Shareswatch Australia

As we approach the end of another year we should not be surprised by the economic turmoil in Europe, the ailing U.S. economy or the rumblings of a major slowdown in the Chinese property market. The signs that all was not well with the global economy have been raised on this humble site going back more than a year. Simply put, borrowing vast sums of money and splashing it around did not fix the global economic imbalances highlighted by the market meltdown in 2008.

Prices for hard commodities such as copper, iron ore & coal have risen strongly over the past decade and are now trading well above their long term historical averages.  This in turn drove the ASX All Ordinaries Index to a bull market high in 2007 and has helped put some support under the market ever since.  But is it realistic to expect high commodities prices will keep propping up the Australian stock market?

Back in April last year I suggested that the Australian economy was not quite as robust as most market commentators appeared to think and that it was quite possible for economic conditions to deteriorate quite markedly over the next few years.  So now one year later after I wrote about a possible economic slump in Australia let’s have a look at how events have unfolded since then.

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.

After some promising gains in the first part of 2010 the Australian stock market closed down today to finish the year basically unchanged. In plain English the share market essentially did nothing in 2010 and so if the Australian economy is really booming, then this is not being reflected in the performance of the ASX All Ordinaries or S&P/ASX 200.

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.

Back in the 2008/2009 when home prices in parts of Europe and the United States were tumbling there were plenty of “experts” saying Australian house prices would also come crashing down. But alas the residential property market remained fairly robust during the global financial crisis and the experts who predicted a crash in property prices were wrong.

Another year, another decade and time once again to look at our shares portfolio and perhaps review our positions. Although the global financial crisis has been tough for investors the fact is that the Australian stock market did bounce back in 2009 and if history is any guide then we are likely to see it finish higher in 2010.

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.

The tentative signs of a global recovery (albeit a weak one) are becoming stronger each day and people who predicted a global depression have faded from view.  So the Australian economy is poised for growth again and everything is back on track right? Well not quite.

Despite howls of  “it’s a sucker’s rally” from some market commentators, Australian stocks have gradually pushed up since bottoming out earlier in the year. While nobody can say for sure what will happen over the next few months a look at the gold price and some stock market charts can at least tell us what is happening now.

It has been hard to write much about the Japanese economy of late simply because the economic data appeared to change every day. But over the last few weeks things do seem to have stabilised and both the government and the private sector in Japan generally agree that the economy probably hit the bottom earlier this year.

The debate about where Australian home prices are heading appears to be getting more intense these days. Commentators who have been predicting home prices will crash have seized on falls seen so far as proof they are right, whereas those who believe prices will not crash pounce on the same data and says it supports their view. Confusing isn’t it?

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.