We’re enjoying sluggish times, and not enjoying them very much…….. The year ended with the concern for Americans that are hurting, because of this sluggish economy. I mean, when families are having trouble making ends meet or are thinking, even if they have a job, I might not have one tomorrow. Fear. You worry about that. I worry a lot about that.
George Bush snr, 1992
The propensity of Congress to create benefits for constituents without specifying the means by which they are to be funded has led to deficit spending in every fiscal year since 1970, with the exception of the surpluses of 1998 to 2001 generated by the stock-market boom. The shifting of real resources required to perform such functions has imparted a bias toward inflation. In the political arena, the pressure to make low-interest-rate credit generally available and to use fiscal measures to boost employment and avoid the unpleasantness of downward adjustments in nominal wages and prices has become nearly impossible to resist. The American people have tolerated the inflation bias as an acceptable cost of the modern welfare state.
Alan Greenspan, "The Age of Turbulence", September 2007.
The principal contribution that monetary policy can make to economic well-being is to maintain low and stable inflation. I think it is true to say that if you wished to forecast the path of the Australian economy, and you were able to have foreknowledge of only one economic variable, the one you would choose would be the path of the world economy. That is not to say that we have no influence over our own destiny – we can make the situation better or worse than it would otherwise be – but we cannot escape the influence of the world business cycle and the other factors that feed off it.
Ian Macfarlane, former Governor of The Reserve Bank, 14 June 2005.
ECINYA COMMENT
All governments talk of lower taxes, lower interest rates, higher spending on more and more pervasive benefits for the disadvantaged, incentives for the corporate sector if they also happen to be benefactors at election time, and spending on ‘nation building’. The fact that governments have no money of substance other than what they raise from taxes or borrow, one would think that expenditures would be thoughtful, careful and have a reasonable set of priorities. Alas, that is hardly ever the case, with Peter Walsh and early Howard regarded as notable exceptions.
So we are left with the central bankers to provide the checks and balances through monetary policy, to apply some brakes to the natural political inclination to be profligate and wasteful. In America this has not worked for some considerable period because Mr Greenspan became part of the political system. But in Australia it has worked. Hence, when we are talking about the sustainability of ‘the recovery’, we must rely on the good intentions and thoughtful policies of The Reserve Bank.
We find it interesting that Mr Greenspan talks of the ‘welfare state’ and America is still having a debate about ‘capitalism’. It sometimes seems that there is more free enterprise in Communist China than in Capitalist America… funny hah, hah! Just think about the bail-outs of the US auto and banking industries; not that they were unnecessary but the scale and enthusiasm was almost grandiose.
Once upon a time, business leaders used to speak up against bad policy – people like the Chairman of The Stock Exchange and senior bankers. But they are now so fearful of subtle forms of ‘punishment’ that no longer happens. It is left to the press to be the investigators that reveal bad, sometimes reckless, fiscal behaviour.
Our tax system needs reform, but will it occur? There will be some changes promoted as ‘reform’, but the main ingredients are likely to be confused and confusing. On top of the ’emissions trading scheme’ confusion, we may enter a period of multiple confusions. The GST should be imposed on food; payroll taxes removed; capital taxes relaxed to reward longer-term holders and encourage capital velocity; pensioners, teachers, nurses, and policemen should be paid more.
BUT if the world economy continues to move from emergency relief to recovery, Mr Macfarlane says we will be all right, and we agree with him. Therefore, we need to be continually alert to what is happening in the world economy. In general terms we are looking for a negative year of circa 1% GDP growth for calendar 2009, followed by 3.0% for 2010 and 3.5% for 2011. Trend is about 3%, which means that world GDP doubles about every 24 years.
THE STOCKMARKETS
In order to assess levels and direction for the Australian stock-markets our primary focus is on the S&P 500 and the All Ordinaries index. The latter is currently contained in a range 4500 to 4800 and the former in the range 1075 to 1110. Our expectation is that a correction will occur soon that takes our market to around 4400 and the S&P to around 975. This equates to an 8% correction for the All Ordinaries and about 13% for the S&P 500. Volatility might be, at times, uncomfortable.
As we drift towards the end of 2009 we need to understand that the drift is in context of an Australian market 50% above its lows in March of this year, but still 30% below its peak in November 2007. The corresponding numbers for the S&P 500 are 30% below the peak and 60% above the March lows.
Why ‘drift’? Volumes are low and muted, and the momentum of the advance is declining. Also, at the time of new Ecinya’s first publication our buy-accumulate-spec buy ratio as a percentage of our total stock universe was 39% and it is now running at about 19%.
FEAR AND THE WISDOM OF TWO BUSH PRESIDENCIES THAT INHERITED STRONG ECONOMIES AND BEQUEATHED RECESSIONS
Much comfort can be found in the wisdom of George Bush snr, a kindly, well intentioned man, but something of an economic illiterate, just like his son. We advise everyone to read the Bush quotes over-and-over again, and then stoutly ignore them, remembering that government is hardly ever the friend of the honest taxpayer-worker. Simply exercise caution in your own affairs, because Messrs Obama and Rudd, though articulate to varying degrees, seem to be playing the economic game of ‘the free lunch’. Each seems to be more of a celebrity than a manager.
We think Mr Obama will change, we sense that Mr Rudd cannot escape his predilection for spin over substance and mischievous and clever wedge politics. If we had longer Federal parliamentary terms, the perception that spin is valuable might change to some degree. Suffice it to say, Ecinya has more faith in the substance of the Australian people than its current crop of politicians.
Mr Obama needs to change direction in 2010 and become something of an economic pragmatist, now that the emergency has passed. Mr Rudd will have to be forced by an election set-back in early 2010 to regain his self-confessed, conservative credentials and hope that external conditions can make Australia continue to look good. In our prayers we should all mention China and India. America has a long way to go and Europe just limps along, aided by the tourist dollar.
ECINYA’S SURVEY
In January 2009 we asked 8 of our confidants to join our editor (making 9 in all) to write down their five major fears/ worries for 2009. This gave us 45 responses (9 times 5).The table below summarises the results:
Responses
- US in all aspects, $US, Obama… 10……………………………………………………….22%
- Australian government policies & abilities… 8………………………………………..18%
- Deflation – recession deepens, asset values continue decline… 6………. 13%
- Geo-political – oil price, middle east, wars etc… 4…………………………………… 9%
- Wages and employment… 3……………………………………………………………………. 7%
- Banks willing to lend, bigger bank losses… 3………………………………………….7%
- Confidence – market, DIY super losses… 2……………………………………………. 4%
- Public & private debt levels… 2……………………………………………………………….. 4%
- Drugs, alcohol, law & order… 2……………………………………………………………….. 4%
- Australian management… 1……………………………………………………………………. 2%
- China over-saves… 1………………………………………………………………………………. 2%
- Trade wars… 1……………………………………………………………………………………….. .2%
- Energy policies globally… 1……………………………………………………………………. .2%
- Resources bust… 1………………………………………………………………………………… 2%
- X factors… 1…………………………………………………………………………………………….. 2%
We found the second most dominant fear to be interesting and consonant with our own generalised fears. The Hawke-Keating government were sound economic managers, before turning into micro-populists, mainly instigated by Mr Hawke in his final term. The Howard-Costello government were sound economic managers before turning into micro-populists, mainly instigated by Mr Howard in his final term. Transition is just as important in government as it is in business, and poorly orchestrated leadership changes are costly for taxpayers.
SO WHERE ARE WE NOW?
David Rosenberg gives the following summation of the American condition:
- Short-term negative interest rates in the bond market with people more concerned with capital safety than yield
- Housing crisis far from over
- Dose of near-term caution for the commodity sector; though remaining long-term bullish
- Some yellow flags over the holiday retail sales season
- Lots of hesitation in capex as excess capacity remains high
- No sign that the recession is "really over"
The US economy has been hopelessly managed since Ronald Reagan said "It’s always morning in America", except for a period where the abrasive Newt Gingrich controlled the economic debate through a Republican controlled Congress. However, things can change and as John Maynard Keynes (everyone’s favourite dead prophet) said "Fundamental change does not occur quickly".
AND IN AUSTRALIA
Our major worries are : The tax system, a flawed approach to carbon emissions, a poor prime minister and treasurer in economic terms. Even Peter Walsh recently described Mr Rudd as an ‘economic illiterate’. Additionally, we are also watching China with a more than usual degree of care.