OVERVIEW
Markets move in waves and the waves morph into cycles. Economic progress or regression does not move in a linear fashion with stock-markets, but at some stage they intersect. When they do the prevailing positive cycle moves to a position of excess and upon reversal to a position of despair…. and excess despair is recession or depression. This process is the underlying foundations of The Ecinya Market Barometer.
The stock-market, inter alia, is said to be a leading indicator and we concur with this view. But that was before Dr Bernanke and his predecessor, Alan Greenspan, turned central banking into a political sport designed to protect the ‘too big to fail’ investment and commercial banks of the world. The current global QE response to the excesses is fraught with danger and could end in tears if those involved continue to obfuscate or tell deep untruths or pursue uneconomic agendas such as is happening in France. The world needs to get back to meaningful work which will also involve less wars and less welfare. Fundamental change does not occur quickly and the global and national timetables should not be rushed.
Since March 2013 our strategic directions and advice has been to sell strength and maintain cash balances. This view continues but comes to a natural end if we get a sufficiently large enough retracement. The focus would then shift to identifying prospects for an improving local and global economy and we would look for signs of a sustainable cyclical recovery. We are not prepared to make that assumption just yet. Housing, employment, commodity prices, and car sales will give some clues. At that point in time earnings forecasts should be being revised upwards. For the moment we consider that markets are making an intermediate top and a retracement is underway, or close at hand. Stay alert and remain nimble.
To navigate the waves Ecinya uses its TACTICAL MATRIX to give some discipline and direction to the process, as follows –
TACTICAL MATRIX
1. Going with the flow, with conviction.
2. Going with the flow, without conviction.
3. Going against the flow, with conviction.
4. Going against the flow, without conviction.
5. Ambivalent/ neutral.
To identify and define the cycles Ecinya uses the following –
MACRO MARKET STRATEGY MATRIX.
Our Macro Market Context operates on 10 levels:
1. Deep despair
2. Very bearish
3. Bearish
4. Concerned
5. Ambivalent/ neutral
6. Comfortable
7. Confident
8. Bullish
9. Very bullish
10. Euphoric
SO WHERE ARE WE NOW?
Tactically, we are happy to sell strength, buy weakness, and stay over-weight cash despite poor returns. Hedge fund activity on uncontrolled futures markets keeps us away from chasing bank dividend yields with gusto. Strategically we hover between 6 and 4.
In a strategic sense we are on the sunny side of ambivalent looking for an ultimate or intermediate low where value can be identified on a sustainable basis so that we could recommend a move towards an investment bias rather than an overweight cash/ trading bias. The world is not in good shape. If it were central bankers would not be acting in the way that they are. Given that most central bankers are economists and have little or no idea about how business and the consumer really works, the fact that they are acting in concert is a major concern. Excesses in fiscal policy can lead to unintended consequences and excessive monetary policy just makes it worse.
When the major commercial and investment banks became an arm of government and hence ‘too big to fail’, central bankers became a flock of vultures digging over the bones of hapless taxpayers, workers and retirees. In foregoing their independence they surrendered their integrity. Fortunately tahnks to Peter Costello and APRA this did not happen in Australia.
Ecinya has always had an immense distrust of Alan Greenspan, and Dr Ben Bernanke has not sufficiently distinguished himself to settle our underlying doubts about his foresight and abilities. His appearances with Hank Paulson pre and during the American banking crisis should not be easily forgiven. The fact that Lehman Bros became the sacrificial lamb to the GFC, and others were spared, was central banking and politics at its worst. Someone prominent should have gone to jail. Our admired central bakers are Paul Volcker, Ian Macfarlane, and Glenn Stevens. One of our abiding reference points came from Ian Macfarlane on 14 June 2005, when he said –
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 fore-knowledge of only one economic variable, the one you would choose is 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.
Thanks to the gross stupidity and inexperience of Wayne Swan, Kevin Rudd, Julia Gillard and Ken Henry in and around the GFC, Australia now runs the risk of having an economic crisis unless the world saves us. Our fate has been transferred abroad. Lyndsay Tanner is exempted from this, though he was part of ‘the gang of four’ at the time. An Ecinya essay at the time criticising the response has proven to be correct….. unfortunately.
REVISITING OUR SIR PERCY ESSAY
The music never stops, the band plays on, and the dance continues.
Ecinya last published on 15 March 2013 and prior to that on 8 March. The thesis was that our market was about to fall and accordingly there was no great need to exit cash and chase stocks, except on a trading basis.. As part of our deliberations we published an essay on 8 March titled ‘Ecinya’s delightful and daring dance with Sir Percy’. That essay set out the details of a bet between Sir Percy and our editor and during the course of the bet we gave an extension of time to Percy until 31 May to equalise the time frame and allow a more cogent outcome. We levelled the playing field.
Percy had the All Ordinaries index falling 2% and we had the market falling 8%. In fact it fell 3.9% by the relevant date, 31 May. The bet was settled on the basis that the mid point between 2% and 8% was 5% and editor could only be the winner at 5.1%. However, in the days thereafter the XAO had fallen by greater than 5.1% and had the bet settled on 12 June editor would have been 99% correct in his estimate, guesstimate, projection, however you wish to describe it. The duration of the bet was 100 days.
The important point was that direction was correct on both our parts and dimension was satisfactory to excellent, albeit 12 days late…… a very close miss.
The table below sets out the timetable of the wager.
However, the point of the bet was not to win, but to engage in thought and have a physical marker at settlement date. An old Jewish proverb says "There is nothing so beneficial as an argument between persons of goodwill." The bet may be over, but the thinking goes on.
ECINYA’S BACKGROUND REASONING AND MAJOR CONCERNS enunciated as part of the bet were first outlined as part of our Strategy Essay of 25 January and comprised –
1. Australian fiscal management during and since the GFC – the chickens are coming home to roost and unemployment, slow growth. and higher taxes are on the horizon in a massive landscape of poor policy development and execution. Mid term (circa 2014) we remain bullish on hard and soft commodities. Australia needs a Federal election as soon as possible. The current Australian government is so far beyond incompetent that bizarre and absurd at both the policy and personnel level seems a more apt description.
2. Dr Ben Bernanke is treating a disabled patient with massive doses of monetary stimulus when the real medical disorder is fiscal profligacy and waste. America may well be ungovernable as it seems increasingly difficult to get Congress and the Obama administration to realise that the Rosy Scenario tango requires both monetary and fiscal policy to be on the same dance floor.
3. Europe needs to address creeping imbalances all over the place. Europe doesn’t bother us as much as people might imagine as our observations is that outside of the capital cities the cash economy functions beautifully and la dolce vita or the sweet life is well in evidence. Of course, European banks are another story as is employment (particularly youth unemployment) and productivity, Germany excepted.
4. China may have a massive credit and property bubble which has not yet popped. The evidence here is moving from anecdotal, scattered and intermittent to more regular and factual. We point out, even now, that Greek GDP per capita is about twice that of China in Purchasing Power Parity terms, considered the most relevant measure for country comparisons.
5. The normal menu of global unrest has a new entree in that China and Japan are in dispute in and around the China seas. We said ‘entree’ not ‘main course’ or ‘dessert’. The protagonists are dancing around one another with more preening than threats. (PS: Egypt and Syria are now centre stage)
POSTSCRIPT
The Australian model is broken and has become almost totally dependent on the strength of the recovery in the global economy.
A bankrupt was asked "How did you go broke?" He replied, "Slowly at first, then it accelerated."
Australia has an extremely deep and narrow export base built around iron ore, coal, and wheat. Other hard and soft commodities add to the mix. At the same time our import base is deep and wide. We manufacture very little and in relation to a major industry, motor vehicles, we subsidise it heavily. Ecinya is of the view that we should and could have a viable car industry, but not under current policy settings.
Our commodities bonanza has existed for a very long time, but was propelled to boom proportions by Asia, China in particular, but Japan, South Korea, and Taiwan before that. Not only did they take massive quantities of commodities from us they also provided a cheap affordable source of imports. Nirvana was upon us. We became the lucky country. But then Asia started to produce building products and cars in abundance as well as consumer goods making our already diminishing manufacturing even more pressured. The policy response has been a shambles of historic proportions.
At the same time State and Federal Labor governments funded by copious amounts of GST taxation (a tax they opposed) decided to expand the welfare state without a comprehensive understanding of sustainable economics. They had no comprehension of the need to save for a rainy day and the basic requirement of providing the structures, skills and physical infrastructure necessary to reduce our dependence on imports when exports have their inevitable and historical cyclical slow-down. Even at the export level basic infrastructure has been lacking and the costs of getting to port and onto ships has been an impediment to longer term success in places like Newcastle and Queensland.
Our model is broken in today’s globalised world. The free trade mantra has become costly and weakened our negotiations. Our wage costs makes us uncompetitive in manufacturing and is now placing stress on our commodities industries as bulk prices have fallen.
Programmes like Gonski, National Disability, and Paid Parental leave plus our ongoing Refugee Programme only enlarge the HOLE we are digging for ourselves. We continue to believe that we are rich, and yet through creeping imbalances, now in early stage acceleration, we have begun to live the delusions being promoted by Prime Minister Rudd. The underlying realities are being lived by households and businesses and the unemployed and under-employed. Still there appears to be a host of persons looking for the simple solutions that Mr Rudd offers.
Ms Gillard lacked experience and the DNA of her Welsh father was a major impediment to her economic and business understandings and governance. For many people a law degree provides a sheltered workshop, and words become a plausible substitute for understanding followed by action. In a 24/ 7 world we get so caught up in dynamism that we forget and forgo basics and fail to learn history’s lessons. The excitement of being in office again led to hubris and now that hubris may lead to a lot of pain.
Just a quick look at wage costs. Stephen Roach former Chief Economist of Morgan Stanley long ago recognised the global labour arbitrage that was going on. The massive investment in emerging world education after WW2 driven mainly by America’s consumption needs and dominance of the world’s financial system created the means for goods and services to be provided by the emerging world. This has now made the the western democracies fat and lazy. In economic terms the word is ‘unproductive’. America has recognised its errors and has stopped exporting jobs, and is now bringing them home.
In Australia, which is always our central focus wage costs comprise the base wage+ holiday pay +penalty rates + superannuation + long service leave + workers’ compensation + payroll tax + legal costs and systems to rationalise labour costs via dismissals in order to save the remaining jobs. The safety nets are now well and truly overdone.
The policy response to globalisation has been a shambles. Ultimately what happens is that we have to sell significant assets, the crown jewels, in order to survive. A few examples that spring easily to mind are Speedos, Arnotts Biscuits, Petersville Sleigh, Fosters and Tooheys beer, Penfolds Wines. Other brands and operations are sure to follow and Graincorp is already on the predator’s menu. No company under our existing economic landscape is safe and the price will be cheap, cheap, cheap. Every dividend paid to a foreigner, every dollar of taxation avoided by even legal means, has the same impact as an import in terms of the balance of payments.
SOME HINTS ON SOLUTIONS FOR AUSTRALIA
The Federal Labor party , in our view, is totally unfit for government. This is not meant to endorse the Liberal party as we will only be able to judge their competence in office, if they were to be elected. Mr Abbott’s Paid Parental Scheme does not impress at this point in time nor does his blue-book on ‘policy’ positions.
The Labor party does not do policy, it does concepts – NBN, NDIS, education, climate change, mineral resources tax etc. ‘Policy’ would require cost-benefit analysis and we have seen no evidence of that over the period of the Rudd-Gillard-Greens coalition in governments since 2007. We see no John Howard, no Paul Keating, no Bob Hawke, no Peter Costello.
Ecinya funds it difficult that you can be anti-business and yet proclaim to be pro-jobs. There is no concept of balance, no appreciation of macro economics nor micro implementation. Mr Rudd was an incompetent prime minister at the time of his ouster and remains so at the time of his resurrection.. The Labor party does not do ‘reform’, it does tax and spend, and hinders via imperfect legislation. The end result is deficits, debts and declining productivity. In a globalised world this is a path to rising unemployment, rising costs, less than optimum growth, and ultimately a fall in the standard of living.
After the next election a referendum should follow extending the Federal Parliamentary term to a minimum of four years and a maximum of four and a half years.
Australia is standing still until the election happens. Confidence in the big-employment sector of small business is comotosed until then. Additionally, major public companies are down-grading their profit outlook on an almost daily basis. During the month of May companies that downgraded their earnings outlook included AGL Energy, Ausenco, Boral, Coca Cola Amatil, Newcrest Mining, Coffey, Virgin Australia, UGL, Worley parsons, Fleetwood, Transfield, Boart Longyear, Cardno, AMP, Invocare, Cochlear, Transpacific and Wotif.
A quick look at the following table will tell you what QE has done for Wall Street. Main Street has yet to become so lucky.
