Analysis: Everythings up, but not right

Gold up. Dollar up. Oil up. Shares up. Last night's world market action sounds too good to be true, and it was.

What happened overnight, and is likely to continue in Australia today, is the start of a classic sucker's rally with speculators rushing to beat the next economic stimulation move by the U.S. central bank.

They bought anything and everything in the belief that the U.S. would print more dollars and now was a time to buy hard physical assets before tomorrow's extra dollars depreciate today's dollars.

It will not continue for long for two reasons. Firstly, because there is a fundamental disconnection between the value of gold, the U.S. dollar, the oil price, and shares. Rarely does every asset class rise in value at the same time because they are actually in competition with each other.

Secondly, the U.S. is not alone in seeking to stimulate its economy by devaluing its currency. Everyone is playing a game of "race to the bottom" where the country with the lowest value money wins.

The problem is that if everyone plays the same game we all go down together, enjoying short-term benefits as currency values adjust.

That's why the U.S. is being mimicked in its interest-rate cutting and money-flooding games by countries such as Brazil, Korea, Mexico, Russia, South Africa, Japan and Poland. Everyone wants to stimulate exports and maintain employment levels.

The odd man out, so far, is Australia where interest rates are high - but where the Reserve Bank missed a well-flagged opportunity to go higher this week a non-decision which was actually a de-facto rise because every other country in the world is cutting interest rates.

The problem with the interest rate and currency-value game is that it must eventually end. An interest rate below 0% means you pay the bank for looking after your money - which is the next step for Japan.

What Australian investors need to do is look beyond the current mad slide down the currency-value slippery dip and consider the temptations that await them.

If, as seems likely thanks to booming (U.S. dollar-driven) commodity prices, we end up as one of the world's high value countries with a currency well above parity it will become very attractive to take a long overseas holiday - and perhaps buy a few cheap shares on U.S. or European stock markets.

The overseas holiday is recommended. Investing overseas is a much trickier proposition because while foreign shares and property look cheap on conversion to Australian dollars there is a reason for that - they are cheap, and they are likely to get cheaper.

The period we're entering today is the reverse of what happened in the 1980s when hundreds of Australian farmers took out loans denominated in Swiss francs. Why? Because the interest rate was low.

The problem, which became a scandal because the farmers were not properly advised, is that the money borrowed had to be repaid in Swiss francs, a currency which soared in value against the dollar.

Today, it's the flipside of that situation. Asset values in Europe and the U.S. look cheap today because of Australia's strong dollar.

But, never forget those asset values are cheap for a reason. The countries involved are in deep economic trouble, and they're not getting out of it in a hurry.

That's why Australia will be the best place to invest for the next few years. Take an overseas holiday, but don't leave your money there.