES says:

    At this level, $200 billion of debt is of little consequence to Australia except that if it is fully funded by foreign borrowings Australian net income is reduced by something like $12 billion a year until the debt is repaid. Of greater consequence is how the money was invested – for example, well-considered investment in infrastructure could have paid dividends of much greater worth far into the future. But this debt was largely squandered on handouts and mismanaged “improvements” which are likely to have little long term value. To a large degree, it was simply a transfer of wealth from those who save to those who spend. To that extent, we as a nation are the poorer for it. And as to its effect on the markets, we’ll probably never know but it’s likely to be slight.

  • Brian Endersbee says:

    In my final year at the University of Adelaide in 1963 engineers had to do economics to give them a bit of “culture”.
    The first (and only useful lecture) was by Prof Peter Karmel.
    He said that economics was not a science but like psychology: The first Rule of Economics is “Thinking Makes It So”. {If the majority become pessimistic about the future then there will be a recession. Vice Versa).
    He then went on to talk about the analysis of the 1929 depression by John Maynard Keynes.
    Keynes pointed out that governments followed the dictate of Wilkins Micawber (Charles Dickens): “Annual income 20 pounds, annual expenditure 19,19,6, result happiness”. Vice versa. So when pessimism caused sacking of workers and less Govt. income Govt. projects stopped causing the downwards spiral to the depression. Governments learned from Keynes, did the right thing recently and no depression. SO DON’T KNOCK IT!!!

  • Frank Arena says:

    very interesting post, however some of the comments left are even more interesting….they have missed the point totally!!! Those that understand trading and speculationg ‘get it’, obviously others (perhaps most), don’t.
    Three leading indicators on the markets are price, price and price…that’s it. Just like the Metallica song, ‘Nothing Else Matters’. Regards Frank Arena

  • Graeme McFarlane says:

    For most of the 20th century, the Federal Govt had a large continuing debt and the country did NOT sink beneath the waves. Mostly, it was onlent to the States via the Loan Council for creation of what is now called infrastructure. Govts of all persuasions thought that this was good. Think … the length of time for design , construction and then getting a project operating ( a dam for irrigation and/or hydro power) was many years and so the people getting the benefit wewre the ones paying, via taxation, the costs. The Sydney Harbour Bridge was built on this basis and people using it ,rather than swimming,paid tolls until at least the 80’s.Financial Services Organisation, mainly banks, insurance and fund managers appreciated the system as it provided a safe haven for a part of their investments. It was only Howard and Costello who made debt into a nasty, evil word. And remember the Future Fund was only possible because of the enormous windfall from the minerals boom.

    The “Cicero Quote” is apocraphal …. the words and actions were foreign to the Romans of the Republic and Empire. A good chuckle though

  • Colin Opwald says:

    The Tiger bubble and the market bubble are just as they are named. The problem is we know the bubble will deflate at some point in time but we do not know at what speed (a burst or slow pucture) nor when. These questions are answered in hindsight. If one does not follow the euphoria to some degree and becomes a contrarian by selling when everyone else is buying one “might” do better than the market. On the other hand if one follows the trend the exact same rule applied….one “might” do better than the market. I suggest that any methodoloy can only alter the level of risk and the level of chance with ones investing. There is no guaranteed SYSTEM otherwise we would all be very wealthy investors. Finding ones individual comfort zone with any system takes quite a bit of strength in ones beliefs or beliefs in ones source of information. None of which guarantees profit only a calculated chance of reducing risk. One can still lose a substantial amount of ones capital by following the letter of the laws of any system just as easily as one can create a substantial gain in ones capital. A good example is what are governments going to do tomorrow eg. in a matter of hours the government shut down the very industry they created a few months earlier with the insulation industry costing billions that has yet to be totally revealed, not losses of the government but losses of the individuals that invested, gambled, mad calculated judgements or whatever, but we are and always be at the will and whime of a hird party that we do not know about until afterwards. That could be a greedy banker or CEO or any other public company. This is not an arena for the foolhardy nor is it an arena for the risk averse investor, but it is an exciting arena that ones might consider investing a portion of ones assetts.

    I wish you all good luck with your future investing.

  • Ralph says:

    So much for the economic conservative whos said he would deliver a balanced budget.
    Lucky for me thanks to Gary I have a plan and my portfolio keeps just inching ahead

Leave a Reply