As I write today the Australian stock market has slumped around -4% so far after the Dow Jones fell -4.3% and markets in Europe also ended sharply lower. As per usual, many finance journalists are hurriedly pumping out scary stories and dramatic headlines to gain readers attention so it’s time to grab a cup of coffee, relax and focus on the facts.
Firstly here is a good reason not to pay too much attention to ramblings of finance journalists in the mainstream media. For example back on June 3rd Michael Pascoe in the Sydney Morning Herald wrote:
“Whether US housing starts are down, will the US have a double dip, what’s happening to US industrial production – who here really cares? Despite the vastly disproportionate coverage afforded such detail about the United States, it’s not our economy and doesn’t directly effect us anymore.
It’s Australia’s good fortune to be in the strongly growing part of the global two-speed economy – the part whose growth is made a little easier if the competition for resources is a little less fierce. Just don’t try to tell the stock market that when it’s having a bad day.”
So in the world of Michael Pascoe it appears we don’t need to worry about what the Australian stock market is doing because it just follows the U.S. market blindly and has little impact on our economy.
So when people look at their superannuation fund and see it not doing that well he must think that this has little impact on consumer spending? He must also think Australian listed companies don’t worry what their share price is doing and that this doesn’t affect business decisions or strategic planning?
Michaal Pascoe is so wrong that he has almost done a complete loop and is in danger of actually being right.
But there is more. He also makes this interesting comment in the same article:
“China bears who haven’t been keeping up with the changes underway there will carry on about an alleged dependence on American consumption patterns, but that’s been exaggerated and increasingly lacks truth. Most of China’s exports now go to other emerging nations.”
As with most journalists, providing hard data or links to the data is not Michael Pascoe’s strong point so below I have included some actual data about China’s exports because his observation about Chinese exports doesn’t add up.
|Table 8: China’s Top Export Destinations, 2010 ($ billion)
Source: PRC General Administration of Customs, China’s Customs Statistics
|Rank||Country/region||Volume||% change over 2009|
For all the data see: US-China Trade Statistics and China’s World Trade Statistics
I mention the above to highlight that what often appears in the mainstream media regarding the stock and financial markets should be marked as works of fiction.
Today the stock market is quite clearly in rout mode. Billions will be wiped off the value of the market and this will have an impact on the economy. The media will bombard us with gloom and doom headlines so we need to keep our heads.
Even if stocks rally next week the damage has already been done because consumer and business confidence will take a hit. Investors are now focused on the pessimistic outlook for Europe and the United States which at some point will also get investors looking at the economic numbers from China again.
As regular readers of this blog will know I have frequently said “keep your eye on the BDI” because I believe the Baltic Dry Index is worth watching. Around 90% or more of global trade is carried by ships so if shipping companies are finding it tough going then that suggests to me that the global economy is struggling.
Baltic Dry Index (BDI – 1 Year Chart
The BDI chart above shows pretty clearly how shipping rates for dry bulk goods have remained stuck in a rut after post the GFC relief rally. The fact that the BDI hit a low earlier this year sent us a clear warning that stocks might tumble.
In other words the BDI had a strong relief rally post the GFC but then fell back as reality set in that the global economy was not doing that great after all. The BDI has also been dragged down by an oversupply of ships but in general terms, I think it is telling us what people are now realising – it isn’t business as usual.
So it appears to me the stock markets around the world are now going through a similar phase to the BDI. I suspect stocks will find a bottom soon but at this stage it’s too early to say at what level that would be. My stab in the dark guesstimate suggests we won’t see the ASX All Ords close below 4000 in the short term but at the moment that looks like a fairly silly statement.
The truth is that none of us know how this will all play out so I am fumbling around trying to make sense of the chaos the best I can so feel free to leave a comment and tell me what you think.
Greg Atkinson is the editor of Shareswatch Australia, the Managing Director of Ohori Capital and a Director of Eco Marine Power. He is originally from Australia but currently resides in Japan. He can be followed on twitter via @GregAtkinson_jp