Tuesday, October 4, 2011

This time it’s no different.

The current obsession with all things negative makes for some pretty depressing times. The media have been scouring the globe for experts prepared to predict the end of the world (or at least the end of Europe and the USA, and some are even predicting a China fizzle) and global equity markets are showing the sorts of gyrations normally only seen on a seismometer reading of a major earthquake. Housing prices have been sliding, and consumer and business sentiment falling. Politically, we hate our national government (according to the polls) and the whole country is basically in a big downer. What good can come of this? Possibly, plenty.

‘This time it’s different’ is the sort of fallacy that collectively we can all be fooled into believing from time to time. In the same way we were promised there couldn’t be a world downturn (because ‘this time it’s different’) the same could be said of those who deny the prospects of recovery (because, they say, ‘this time it’s different’).

But are the signs of recovery, in Australia at least, already there? One certain sign has been the clear evidence that Australian consumers have read the tea leaves and flicked the switch from being consummate consumers to avid savers.  Official ABS data released mid year showed that the household savings ratio rose to 11.5% - the highest rate of household saving in 24 years.  In other words, you have to go back to 1987 to find a more conservative bunch of savers than we are today.

That news was followed in September by reports that cash deposits are growing as businesses and consumers put money into safe haven accounts. In August alone, $27 billion was pumped into bank deposits, and between Westpac and the Commonwealth Bank, consumers pumped a combined $4billion into deposit accounts in one month.

It’s been a trend noted by the Reserve Bank, and one felt acutely by Australian retailers from Myer to David Jones to Harvey Norman and JB Hi Fi. While it may be bad for shareholders of retail businesses, it’s encouraging to know that consumers and business are winding down debt and increasing their savings.

Another sign is the evidence that the economy is still growing. Australian GDP rose 1.2% in the June Quarter, and this week, Australia’s trade surplus recorded its second largest number ever, largely on the back of the resources economy but also with strong performance in the traded goods and services sector, and even dwelling approvals recorded a strong rebound (albeit from dismal levels).

Sure, there’s a two speed economy at work, possibly three and even four speeds. But you could have said the same prior to the GFC, when urban markets were going well but regional and resource markets weren’t exactly glamorous.

Searching the tea leaves for more signs for positives are the continued reports of strong company profits. Amidst all the talk of earnings downgrades, most company profits during the reporting season have been positive, and ahead of expectations. According to the AFR, two thirds of companies reported increased profits this year, while 37% were better than expected.

And when companies are making profits, people keep their jobs. The unemployment rate, as recorded by the ABS,  crept up slightly to 5.3% in August. Hardly a calamity. Since 1978, our unemployment rate has averaged 7.11% and peaked at over 10% in 1992 – and we recovered from that.  

The equities markets aren’t providing many grounds for positive thinking but even here, there’s a clear view that markets are oversold and trading at heavy discounts. The fundamentals, my economic friends tell me, are generally all pretty good.  The markets though have been rewarding good profit reports with falling prices, and the Greek/Euro position has provided the latest excuse for pessimism. Markets, as Adam Smith observed, are driven by ‘animal spirits’ and right now the animals have broken out of the zoo and are on the loose.  But they will return to their cages at some point.

Summarising the global equities funk was this comment by a trader with ING:

‘‘We’re really oversold,’’ Paul Zemsky, the New York-based head of asset allocation for ING Investment Management, said in a telephone interview. His firm oversees $US550 billion.

 ‘‘The US data has not been bad. The Fed has indicated that it’s not out of bullets. There’s no sign of recession in the US and yet the market is pricing for one.’’

So what’s happening here? Markets are oversold, trading well below their true worth. (I’ve heard some highly respected economists suggest the true value of the All Ords should be around 5500 points, not sub 4000 where it’s been trading lately). Plus, employment remains good – at historically low levels even – and household savings are rising. Bank deposits are growing, and the economy generally remains in positive – though patchy - territory.

To my way of thinking, consumers (far smarter than the politicians they elect) have decided to wait. Purchases are being postponed until the general economic outlook – along with the media headlines – starts to look a bit more certain.

And all this means is that more pre load is being added to the economic spring. The more preload that is added, the more the spring will bounce back as all those postponed consumption decisions will catch up. (This need not mean a return to asset price inflation, as we saw with housing, but it should ideally mean a return to more normal volumes of activity – and money flowing through an economy is as important as blood flowing through your veins).

So what’s the hold up?

Confidence it seems is everything, and we don’t have much right now. Little wonder, given the economic and political management of our Federal Government. The people – and business – know intuitively that this government is a mess and this isn’t a good time for carbon taxes, congestion taxes, taxes of high cholesterol foods, new tax systems, huge expenditures on broadband with uncertain benefits – it’s a long list.

But with confidence sapped, and until there’s a climate of more stability and certainty in our political leadership, along with signs that the global economy isn’t about to fall off the edge of the earth, we aren’t likely to see much change. But when it does, the change I suspect will be rapid and positive.

Remember, this time, it’s no different to last time.

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