Shareswatch Australia

A sure sign that an economic trend has been established is when the OECD finally jumps on the trend bandwagon and recently the OECD has joined the group of recently converted economic pessimists. Gone are the days when big borrowing, big spending governments would save the day – the theme of the day now is hang onto your hats because we might be in for a bumpy ride.

Over the last few months media commentary regarding the Australian economy has turned decidedly gloomy. The wonders of the mining boom are now being questioned,  the U.S. and European economies matter again and people are starting to wake up to the reality that an economic strategy that basically relies on China dragging Australia along for the ride might not be that clever.

Often lost in the debate about house and home prices in Australia is the discussion regarding if our national obsession with housing is good or bad for the overall economy.  Instead of rejoicing that residential real estate prices in Australia rose during the global financial crisis, maybe we should be looking a little closer at why prices are rising to see what problems this might be causing.

As the year has progressed I have noticed that my view of the Australian stock market and economy has become increasingly at odds with most of the mainstream market commentators back in Australia.  Whereas they see reasons to be optimistic and feel the economy is robust, I feel the situation is quite different and believe the Australian economy is dangerously unbalanced and possibly primed for a nasty correction.

Over the last few weeks most of the financial media have once again managed to draw the wrong conclusions on a range of issues from Australian dollar to the strength of the Australian economy.  Talk of the so called two speed economy seems to be back in vogue whereas I believe we should be focused on and worried by, the unbalanced nature of the Australian economy.

Stock markets around the world have had a very volatile run over the last few weeks with everything from debt levels in Europe to housing statistics in the U.S.  giving scaring investors. But during times of market volatility it is important to try and spot the longer term market trends and not get carried away by sensational headlines or daily market swings.

Now that the major stock markets around the world are falling the Australian media have become obsessed with the concept of a “two speed economy”. I am not sure who first started using this term, maybe it was the gurus at the Treasury or the Reserve Bank, but in my view there is no such thing as a two speed economy. The situation we have now is that the economy has simply been mismanaged.

Some time ago I wrote that we would better served by having a Hobbit look after the Australian economy than the RBA, Treasury & Government and recent events have made this idea look particularly attractive. For at present we have the RBA raising rates, the Government spending and the Treasury appears to be unsure what is happening.

One year has now passed since the failure of Lehman Brothers sent global financial markets plunging and only recently has it felt that the global economy may finally be entering a period of recovery. But will conditions be better or worse in 12 months? Will house prices be higher or lower and where will Australian stocks be in September 2010?

The world’s major stock markets have all enjoyed fairly strong rallies over the last week or so and in Australian the ASX All Ordinaries has run up around 30% since March. But there is a sense of unease amongst investors because there are still plenty of economic indicators that suggest the global economy still faces challenges.  That is because we have entered what I call the Economic Twilight Zone!

One of the most discussed economic topics at the moment in Australia is regarding whether real estate prices are about to plunge across the nation or if Australian residential property will generally be spared from the savage price falls seen in the U.S. and the U.K.  Rather than take sides in this debate, I will merely outline some of the arguments being tossed around in newspapers, online forums and blogs etc. and see how well they hold up to scrutiny.

There is no doubt that the Japanese economy is suffering as a result of the global economic crisis. However much of the reporting in the western media is at best poor journalism and at worst, simply wrong.  So rather than focus on sensational attention grabbing headlines, let’s look at some forecasts and facts.

Although Kevin Rudd stated some weeks ago that Australia would not slide into a recession it seems another one of his forecasts has exposed just what an economic dunce he is. Possibly only Wayne Swan can make worse assessments regarding the state of the Australian economy with Glen “I raised rates too far” Stevens (the Reserve Bank Governor) finishing of a trio of people who are best ignored. As I wrote a while back…we would be better served by getting a hobbit and wizard into the government economic team as soon as possible. (see The RBA,Swan and a Hobbit)