Henry Smith: Analyzing Economic Trends and Implications

In 2023, we experienced the fastest pace of interest rate hikes in 30 years, and in 2024, interest rates may still remain above 4%. On one hand, living costs have been pushed higher, with lunch boxes priced below 10 Australian dollars disappearing, and lunch prices in the central business districts of Sydney and Melbourne rising to around 18 Australian dollars. Rental prices remain high and have hit historic highs, rising by 50% compared to the pre-pandemic peak. Disposable income for households has decreased by over 10%, leading to tight liquidity in the consumption sector. Despite adverse conditions, property prices rose against the trend in 2023, with an average increase of 5%, and the stock market surged, with the Australian market rising by 10% and the US NASDAQ market rising by 53.8%. This once again confirms a logic: the top owners of global wealth concentrated funds in US stocks in 2023, achieving a growth rate of over 50% in the wealth of billionaires. Wood Sister's fund returned over 66%. At the same time, 2023 was also a fruitful year for cryptocurrencies, with the price of Bitcoin more than doubling. Therefore, the US stock market and the cryptocurrency market remain targets for asset allocation for Australian households.

In 2023, despite a series of interest rate hikes, asset prices did not suffer significant blows; instead, they reached new highs. For instance, technology stocks, exemplified by NVIDIA, saw their prices double continuously. Meanwhile, in the real economy, major industries experienced reshuffling, while the labor market remained dynamic. Although the pace of inflation slowed down, unfortunately, it became challenging to lower prices of goods or assets that had previously increased. Therefore, to return to the real purchasing power before the pandemic, households would need to have over 50% more income than pre-pandemic levels to offset the decline in real purchasing power caused by inflation and rising asset prices resulting from government stimulus measures over the past two years.

Our household finances are once again being harvested. Without understanding the underlying logic behind the economy and social structure, our family wealth will continue to be diluted amid artificial interventions such as interest rate hikes, inflation, and rising asset prices. In the first half of 2024, it is anticipated that the first interest rate cut will occur. The magnitude of the rate cut will not be significant, considering the systemic risks associated with mortgage loans and the possibility of inflation reigniting. Therefore, I expect the interest rate level of 4% to persist until October 2024, with monetary policy remaining tight. As a result, attention may shift towards stocks that were previously undervalued due to the impact of interest rate hikes. Over the next six months, funds may gradually flow from heavily inflated large-cap or technology stocks to industries or stocks previously undervalued, including manufacturing.

For the working class, Australia remains predominantly blue-collar territory. Average wages for workers in the Australian mining and manufacturing industries have increased by 5.5% and are maintaining an annual growth rate of 3%. The transportation and energy sectors are also closely following suit. As electric vehicles gradually become more widespread, the field of renewable energy presents numerous investment and entrepreneurial opportunities. Those interested can watch our YouTube interviews with entrepreneurs in the renewable energy sector. With the commercialization and domestication of renewable energy, it is becoming increasingly challenging to sustain high oil prices. Once the situation in the Middle East stabilizes or the sales of electric vehicles stabilize over the next 2-3 years, the actual demand for oil is expected to significantly decrease. It is not advisable for investors to purchase oil-related stocks or futures in the medium to long term.

In 2024, higher interest rates will constrain borrowing for households and businesses, increase the cost of capital, and encourage savings. For governments, higher interest rates will compel them to reevaluate their fiscal outlook sooner. The vicious cycle of rising deficits and interest rates will exacerbate concerns about fiscal sustainability. The current Australian and U.S. governments are willing to confront the negative effects of expansionary fiscal and monetary policies accumulated over the long term. They are also addressing pressures such as weakened consumer power in China and aging populations in major economies. Therefore, to ensure the well-being of future generations, and even generations beyond, they will maintain a relatively cautious monetary policy until new productivity generates global commercial value. However, they may continue to incur debt for infrastructure or other short-term profitable government projects during economic pressures.

Throughout the year, the outlook for the Australian dollar remains positive. The Australian dollar against the Chinese yuan is highly likely to touch 4.9 and maintain high-level volatility. Oil and natural gas prices will decline. Property prices will experience a slight decline from May to June 2024, continuing until the end of the year due to interest rate cuts lagging behind market expectations. The market economy structure will undergo a new industry reshuffle in 2024, with many businesses unable to adapt to future social development being phased out. Low-risk investments in 2024 will continue to involve portfolio diversification, primarily focusing on aging populations, life sciences; technological advancements, artificial intelligence, and digital currency; rare minerals, national strategic resources, or the Australian dollar, Canadian dollar; and allocating a small proportion to undervalued Hong Kong stocks.

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