Or was the recovery we saw in our Australian markets last week just another bounce prior to another setback?
I spent the Australia Day weekend fishing, and thinking about this.
There are two questions we have to ask ourselves.
- Is the sub-prime failure in the United States just the preamble to a larger financial breakdown, which could turn the global mood even uglier than now?
- AND
- Will the Reserve Bank of Australia put up interest rates when it meets next month?
Before trying to answer that, there is one lesson for everyone from the bath the Australian markets took last week. Don't panic.
I've said it before and I will say it again. To sell in panic mode is a grievous mistake.
Those battlers who were panicked into selling last Wednesday have lost up to 15 per cent of their savings.
Big media did not help. By talking of meltdown and losses running into the billions - without any perspective - the stories on the networks would frighten anyone.
The Australian market fell last week - in percentage terms - by far more than Wall Street, or London and he other European markets. That is illogical.
And it's just as illogical to assume that the problems are over. They are not. If you want to know what one of the world's wealthiest and heavyweight investors thinks, then the article by George Soros in the Financial Times is worth reading.
And although the US Federal reserve has cut interest rates by 0.75% in an attempt to stave off recession in America, it is more than likely that interest rates in Australia will go up by another 0.25 per cent next week. if the stock market recovery holds, you can bet that happens. Inflation in Australia is running well above acceptable levels, and has to be brought down if our savings are not to be eroded.
No doubt egged on by the Fed, the New York state regulators that control Wall Street are attempting to work out a deal to clean up the worldwide debt default mess. This involves a deal to refinance the US bond insurers. So far they have met with reluctance - mainly because these institutions were responsible for the debacle in the first place, and still don't know who owes what to whom.
If and when the debt mess is solved, world stock markets will surge. Watch out for this news. Then it will be time for investors to go hunting for bargains.
It's also time to review all your investments. Look at them and see if they are performing as you think they should. I run a number of portfolios, and if you;d like to take a look at them email me, and I will send you back a free copy of my January newsletter, Mastering Money.
