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I'm in Australia.

My prediction is the economy isn't going to fare very well. I also think that the property market is going to drop. I also think there will be high inflation to come.

I can explain why I think these things, although I think it's not the point of the question. It's not about what I think will happen, it's about how I should react to it.

So my question is, if under these economic conditions, where would be the best place to park my money?

If I leave in the share market, then I'll lose money from stock prices falling. If I leave it in the property market, then I'll lose money from property prices falling.

If I keep it in the form of cash, then inflation will eat away the value of my cash.

IS there a safe way for me to park my cash?

EDIT : Okay for the purposes of clarification, this is what I think will happen to the Australian economy. It is a unique situation given the proximity and size of Australia.

Right now, Australian house prices are crazy high. Eg. The Economist predicts that there is a bubble bigger than the size of the US one. Inflation is also rising due to global inflation.

What I predict is that interest rates will rise until about the end of 2011, and then the house prices will start to come under pressure - they're already under pressure now, but people have borrowed so much, that high interest rates, more will be forced to sell.

In the face of a property market crash, central bank will lower interest rate - at that point, the Australian dollar will crash, leading to even higher inflation. Just as in the case of Ireland, a declining property market crash will sink the economy and lead to high unemployment.

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    Great question and I'm keen to see the responses. I'm moving back to Oz and am very leery about interacting at all with the Oz share market or property market (especially the latter). – gef05 May 24 '11 at 13:14
  • How would prices fall under high inflation? – mouviciel May 24 '11 at 13:23
  • @mouviciel : i've added my reasoning in the post now – Joe.E May 24 '11 at 13:34
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    As this question has popped onto the front screen (thanks to a minor edit)... I feel it worth asking (a) did the Australian economy do anything like you suspected, and (b) (only if you're happy to answer) did any measures you took work? – TripeHound Sep 14 '17 at 12:30
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    @TripeHound a little research and I see that interest rates did not rise, house prices did not fall, however the AUD did suffer a substantial decline over a roughly 3 year period, but inflation went down as did gold and silver. So, anything that was short AUD (non-australian assets or currency) likely did quite well, although the ASX rose as well and would have at least hedged against the currency decline, although belatedly. – Michael Mar 24 '18 at 5:10
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For diversification against local currency's inflation, you have fundamentally 3 options:

  • Buy goods, that will be of demand during inflation
  • Forex: change your $AU into eg. UK pound, or US$ before inflation, wait until the market catches us with the crash, change it back -> profit from difference
  • Gold: similar to above, except tends to be more stable on the long run (underlying assets usually can't mess themselves up)

Depending on how sure you are on your prediction, and what amount of money you're willing to bet to "short the country", you might also consider a mix of approaches from the above.

Good luck.

  • What kind of goods do you have in mind? You need something which is cheap and feasible to store; which does not itself depreciate or degrade. – poolie May 31 '11 at 2:18
  • @poolie ford F-150 Raptor truck lost 10% in 5 years or so youtube.com/watch?v=KBcNfIwnJK4 – aaaaaa Nov 21 '18 at 14:24
  • Lol, but storing, insuring, maintaining a bunch of trucks is still going to cost you money. Especially in Australia. – poolie Nov 22 '18 at 17:01
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If you think your cash will buy fewer goods in the future due to inflation, are there goods you will want or need in the future that you can purchase now? I think the cost of storage would need to be less than the inflation in price for this to make sense. If you used commodity trading there may not actually be a storage cost but likely some fees involved that would need to be weighed against the expected inflation.

Basically if "things" are going to cost more in the future, making your cash worth less, can you convert cash into "things" before prices escalate?

4

Given those assumptions (which I happen to think are reasonable) it seems to me the obvious place is to buy non-Australian assets, such as the Vanguard VTS (total US share market) and VEU (world ex-US) ETFs, and perhaps also some international fixed-interest ETFs.

  • As the AUD falls, the AUD value of these foreign investments will increase
  • You avoid buying local property at what may turn out to be inflated prices

I think keeping a certain amount of cash would be prudent anyhow.

If you felt very sure this was going to happen, you could borrow in Australia and buy foreign assets, expecting that as the AUD falls, the relative cost of the borrowing will also fall. This is obviously fairly risky, not least because Australian interest rates are already high and may go much higher, and while the rates go up the exchange rate will also likely go up.

As I mentioned on another answer, I think buying gold or other commodity instruments is a poor choice here because the Australian economy and the AUD is so tied to those prices already.

3

Taking into account your POV I would recommend mostly goods that will be harder to obtain, precious metals (not only gold) and forex (although the forex aproach depends on some other country not having troubles with it's own economy which in a world as interconnected as ours by internet and all the new technologies doesn't seem likely) i highly recommend silver which is cheaper than gold and is stable enough in the long term

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    Metals would be a questionable choice in this particular case, because the Australian economy and exchange rate is highly correlated with commodity prices... – poolie May 28 '11 at 23:33
  • Could you please explain how they are highly correlated? – jclozano May 29 '11 at 16:19
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    The mining and resource sector is a large fraction of the Australian economy and share market. (6 of the top 20 companies are in this sector). When the price of say gold or uranium goes up, investors see this as positive for the large Australian companies that mine them, and also positive for the economy as a whole because of the flow-through effect of increased activity on retail sales, house prices, banking, etc. This site asserts there is a a 0.8 correlation. – poolie May 29 '11 at 20:06
  • I agree that metals ETF's and Mining Stocks would be a bad choice but i was thinking more on physical – jclozano May 30 '11 at 15:47
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    OK, but there's still a correlation. If the price of gold goes up, the price of gold miners very like goes up too, as does the ASX200 and the Australian dollar. I'm not saying don't hold physical metal, just that it's not a particularly good hedge against an expected decline in Australia and the AUD. – poolie May 31 '11 at 2:13
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Typically in a developed / developing economy if there is high overall inflation, then it means everything will rise including property/real estate. The cost of funds is low [too much money chasing too few goods causes inflation] which means more companies borrow money cheaply and more business florish and hence the stock market should also go up.

So if you are looking at a situation where industry is doing badly and the inflation is high, then it means there are larger issues. The best bet would be Gold and parking the funds into other currency.

  • Dheer - exactly. So inflation would have a tough time appearing in a bad economy as the OP asked. I'd be curious what economic factors could produce such a combination. – JoeTaxpayer May 25 '11 at 1:52
  • Stagflation. There is no guarantee at all that inflation causes consumer goods, property and shares to move together, and inflation is generally not a recipe for a flourishing stock market. – poolie May 29 '11 at 20:18
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Apart from some of the excellent things others say, you could borrow money in AUD and invest that in another currency (that's risky but interesting) if the AUD interest rate is low and the other countries interest rate is higher, you'll eventually win.

Also, look at what John Paulson did in 2007, 2008... I wish I'd thought of that when I was in your position (predicting a housing crisis)

  • What did Paulson do when he predicted the housing crisis? (The wiki link doesn't appear to mention anything on this) – jozzas Aug 31 '11 at 5:33
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    He started buying insurance policies, loosing money. I think he lost over 200M USD before the crisis. – GUI Junkie Aug 31 '11 at 7:57
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    @jozzas, More about Paulson here – GUI Junkie Sep 1 '11 at 20:06
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The best investment is always in yourself and increasing your usable skills. If you invest the money in expanding your skills, it won't matter what the economy does, you will always be useful.

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    Doesn't really answer the question and doesn't that depend on what "skill" you're learning and what skill maybe in demand in the future. – Joe.E May 26 '11 at 23:00

protected by Chris W. Rea Sep 13 '17 at 16:32

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