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Trying to take in the big picture global economic view.

November 17th, 2009 · Greg Atkinson · 4 Comments

When it is hard to make sense of what is going on with the global economy I feel it is often best to try and remove the noise created by endless stock market reports, economic surveys, financial forecasts etc. and try and focus on facts not fiction. It also helps to put aside people’s opinions (including our own), relax and calmly assess what the data is really telling us, as opposed to trying to use this data to predict the future.

Firstly we all need to appreciate that the results from surveys of any form are not a perfectly reliable source of information. Just because a survey of business confidence says companies are more optimistic about the future does not mean business conditions will improve.  Surveys can be pretty unreliable so I put them into the ” noise” category and therefore will not take them into account in my attempt to put together a big picture economic view.

Secondly forecasts, as I frequently mention, are best described as forward looking guesstimates.  No matter how many degrees a person has the fact is that none of us mere mortals can see clearly into the future.Yes we all make forecasts in some form as investors, but we should appreciate how limited these forecasts are and be prepared to admit we were wrong, regroup and get over ourselves.

People who boast that their forecasts are always accurate are either egomaniacs, are delusional or are trying to sell you something. (or a combination of all three)

So what do I consider as hard data?  Well unemployment numbers, actual reported trade figures, stock market levels and economic indicators like the Baltic Dry Index (BDI) are what I consider good sources of hard data. Of course even hard data can be tweaked or massaged so I am not suggesting that any of the aforementioned data sets are flawless, but they certainly give us a better view of what is actually happening than surveys or the ramblings of financial journalists.

Let’s start off with one fact we know is true; the global financial crisis has resulted in the loss of millions of jobs  across the G-20 nations.  In addition the number of hours worked per person has also decreased in most of these countries and thus millions of people have seen their earnings reduced.

So we know that there is less money flowing into the hands of consumers. This can be also be confirmed by looking at official retail sales figures or checking the annual reports of the major retailers.

We also know that billions of dollars have been wiped off the value of assets across the globe ranging from property in Ireland to the stocks portfolios of many thousands of Australians. Some companies and individuals have taken investment losses of 20% or much more and this will hit government tax revenues.

All in all, a lot of people and companies have less money at their disposal now than they did before the GFC struck. Household finances need to be adjusted and corporate balance sheets repaired. These are facts.

To save us all from a global depression so terrible that nobody could actually describe it in concrete terms, the G-20 leaders decided to toss money around to shore up demand for goods and services. Hundreds of billions of dollars have been used to spur demand for everything from highways to cars and from home insulation to iPod docking stations, all because the global economy was apparently about to collapse.

What amuses me the most about the G-20 spending frenzy is that the leaders don’t appear to see the irony in warning us one day that the planet is about to boil because of human industrial activity and then the next, pledging to spend billions to…well…support the growth human industrial activity.

It is also curious that only a small fraction of the billions spent by G-20 governments have any environmental or save the planet value.  Additionally, if they truly believed their own rants about global warming then shouldn’t they have allowed the global economy contract? (because we know that would really cut CO2 emissions, it already has)

Okay enough with thinking logically, let’s get back to reality. Thanks to all the economic stimulus money being tossed around the global economy seems to have bottomed out for now and several major economies appear to be getting back to GDP growth again. Japan is back into the black, the U.S. economy seems to be getting off the floor,  Chinese economic activity is still surging ahead (for now anyway) and in Australia it was a case of  “no worries mate”. (maybe)

Clearly economic activity is on the rise. One of the more reliable economic indicators around – the Baltic Dry Index, has now moved past the 4000 and is reaching towards levels last seen just before the Lehman Brothers debacle.  So if we put aside our opinions and just stck to the facts, it is quite obvious that the global economy is no longer heading backwards and appears to be crawling out of a hole…for now.

But that is all the hard data suggests, and it is hardly surprising that we are seeing economic activity nudging upwards since the massive amounts of money being pumped into the  various G-20 economics is meant to do just that. Was it really possible for this not to happen?

In truth, all that the G-20 leaders and central bankers have done is react to a situation they never saw coming in the first place. It is a bit like looking in your rear vision mirror and spotting Godzilla chasing your car. Needless to say you would most likely hit the accelerator and go as fast as you could, sure you may lose control of the vehicle and crash, but at the time it seemed like the only thing to do.

Of course Godzilla may have actually been intending to run harmlessly past, or perhaps if you drove your car into the bushes and hid the big fella would have been unable to find you. But because you never tried those things you simply assume as you speed towards an uncertain future, that you have made the right decision.

We are now in the economic equivalent of that Godzilla evading car, let’s just hope we don’t crash! (and are we sure we even really saw Godzilla in the first place?)

Economic cycles are one of the characteristics of a free market capitalist system. Most of us in our own little way help to create them. Our desire to be  be financially secure and enjoy life help create economic bubbles.  Our fear when things turn pear shaped help cause recessions and send stock markets plunging. Few of us are innocent spectators at the global economic circus, most of us are actually quite willing to join in or even be one of the star performers if we got half the chance!

There are many downsides to the free market system, but I don’t see a lot of people heading to the hills to grow their own vegetables and live in shelters made from animal skins. Actually the traffic has been overwhelmingly in the other direction for many thousands of years.

Therefore I am not going to factor into my view of where we are in this mess any Kumbaya-like notions that significant changes will be made to the capitalist system.

At the moment there are no clear and certain trends. Yes the BDI is up, but oil demand remains stubbornly low. Gold prices are rising strong in U.S. dollars, but gold demand for jewellery in Asia has fallen significantly. Every time I think the glass is half full I look again, and it appears half empty. We are still in what I described a while back as the Economic Twilight Zone.

So my big picture view of the current economic situation is that the global economy has simply bounced off a cyclical bottom aided by the economic stimulus actions taken by G-20 nations.  However this is not to say that the global economy would have not bottomed out on it’s own anyway, nor does any data illustrate to me that what the G-20 nations have done will be successful over the longer term.

But what do you think?

Finally let me leave you with some words of wisdom(?) from Donald Rumsfeld. (former U.S. Secretary of Defense) I think it sort of sums up well what we know about the state of the global economy at the moment.

“There are known knowns. These are things we know that we know. There are known unknowns. That is to say, there are things that we know we don’t know. But there are also unknown unknowns. There are things we don’t know we don’t know.

Clear as mud!

4 responses so far ↓

  • 1 Len D // Nov 22, 2009 at 7:38 am

    The overall view of the economy is pretty messy. I guess there will be winners and losers out of this turmoil but I think we need to be careful in assuming Australia will be one of the winners.

  • 2 Greg Atkinson // Nov 24, 2009 at 6:50 pm

    Len I do worry that Australia is counting it’s economic chickens before the eggs have hatched so to say. I am back in Sydney at the moment and one thing that I have noticed is there seems to be a lot of vacant commercial property while at the same time there are clearly plenty of additional commercial/industrial property developments in the pipeline. I wonder if “over confidence” is starting to cloud people’s judgement?

  • 3 TG // Dec 2, 2009 at 12:03 am

    Well written Greg. Spot on too I believe. Too much “noise” in the facts we see and hear of late.

    With all the Sovereign debt piling up we still have a long, long way to go before we can all breath easy.

    The psychological aspect of this GFC has been fascinating to watch. Just like the ETS and Climate Change drama of late. Well orchestrated Media campaigns, some “interesting” statistics, a few “know it all” Academics, a survey or two and a plethora of baseless rhetoric, if quoted (generally out of context) and repeated often enough, will eventually convince the Sheeple of the truth!

  • 4 Greg Atkinson // Dec 2, 2009 at 10:11 am

    TG thanks for the feedback. I have found it hard to write about the economy etc lately because months ago I said we were in the The Economic Twilight Zone and that is where we remain today. I really don’t have all that much to add.

    Of course some well known financial commentators try to pretend they know what is happening but the truth is we will all have to just wait and see how events unfold.

    I also said a while back that the Australia stock market would have a hard time getting past the 4800 – 5000 level and this is what we have seen now for months. Despite all the RBA hype about the economy, ASX stocks are still trading at recession like levels. (remember we were up around 6500 in 2007!) This GFC is proving hard to shake off.

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