Thursday 11 August 2011

What Next?

"The Fortune Teller".
Mikhail Vrubel. [1]
So far, as the sharemarkets start to calm down, it appears Australia and the world dodged the bullet.

Locally, superannuation funds and its account holders must have suffered considerably.

However, last Tuesday 09-08-2011, the press was reporting what could have been the first local negative effect of the financial turmoil:

"MARGIN calls sparked by Australia's five-day share rout have surged to levels not seen since the middle of the global financial crisis, forcing thousands of investors to dump shares or top up with cash to avoid a forced sell-off.(...)
"Bendigo Bank confirmed that more than 1000 of its clients had received margin calls in the past two days of trading.
"The Commonwealth Bank also reported a surge in margin calls since Friday
"The latest figures show about $19.2 billion is tied up in margin loans across Australia, well down from a peak of $41.5 billion in the December quarter of 2007."
(See here).

Thankfully, the sharemarket convulsion apparently was brief enough and did not trigger a substantial number of margin calls and as the local market started to regain ground, pressure lifted from those leveraged portfolios.

Making allowances for the effect this had on private sector balance sheets and discounting new catastrophic news (all of which might be a foolhardy thing to do!), volatility should subside gradually.

It may be a little too soon to tell, but it seems the sharemarket convulsion did not create an analogous to the "credit crunch", like the one observed in 2008/09, as feared by Paul Mason.

Does this leave us with business as usual?

Not necessarily. For one, consumer confidence was affected, at a moment when the local economy was already losing steam. This, by the way, was the main risk expected by Ross Gittins.

More importantly, by itself the sharemarket convulsion did not test the Australia/US+Europe "decoupling" theory.

Let's remember that in 2008/09 all the largest economies agreed to apply fiscal stimulus. This sustained aggregate demand, which flowed among other places, to China and developing economies, and these countries were happy to indulge by producing and importing.

Today, a similar agreement would be much more unlikely, for a variety of reasons: political ones (the US politically-induced aversion to deficits and public debt) and institutional ones (the Eurozone nations' decision to transfer their money-issuing sovereignty to the ECB).

As even well-known bulls appear to concede, fiscally constrained US and Europe seem headed to a long period of stagnating growth, at best. For Australia that means that growth would have to come essentially from China.

Will China be able to sustain its growth by switching to internal demand? That seems to be the question now. Bulls seem to take that for granted, and they might well be right.

But, then, again, that was the question then.

If China were not able, would Australia escape the bad example set by the US?


13-08-2011: An abundant crop of analysis today:

Peter Hartcher's "Winning global confidence" tops the list. Lots of interesting facts, mixing political ones with strictly economic analysis.

The black spot in Hartcher's analysis (common to about all analysts, for that matter), becomes particularly prominent here:
"In three important ways, however, Australia's situation is weaker. In 2008, the federal government had no debt, only assets. Today, its debts are modest by world standards, yet they are real and would pose a constraint on stimulus spending.
"This is why the Gillard government should not see a global downturn as an opportunity to relax its stance and justify deficit - although in a serious downturn that would be inevitable - but why it needs to redouble its efforts to pare spending."
I wish Hartcher had a look at billy blog!
Ian Varrender's "Our Lucky Country rating under threat as the dragon tires" gives an altogether different perspective:
"Buckle up. That bumpy ride we experienced this week was just the beginning. (...) 
"When it comes to being The Lucky Country, we are it, if only because we are in the least worst situation of any other rich nation. But the frenetic growth of the past 15 years has ended. That's something we need to get used to".
Varrender reckons China may have considerable difficulties expanding its internal demand. I guess next week we'll see if I was too optimistic (isn't that ironic?).
Ross Gittins's "The real action is taking place in developing world" sees things in the exact opposite way: he deposits a lot of faith in developing economies, and backs this faith up with some evidence.

Is this evidence conclusive? He seems to think so:
"No prize for having guessed the punchline: the rich countries likely to do best over the rest of this troubled decade are those most closely plugged into the developing world.
"Heard of a poor, cautious, sorry-for-itself country called Australia? It sells less than 10 per cent of its exports to Europe and only 5 per cent to the US, but about two-thirds to developing countries."
I guess we, like the blind man, will have to wait and see.
A much simpler analysis, during the week, was Jessica Irvine's "Rating cut won't count for much".

Don't get me wrong: I am a believer that simple is beautiful. Consider me an Ockham's razor fanatic.

As Hartcher, Irvine should read billy blog.

The bond behaviour she described can be explained in much simpler terms: there was no real economic risk. Whatever risk was present, it was politically induced and politicians of both persuasions will first cut age pensions and unemployment benefits than touching debt service.

Deep down, bondholders knew this. Paul Krugman has had a wonderful time making fun of the mythical "bond vigilantes" who were supposed to punish American profligacy.

This way, the first half of the piece, addressing the US downgrade, scores some good points, and misses some others.

The second half, though, addressing the general outlook for lil'ol Oz, which is what concerns me here, is pretty good.


Image Credit:

[1] "The Fortune Teller", by Mikhail Vrubel: Wikipedia.

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