Both the ASX All Ordinaries and S&P/ASX 200 have been basically moving sideways now since September and although the market may seem to be drifting, it is actually reflecting fairly accurately the state of the Australian economy. For despite what some finance journalists seem to believe, the Australian economy will not be able to surge ahead simply because the Chinese are stimulating their domestic economy.
Over the past year or so I have tried to highlight that the global economy consists of more than just China and thus for Australia to ride another commodities boom, we need all our major trading partners to be growing their economies as well. I know this is hardly news, but if you read some of the commentary in the Australian business media you would think our economy only relied on how the Chinese economy was tracking.
My view of how the global economy is faring will be different from someone based in Melbourne for example. The main reasons I view things differently are largely because I am located in Japan, most of my business news comes via non-Australian sources and I focus more on how the Asian economies are doing as opposed to mainly monitoring the Australian domestic economy.
Therefore when I try to assess how global economic events will impact the Australian economy I am quite often not aligned with mainstream thinking. For example I said earlier in the year that the RBA was misreading the tea leaves and would raise rates too early, that the Austrlaian economy would struggle in 2010 and that the stock market would bounce back but find it difficult to rally much past 5000.
While some market commentators seem to think the worst is over for the Australian economy I am more cautious because I simply don’t see economic activity in Asia surging ahead. Yes the worst of the economic slump is probably behind the region, but the good times have certainly not returned as yet.
At the moment the stock market agrees with me, for despite all the bullish comments from the RBA, some business leaders and many market commentators stocks are stuck in a holding pattern. This means investors still remain cautious and are not that optimistic about 2010.
In addition if we look at oil prices we can see they are also stuck in a rut at around $70 USD a barrel and the Baltic Dry Index (BDI) has failed to pass 5000 and recover to levels seen before the Lehman Brothers fiasco. Yes it is trending upwards, but it has not exactly staged a rapid recovery.
Baltic Dry Index (BDI) 3 year chart
The BDI is one of the economic indicators I watch closely because it is a fairly accurate gauge of global trade. (see also: The All Ordinaries, the Baltic Dry Index and other charts to watch ) It can however be skewed somewhat if there is an oversupply of ships and apparently this situation is the reason it has failed to rally strongly this year.
From what I have been reading as some old “rust bucket” vessels are scapped the current overcapacity in the global bulk carrier shipping fleet will be reduced and as a result the BDI should recover in 2010…well that’s the theory anyway.
But what worries me is that despite strong growth in China the BDI remains flat, Australian commodities exports are not surging ahead and all that appears to have happened is that global economy has bounced off a cyclical multi-year low.
I am not expecting the global economic situation to slide backwards in any significant way, but is the Australian economy (and people) really prepared for a challenging 2010?
My late year tip for investors is to “keep an eye on the BDI”. If the Baltic Dry Index does not show signs of life within the first few months of 2010 then personally I would expect 2010 to be tough going for the global economy.
Just to make things more complicated we have our beloved leaders and bureaucrats gathered in Copenhagen to discuss how they can concentrate more power in their hands. The Australian delegation led by Kevin “my carbon footprint is bigger than yours” Rudd is one of the largest and thus all of us will need to switch off out lights for the next few weeks just to make up for how much CO2 they have helped release into the atmosphere.
Nothing quite makes as powerful statement about global warming than flying people all over the globe. Well done Kev07, may your jet’s vapour trail be a sign to all the climate change “deniers” that you mean business!
The Copenhagen Circus will result in one of those vague statements where everyone will agree to say how serious a risk climate change is but will be light on details. In typical United Nations fashion the Copenhagen climate change conference will be a massive talkfest, cost a fortune, provide good photo opportunities for world leaders but will fail to solve problems.
Australia’s great idea of burying CO2 underground (and hoping it goes away) also seems to be on the nose. The Copenhagen crowd are not that keen on Carbon sequestration and I don’t blame them. It is unproven technology and is akin to sweeping dirt under the doormat.
Finally let me just say that you know you live in interesting times when a man who has done nothing significant to make the world more peaceful wins a peace price. If President Obama can win the Nobel Peace Prize while ramping up a war in Afghanistan then it is not beyond belief that our own Wayne “the inflation genie killer” Swan could get the nod for the prize in economics next year.
Go for it Wayne, bring home the prize for Australia! You have done just as little for the economy as Obama has done for world peace, so by that measure you are a winner!