RBA Set to Cut After ‘Awful’ US GDP

On Friday we wrote about the world’s central banks hitting a new record of global quantitative easing, or money printing.  Additionally central banks all around the world are cutting interest rates to jointly stimulate a desire for debt funded investment and also to devalue their local currency to make their exports more competitive on the global market.  It is, quite simply, a race to the bottom as you can’t maintain competitive advantage if everyone else is doing the same…

So on the eve of our own central bank, the RBA, meeting to determine our future it should be no surprise that the Australian Financial Review carries the headline “Weak US pressures RBA to cut”.

Why?  Well on Friday night we learned that the US GDP for the second quarter of the year came in at less than half the market expectations at just 1.2%.  It was even less than the Atlanta Fed estimate of 1.8% we reported in last week’s Weekly Wrap.  Hardly the ‘escape velocity’ the hope camp keep talking up as underway.  Now that is the headline you will see in the mainstream press, and it is bad enough.  But behind the headline, as is increasingly the case with a lot of US economic data, we saw the last two quarters quietly revised down on more accurate final data.  Q4 2015 went from 1.38% to 0.87% and Q1 2016 back to just 0.83%.  So we have had 3 quarters in a row averaging less than 1% growth.  The technical economic term for that is ‘awful’… And so not surprisingly bets on any US rate rise in 2016 have plummeted.

Now back to the AFR story and you can see that after the low inflation data last week (again reported in the Weekly Wrap), the myriad of global central bank stimulus either started or muted to be close since Brexit, our strengthening Aussie dollar, and now more confirmation of a weak US economy, and the RBA looks compelled to drop our rates to 1.5% tomorrow.  Their dilemma is that this would simply further inflate the already unstable looking property bubble and consumption of debt.  Just remember that Australia already has the highest personal debt to GDP in the world.  

If they don’t the AFR reports AMP predicting the Aussie dollar could hit 80c.  That Bloomberg’s survey of economists had 20 out of 25 predicting a rate cut after the CPI print, but before the abysmal US GDP, could lead you to think it is now almost a certainty.

The implications for Aussie gold and silver investors are many, but principally buying gold today see’s you buying cheaper (at a higher AUD) then it would be after a rate cut.  But that is short term ‘noise’.  The big picture see’s us, as with the rest of the world, on a stimulus fuelled debt binge and currency debasement race to the end.  History tells us those with gold and silver survive that ‘end’ much better than those who don’t.