America today has elements of all of the discredited ‘isms’ of yesterday hidden behind the facade of a supposedly free-enterprise economy and democratic system, though only about 26% of the population vote for any administration in office, and even less if the gerrymander is analysed in greater detail. The ‘isms’ are fascism, capitalism, social welfarism, big government conservatism, legalism, religious dogmatism, and powerful cronyism, amidst pervasive elitism. The American elite has created national and international kaffirs, and within America itself the second class citizen, not encouraged to vote, are as below the rule of law as the elite is above it.
Success breeds excess: America accepts without question its profligate behaviour in relation to energy consumption, poor wages in many areas of its economy, unfunded pension liabilities, a second class education for many of its residents, the same in health, corporate welfare, tax shelters for those who can afford them, an excess of legal mantra over common sense, rampant debt creation largely involving other people’s savings, excessive speculation via derivatives and other exotic financial instruments, poor public and private accounting. These successes and excesses have led to a country often seemingly out of control and exposed to regular crises, few of which are anticipated, and after the event, the response is shambolic, creating the conditions for the next ‘bubble’.
Why not try common-sense conservatism? In America common-sense conservatism has been replaced by a religious dogma that god is somehow more favourably disposed towards American goodness and superiority than most other nation states. The creators of hope, freedom, and progress for such a long time, appear to be prisoners of their own worship of American capitalism rather than balanced free enterprise. They prefer to promote fear over hope; war over peace; manufactured myth over debated fact; spin over substance; force over persuasion; the might of the law over the rule of law; the replacement of politicians of good sense, judgement and integrity by charlatans and fools. In short the ends, as defined by an elitist minority of church and state, justifies the means; winning is not the most important thing, it is the only thing.
But a world without a good and effective America is a deprived and deficient, and less efficient, world. Not all of America is misguided, corrupt, or ignorant. The problem is that recent Administrations appear to have had too few good men capable of articulating and executing a vision for the good of mankind. The next President of the United States is a most important, perhaps even a critical, appointment. A man with an iron fist, a velvet glove, and the rhetorical skills to match wisdom and attitude. Ecinya cannot see it happening without major electoral reform, but America does not yet appear to have a pervasive belief that the system is broken,
The ECINYA pages 13/1/2006.
Exactly how it has managed to do it is a bit of a mystery, but the Rudd government has somehow been able to produce a labour relations mess that is exactly as bad as the one it said it planned to replace.
Peter Ruehl Australian Financial Review 15/9/2009.
The global economy is beginning to pull out of a recession unprecedented in the post World War ll era, but stabilization is uneven and the recovery is expected to be sluggish. Financial conditions have improved more than expected, owing mainly to public intervention, and recent data suggest that the rate of decline in economic activity is moderating, although to varying degrees among regions. Despite these positive signs, the global recession is not over, and the recovery is still expected to be slow, as financial systems remain impaired, support from public policies will gradually diminish, and households in countries that have suffered asset price busts will rebuild savings.
International Monetary Fund World Economic Outlook Update 8/7/2009.
ECINYA COMMENT
The question was recently asked of our editor: "Have we seen the bottom?" The answer is, most probably, "yes", but there is more than a single ‘bottom’ on the road to recovery. In each up cycle there are typically 3 bottoms. So the answer depends on which ‘bottom’ we are talking about. At the March 2009 lows the All Ordinaries index had fallen 55% from its 2007 high to 3111, and our global proxy, the S&P 500 had fallen 57% to 676. Since the March lows the All Ordinaries has risen 43% to 4536 and the S&P 500 has risen 51% to 1049.
Our guess is that the next ‘bottom’ will be around S&P 940 to 950 implying around 4200 to 4300 for the All Ordinaries. A 10% fall in the S&P 500 would probably result in a 6-8% correction in Australia.
"Is the recession over?" Once again, a question that does not get you too far. On 25 August we wrote the Ecinya Insight essay "Time to pause". In that essay there was a very pertinent quote from a market doyen, George Soros, that in essence said ‘the answer depends upon the inputs’.
Australia is well placed in hard and soft commodities and the fortuitous happening of The Gorgon gas field is Australia’s latest economic salvation project. Additionally, we benefit from the perceived need for the Chinese to convert their US dollar holdings into real and productive assets and this underpins our asset values to a certain extent.. The China focus is likely to be Africa and Australia.
THIS is a "made in America’ global recession. IT IS NOT POSSIBLE for the Obama administration to have so quickly solved the problems that have caused the ‘global financial crisis’….. the GFC. All that the Keynesian response has done is to have ‘plugged the holes’. The ship is still full of water, and making its way towards the safe-haven of the shore where coconuts and fresh water are in abundance. The G20 account for 80% of the world GDP and Australia accounts for 1% of world GDP. It seems that the US markets are already pricing in 4% GDP for calendar 2010 according to some economic and market commentators. America is about 20% of global GDP and for the world economy to function at, or near, a ‘normal’ level, America has to be functioning at or near its potential. ‘Potential’ is about 3% GDP growth per annum. America has not yet faced up to its systemic and structural problems, though they have begun to be addressed.
The incorrect systemic diagnosis is: "MORE REGULATION" is needed. The real problem is that more SUPERVISION is needed. America has plenty of laws and legal agencies that exist to curtail and control excess, but American crony capitalism is built upon the twin concepts of celebrity and excess. It breeds people like Mr Madoff, Mr Kenneth Lay of Enron and the various chief executives of bailed-out organisations like IAG, Morgan Stanley, Merrill Lynch, Bear Stearns, Lehman Brothers, CitiBank etc. Overseeing these various failures was Presidents Reagan (1981-1987), George H W Bush (1989-1993), Bill Clinton (1993-2001), and George W Bush (2001-2009). And, always in the wings, the politically attuned, Mr Greenspan fuelling the flames with accommodative monetary policy.
It is a bit unfair to include Bill Clinton because he did oversee a period of relative prosperity, mainly due to the fact that Newt Gingrich was in control of the US Congress and kept fiscal spending under control. America actually was in surplus at the end of the Clinton era which provided the cash for Mr Bush to pursue his military adventures.
BUT WHAT OF AUSTRALIA?
Because Australia had a fiscal surplus going into the GFC, a strong band of central bankers led by Mr Alan Macfarlane and then Mr Glenn Stevens, plus the Australian Prudential Regulation Authority and the labour market reforms introduced by Paul Keating and retained by the Howard/ Costello team, Australia has escaped the worst of the GFC. The global commodities boom also assisted significantly.
BUT there are caveats to Australia’s current relative immunity. Much of what we can achieve is dependent on the health of the external economy, but we can make things harder for ourselves if we waste scarce resources as much of our consumption sucks in imports. Australia still needs to work on import replacement rather than creating jobs in China and Asia generally.
Let’s start with Westpac Economics August Market Insights offering: "The global investment community went cold on growth trades in June – but they got their risk appetite back in the second half of July. The full gamut of growth orientated asset classes have performed very well of late. The apparent catalyst for this formidable return of confidence has been the apparent improvement in the US data flow, a better than expected corporate earnings season and further evidence of resurgent growth in China. We believe in the third factor, but the first two are illusory. Better data emanating from the balance sheet constrained jurisdictions is due to the intersection of the inventory cycle and fiscal stimulus. Add that to low quality earnings driven by corporate cost cutting and you have a house of cards. All that said, the market believes, and will have little reason to change its mind for some months, possibly even quarters, as these transitory factors play out."
BUT in Ecinya’s view the transition from recovery to expansion is not linear in either market or economic terms. The Rudd government is making serious mistakes in its industrial laws which will impact adversely on jobs, wasted expenditures in indigenous housing and school facilities plus a serious and confusing pre-occupation with the global emissions trading debate and the broadband roll-out. Mistakes are likely to occur as other infrastructure spending packages roll out.
Our belief is that the Hawke/ Keating government was thoughtful in policy formulation and thorough in execution. Hawke/ Keating achieved broad support through lucid and logical explanation. The Liberals under Howard Costello were thoughtful in policy formulation and thorough in execution and achieved reasonable support via explanation and persuasion. The GST has been the biggest policy success in domestic terms in the post WWII era of ‘modern’ economics. It is interesting that Mr Keating is reported as expressing disappointment in Labor policy and attitudes saying the current Federal administration is focused on power, lacking policy passion.
Mr Rudd is a regression to the Whitlam years of bluster, filibuster, spin and nonsense. Hence without a large dose of luck emanating from the global stage Australia will find itself saddled with high private and public debt relative to income as local and global interest rates rise towards ‘normal’. Mr Rudd is so obsessed with re-writing the economic history of Australia that he has forsaken management of the present to secure a comfortable future. We fully expect the Ken Henry tax ‘reform’ package to reflect the governments lack of understanding of the reality of practical economics.
DEBT is never a problem if the money is well spent, but there is clear evidence of spending for spending’s sake. BUT it is not just Mr Rudd that has fallen for a wholesale mis-interpretation of Keynesian economics. David Rosenberg, ex Merrill Lynch, and now with Gluskin Sheff of Canada, said on 10 September "All the growth we are seeing globally this year is due to fiscal stimulus".
There are two related local and global fears – Firstly, that take away the fiscal stimulus and you are left with very little that assists sustainable growth. Secondly, we have a muted and jobless recovery.
At Ecinya we always take great comfort in Bill Bonner’s 2007 statement on fiat money : "Clearly, the central bank of Zimbabwe has overdone it. But if the central bank of the USA has overdone it few seem aware of it. The secret is to give people more money, but not so much more that they realize all they’re getting is pieces of paper. Paper money may be a fraud, but it still represents purchasing power. When more units of it appear, people assume they have more purchasing power. And when they spend more, the merchants think there is more demand & increase production. Pretty soon there is a boom." In January of 2009 we said; "Fiscal stimulus should work based on historical precedent and barring a serious war, but some of it will be well & truly wasted." As of today our fears are, unfortunately, being realised.
Westpac are forecasting global growth for 2010 at 2.6% and negative 1.2% for 2009. Australia is at 1.8% for 2010 and 0.2% for 2009. A 1% shortfall in global growth is about US $700 billion, just a tad less than the entire GDP of Australia. This is a significant number. It is akin to Australia disappearing from the world economy for an entire year.
CONCLUSIONS
- We are through stage 1 of the ‘recovery’. There are two up stages yet to be completed after two periods of consolidation, retracement, or stagnation – whatever you wish to label it.
- We need a period of consolidation or retracement, about 8 to 10% of the current indices would be appropriately constructive and technically and economically logical.
- Mr Obama has to address some serious long-term structural and systemic issues.
- There are dangers in the pursuit of ideological agendas in climate change and US health-care. Affordable health-care is important for America, but a big agenda item for recessionary times.
- The Middle East remains an omni-present threat.
- Bankers in Europe, America and China are not yet telling the ‘whole truth and nothing but the truth’.
- China is beginning to get impatient with America and trade-war debates are surfacing. America is perpetually impatient with China.
- Global employment has not stabilised.
- The possibility of a US$ crisis is real. Watch gold and precious metals generally.
- Excesses are returning, local examples being the float prices for CarSales.com and Myer. American examples are investment banking profits and salaries.
- Markets do not go up forever; they need to pause to allow time for the real economy to catch-up. The real economy is the production of goods and services. The symbol economy is money and credit.
OVERALL
The pendulums swing, imbalances ebb and flow; and the (fiat money) band plays on.