Wry & Dry

Cheap finance doesn't turn a bad investment into a good investment

W&D had to delve into the deep recesses of his mind to recall a negative CPI number.  Well, it seems a long time ago - it fact is was just December 2008.

And so the March Quarter negative CPI figure surprised not only W&D but also the market.  It also, weirdly, drove the RBA's Chief Teller to cut interest rates to a record low, notwithstanding declining unemployment, a modestly growing economy and a tolerable exchange rate.

Borrowers rejoice.  Depositors weep.  And that is the way it will be for some years.

CPI since 1998Not only are global low interest rate settings helping to keep the lid on local interest rates, but the usual drivers of higher inflation (and hence higher interest rates), such as significantly higher real wages, a weak currency or ballooning oil prices, are not on the horizon.

W&D puts his prediction of lower interest rates into the W&D time capsule, to be opened in five years' time.

So, W&D hears readers ask, what does this mean for investors?

The clear opportunity is to borrow funds cheaply to invest.  But, a fool and his/her money are soon parted.  So the usual dangers of geared investing become more acute because of the temptation to look only at the cheapness of finance and not also at the wisdom of the investment.

W&D well remembers when investors had the temptation of significant up-front tax deductions for a whole range of agricultural investments.  W&D reluctantly goes to the archives to remind readers of two companies whose glory days were driven by tax schemes but whose downfall was driven by bad investments:

Great Southern

Timbercorp

Today, W&D's cluttered desk is littered with shocking investment proposals, with the low cost of borrowing hiding threadbare investments. 

W&D urges readers to certainly consider leveraged investing (with rates this low, it's positive gearing) but to equally look at the quality of the investment.