"My genuine concern for Australia is to pay very close attention to the macro-economic and micro-economic issues that will determine our future. Ideological objectives along with philosophical goals will not get us there and being lucky will not be enough. The successful leaders of today must understand that their power rests with the people for whom he or she is responsible. To tap that power the leader must abandon the old baggage of dominance, control and self-centredness."
The Hawke and Keating governments, for example, are singled out as particular milestones of national progress. Both leaders represented a ‘new breed’ of political leadership that was "not blinded by the ideologies of the past " and their governments had "courage and the foresight" to drive reforms that sustained improved productivity and national competitiveness. [Argus] says the Hawke-Keating macro-economic reforms were underpinned by a sustained, relentless and exceedingly well informed micro-economic agenda. By implication, Argus is unhappy with the economic logic that drives the Rudd government.
Interview with Don Argus, retiring Chairman of BHP, The Australian 25/3/ 2010.
Financial Market recovery: It is helpful that the global financial system is gradually recovering its poise, after a near-death experience eighteen months ago. Perhaps like a patient that has suffered an acute cardiac event, there has been some lasting tissue damage, but quick intervention avoided something much worse. A period of emergency life-support has been, followed by a period of recuperation, with some ongoing medication, during which the patient has been able gradually to resume normal activities.
The Banking Sector: The challenges that remain ahead for the banking sector in major countries nonetheless remain considerable.
Challenges from Sovereign Debt: For several important countries there was a trend increase in debt-to-GDP ratios going on before the crisis occurred. It is these more deep-seated trends that are really the greater cause for concern. So a number of advanced industrial countries face some difficult fiscal decisions over the years ahead. Unless a credible path to fiscal sustainability can be set out, growth could easily be stunted by rising risk premia built into interest rates as markets worry about long-run solvency.
Economic Recovery: In the United States growth spurred by a swing in the inventory cycle is thought to have marked the turning point in the second half of 2009, but most observers still expect only moderate growth this year. In Europe, the momentum for recovery has been less certain. In important emerging countries like China, India, Brazil and a number of smaller east Asian countries the letter ‘V’ is a reasonable description of the the trajectory to date. (But) we should expect to see some moderation in the pace of growth of production in some of these cases this year.
Glenn Stevens, Governor Reserve Bank, 26/3/2010.
Credit and debt, in short, are among the essential building blocks of economic development, as vital to creating the wealth of nations as mining, manufacturing, or mobile telephone. Poverty, by contrast, is seldom directly attributable to the antics of rapacious finaciers. It often has more to do with the lack of financial institutions, with the absence of banks, not their presence.
Niall Ferguson, "The Ascent of Money", 2008.
WHAT IS THE RESERVE BANK GOVERNOR TRYING TO TELL US?
In our view the Governor is saying that we have not yet returned to normal in economic terms, in banking, debt, and growth terms. Australia may be in better shape than most, but we are still dependent on the global economy returning to ‘normal’ as soon as possible. The time table is unlikely to be calendar 2010 though by year-end things should be clearer. Oblique references to ‘some countries’ and ‘several important countries’ seem to refer to the USA and Britain, but protocol demands that inference is better than outing.
Yesterday the Governor also took the unprecedented step of giving a TV interview specifically to warn people about assuming interest rates will remain low as they accelerated their housing purchases.
Australia is dependent very much on growth in the world economy and interest rates are moving up in a pre-emptive move against (asset) inflation. The RBA is giving itself plenty of scope to halt rate rises, or even to ease, if world growth stutters.
WHY CAUSE FOR PAUSE?
In summary –
- China is trying to slow its economy.
- The USA is far from out of the woods and the printing press limits to prevent deflation are near to being exhausted.
- The trade and currency tango occurring between the USA and China.
- Australia is raising interest rates.
- Ecinya has a suspicion that the first half of calendar 2010 is far from robust and 2010 full-year earnings will be a subdued base for a number of companies .
- Forecasts for local 2011 earnings are generally high and will come under strenuous review once 30 June 2010 arrrives.
- The SP500 has hit an intermediate peak at 1174, some 68% off its March 2009 lows.
- The XAO is similarly 55% off its march lows.
- Momentum in both the US and Australian markets is slowing.
- Political uncertainty in Australia is rising with waste apparent in several government stimulus programs.
- First quarter US growth is a confusion with reputable pundits split below 2% and above 3.5%. Our suspicions veer to the lower end of the forecast range.
We have stressed patience over the past few weeks in "Ah Magoo, you’ve done it again" , "Patience: The hardest of the market disciplines" and "Watching, waiting, wary." However, you can observe that we have stayed fairly fully invested up until this week.
WHAT TO DO?
An ECINYA investment rule says: "Good trading is a peculiar balance between the conviction to follow your ideas and the flexibility to recognise when you have made a mistake. In a bull market focus on price & momentum, a bear market focus on valuation."
The stock-market is currently bullish, but in our view the market momentum is elevated enough to think about taking some profits plus the gap between perceived value and price has narrowed sufficiently to support such action. Accordingly, we have turned the Bamboo account entirely to cash after 14 weeks of operation, and created some cash in Cactus (see Ecinya Funds). However, there are still stocks where the valuation parameters are favourable and these stocks are contained within our Stock Recommendations. However, the market is, in our view, more of an ‘accumulate’ market than an outright ‘buy’.