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The stampede towards global economic pessimism

September 13th, 2011 · Greg Atkinson · 28 Comments

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.

Even the Reserve Bank of Australia sounds cautious recently which says something since they appear to specialise in being so far behind the curve, that they almost appear to be clairvoyant.

But let’s get back to the OECD who recently provided an update on the state of the global economy in which they observed;

Economic recovery appears to have come close to a halt in the major industrialised economies, with falling household and business confidence affecting both world trade and employment, according to new analysis from the OECD. Growth remains strong in most emerging economies, albeit at a more moderate pace.

“Growth is turning out to be much slower than we thought three months ago, and the risk of hitting patches of negative growth going forward has gone up,” OECD Chief Economist Pier Carlo Padoan said during a presentation of the OECD’s latest Interim Economic Assessment.

Source: Economic growth perspectives weakening as recovery slows, OECD says

So three months ago the OECD had a different view hey? Well let’s go back three or four months and see what I was saying on this humble blog.

I don’t have an army of economists or researchers at my disposal so to paraphrase Dr. Emmett Brown Doc from Back to the Future; please excuse the crudity of my analysis.

In April when the OECD were still somewhat upbeat I wrote:

“Over the last few years I have stressed that the actions of the G20 nations in response to the global financial crisis amounted to little more than going on a spending spree to try and prop up demand. This of course works for a while, but it is a dangerous strategy because it relies on consumers and businesses picking up the slack once government economic stimulus spending stops.

We are now at the point where most, if not all, of the G20 nations are starting to either ease back on government spending or make fairly drastic budget cuts in order to get debt levels under control. The big problem is that it doesn’t look like the average consumer is overly keen to shop until they drop and companies are finding business conditions are still challenging.”

Source: The Global Economy, Baltic Dry Index, Gold and China

Again in July I was once again raising a red flag when I stated:

“…….Purchasing Manufacturing Indexes (PMI’s) in China, India and South Korea are currently trending downwards – this may be just a short term development but it’s hard to see what would reverse this trend at the moment.

Extra demand from the U.S or Europe seems unlikely and demand from Japan is also likely to be subdued for quite some time. Perhaps consumers in these nations will suddenly go on a spending spree but I would put that in the unlikely category at this stage.”

Source: Recession watch and the Reserve Bank of Australia awakens

I don’t blame the OECD for being reluctant to state the obvious because they appeared pretty keen with the idea that throwing a lot of money around (much of it borrowed) was a good way to get over a crisis which was caused largely because there was too much debt around.

Interesting logic isn’t it? . It’s a bit like a plan to shed some weight by not exercising and eating only junk food.

Back in Australia the tricks to balance the budget (or try to balance the budget) are already being prepared and it appears the Gillard Government is getting ready to raid the Future Fund to help make the books look better.

The sad reality is that the Government is going to take money out of a fund set aside to fund pensions because it wasted millions of dollars on for example pink batts, outdoor learning areas and building projects that were wasteful.

But wait, there’s more! Just as the global economic clouds are gathering the Government is going to hold an enquiry into the media and push through a carbon tax that is unpopular and unnecessary.

A media enquiry, that’s a good way to achieve nothing. But why not go for another Ruddesque 2020 Summit I ask? At least when Rudd did something that was absolutely pointless he did it with some style.

It’s no wonder that the number of economic pessimists is growing. Over the last few months there has almost been a stampede of economists, finance journalists and others as they rush from the “it’s all okay we are with China” team to the “it isn’t looking so good” camp.

There are also not too many (any?) economists talking about interest rate rises as being a sure thing this year anymore either.

My view as people probably know by now, is that rates were raised too far by the RBA and should have already been cut by now. But never fear, the RBA will keep battling inflation even as small businesses close, workers are laid off and manufacturing sector ends up so small that we will have to import all mining equipment, not just most of it.

But in the midst of this gloom my contrarian spirit is beginning to stir. The global economy is certainly not doing well, but maybe there is a little too much pessimism around now?

The Baltic Dry Index (BDI) for example is the highest it has been all year, oil prices look like they might creep up again and maybe even gold could be losing it’s shine.

I am not quite ready to be running against the pessimistic stampede yet, but I will have my running shoes close by and be looking for signs that the time has arrived to be more optimistic about the outlook for the global economy.

Greg Atkinson is the editor of Shareswatch Australia and the Managing Director of Ohori Capital He is originally from Australia but currently resides in Japan. He can be followed on twitter via @GregAtkinson_jp


28 responses so far ↓

  • 1 Biker // Sep 14, 2011 at 9:34 am

    Greg: “I will have my running shoes close by…”

    It would be too unkind to ask what brand of runners bears wear! πŸ˜‰

    Biker
    Getting our kicks on R66…

  • 2 Greg Atkinson // Sep 14, 2011 at 5:50 pm

    Well today I felt like running with the pessimists. (shoes or no shoes) Portugal, Ireland, Italy, Greece, Spain (the so called PIIGS)..and now some French banks have been downgraded.

    Where will this all end?

  • 3 Stillgotshoeson // Sep 14, 2011 at 8:11 pm

    I think RBA rates are about spot on.. The economy needed cooling and this has occured. People are still spending, just being much more cautious about where, how much and how funded. Less desire to use credit to fund lifestyle, savings are up.. these are all good things. The RBA rate will have zero relevance to the mortgage rate in the short to medium term. High rates indicate a strong and healthy economy, our rates are not high, yes higher than other countries but not high by historical terms in Australia.

    Falling rates indicate an economy in trouble, we have had a lot of “retail” open of the preceding boom years, more than our small population can sustain.. there are only so many big screen tv’s a household needs/wants.. everyone that wants and can afford one (or more) already has one (or more)

    RBA drops rate to Keens predicted 0% will still see mortgage rates at around 5%. Bank margins and shareholders still have to be appeased.

    The situation in Europe is getting worse daily, our banks still source a signifigant amount from overseas, these overseas borrowings will come at an increased cost, an increased cost that will be passed on. Take up of mortgages has “softened” however the banks still need to refinance current borrowings on their books. RBA may lower rate in the near future, don’t be too surprised to see rates charged by the banks stay fairly close to current levels and even increase in 2012.

    Where will this all end? When the markets are finally fed up with the magic tricks of governments pulling coloured ribbons from their sleeves and rabbits from hats and decide it is all ho hum, seen it before and walk away from the show. We are not there yet but getting closer. Australias status as the “lucky country” is about to be tested big time. I may appear to be pessimistic, however I am, and have always continue to be optimistic for Australias economic future.. (Carbon Dioxide tax dampens the optimism a little) Just a bout of excessive debt cleansing is going to occur first.

  • 4 Biker // Sep 14, 2011 at 11:41 pm

    Shoes: “I may appear to be pessimistic, however I am”

    Do you mean in respect to our dollar, Aussie banks, property, unemployment, consumer confidence, a technical recession, or China, Shoes?

    Or perhaps all of the above?

  • 5 Ned S // Sep 16, 2011 at 8:08 pm

    Well, even if Asia should continue to go well Biker, which I think is likely, we’ve also got to bear in mind that they can get minerals elsewhere – So our terms of trade aren’t going to stay up where they are long term I reckon?

  • 6 Stillgotshoeson // Sep 16, 2011 at 9:55 pm

    China are already looking to source resources from Africa and South America……….

  • 7 Biker // Sep 16, 2011 at 11:02 pm

    Flying over Alaska in a light plane recently, we saw the same extensive ferrous ranges Lang Hancock must have spotted in WA’s far north decades ago. There’s no shortage of iron ore in the world, but getting it mined and shipped presents some major issues.

    My wife’s granddad was a co-founder of Liberian Iron Ore.
    The company’s operation was plagued by talk of nationalisation and, despite its free port advantages, couldn’t compete with Australian extraction/shipping*. Interesting to see BHP looking at the area.

    Great that we all retain an optimistic outlook.
    I see DRUS is still pushing uranium hard. Extraordinary
    considering the fallout… .

    * Its shares fell from $19.00 to zero in the late seventies.

  • 8 Ned S // Sep 16, 2011 at 11:09 pm

    “the crudity of my analysis” – An unfortunate choice of words there perhaps Greg? (Sort of reminds me of the chick I went to school with whose English Master chided her over writing an essay about ‘arsnicking’ the animals. :)) … Yeah, yeah, I know what you mean – But given how languages change over time … ??? πŸ˜€

  • 9 Greg Atkinson // Sep 17, 2011 at 8:17 am

    China doesn’t need to look too far for another major source of commodities..Mongolia is right on their doorstep so to speak.

    Back in 2009 I wrote:

    “….I wonder if many Australian financial journalists and market commentators realise that the world is a fairly big place and that Australia is not the only nation that digs stuff out of the ground. In addition many seem blissfully unaware that some nations realise that they rely on Australia too much for everything from LNG to Uranium and are actively seeking alternative sources of supply or ways to reduce demand.”

    Source: Are we facing a peak demand scenario for Australian coal and iron ore?

    It seems to me that the cunning economic plan in Australia relies on a continuing commodities boom during which our major customer’s will keep paying high prices.

  • 10 Biker // Sep 17, 2011 at 11:28 am

    “It seems to me that the cunning economic plan in Australia relies on a continuing commodities boom during which our major customers will keep paying high prices.”

    Hey, wait-a-bit, Greg… What about the NBN?!

    Strange that China hasn’t clued in about their massive Mongolian reserves yet. Imagine shipping Aussie ore all the way to China.
    Dummies!~ πŸ˜€

  • 11 Ned S // Sep 17, 2011 at 2:15 pm

    Just on the current state of things in Europe:

    http://www.ctv.ca/generic/generated/static/business/article2169565.html

    Additionally, I read a humorous comment by a Greek recently (where the gov has introduced a $4 billion property tax):

    “How many times do they want us to pay for our homes and our shops?” (Though I doubt the gentleman asking the question actually meant it to be funny? Poor bugger!)

  • 12 Leigh // Sep 17, 2011 at 3:07 pm

    Greg,

    “Where will it all end.”
    It will end, when a country, bank or anything else that goes broke is allowed to go broke. If Greece defaulted when the problem first appeared we might at least be part way over it by now. If the banks that hold billions worth of Greek debt loose out, bad luck for them and their shareholders; that was their investment decision. The tax payers should not be expected to prop up a failing banks because of bad management decisions and if they are propped up by Government funds those funds will have to be borrowed and the cycle starts again.
    What a system! If I default on my mortgage,the Government says, “we can’t have that”, and they take a wad of cash from a bottom draw to help me out. So am I likely to be more cautious or go out and borrow some more?

  • 13 Leigh // Sep 17, 2011 at 3:20 pm

    one more thing,
    I agree with stillgotshoeson, that we might not see rates move much despite a rate drop by the RBA. I have just locked in a 6.99% for five years. Regardless of whether it is a good rate or not, it is one I know I can handle for that time. My reasoning is that we should all be looking at what we can do within our means and don’t worry about the crazy world outside the door.

    Get rich quick people often get broke just as quick. Spare a thought for all those who took out margin loans in 2007.

  • 14 Greg Atkinson // Sep 18, 2011 at 10:33 am

    Here are come interesting comments bu Michael Stutchbury that appeared online in The Australian recently:

    The key point is that the jobless rate is not falling below 5 per cent, as forecast by Wayne Swan’s budget in May, let alone to just above 4 per cent as the Reserve Bank then tipped for 2013.

    Yet the Reserve Bank is not cutting its 4.75 per cent cash rate because it is more focused on putting a lid on a “significant pick-up in labour costs growth”, generated in part by the economy’s weak productivity performance.

    The ABS this week modestly lowered the inflation heat with a new seasonal adjustment for the consumer price index. But it is not enough to change the basic picture that underlying inflation has bottomed and is headed up.

    By not reacting to the weaker-than-forecast job market, the central bank is putting the pressure on businesses, particularly in manufacturing exposed to the high dollar, to squeeze out productivity gains, to let go of workers “hoarded” during the financial crisis and to stand up to union wage demands encouraged by Julia Gillard’s industrial relations regime.

    Source: Labour market policy failure will hurt the weakest parts of the economy

    I guess in all fairness the RBA is probably stuck between a rock and a hard place hey?

  • 15 Biker // Sep 18, 2011 at 11:35 am

    Ah, that ‘dual economy’ again, hey?

    “I guess in all fairness the RBA is probably stuck between a rock and a hard place hey?”

    In fairness to the world’s leading economists, I recall citing
    Sylvia Nasar’s wonderful history of Economics, ‘Grand Pursuit’ in respect to the inability of the very _best_ economic minds of the last century being able to apply their learning to predict, or personally $urvive, developing crises. Most lost the major part of their wealth when a crisis hit.

    It’s foolish to even attempt to predict what will happen in Australia in the next decade. Our situation is just far too complex. Individuals can only attempt to make decisions based on _current_ trends, to protect themselves. One rider to this position is that if an individual preserves a wide range of choices, with flexibility to change strategies when it suits,
    s/he’s probably going to $urvive… even thrive… .

    Has Leigh made the best decision in locking in 6.99% for five years? Yes, if s/he’s happy with that decision.

    Biker,
    Mesa Verde

  • 16 Stillgotshoeson // Sep 18, 2011 at 8:14 pm

    Biker // Sep 18, 2011 at 11:35 am

    Individuals can only attempt to make decisions based on _current_ trends

    an individual preserves a wide range of choices, with flexibility to change strategies when it suits,
    s/he’s probably going to $urvive… even thrive… .

    So if one was to stay out of 1 area of investment, based on current trends, and redirects their investment strategy elsewhere to take advantage of said current trends but yet remain flexible to then drop those current strategies in favour of the previous investment class that was not then attractive as an investment class but has become once again is actually doing what could well be a profitable strategy.. maybe even an extremely profitable strategy? My goodness, whom ever ould of thought such a possibility existed…..

    @Leigh Picking the top and bottom of mortgage rates is the same as trying to pick the top and bottom of property, share and precious metals prices, it can not be done.. hindsight tells us.
    Getting a rate that makes you more comfortable in your budget for the next 5 years… nothing wrong with that, rates may come down a little, however over 5 years I can not see that occurring. Fluctuations in rates over 5 years will most likely see you no worse of and quite possibly even better off over the 5 years than not locking in.

  • 17 Biker // Sep 19, 2011 at 9:16 am

    Shoes: “So if one was to stay out of 1 area of investment, based on current trends, and redirects their investment strategy elsewhere to take advantage of said current trends but yet remain flexible to then drop those current strategies in favour of the previous investment class that was not then attractive as an investment class but has become once again is actually doing what could well be a profitable strategy.. maybe even an extremely profitable strategy?”

    My goodness! What a long sentence… . Calm down son. Don’t take my generalised statement so personally.

    I _can_ see how you’ve misinterpreted my general comments as a criticism of you for declining to buy property. In fact, my point was that even the very best economic minds utterly screw up at times. I certainly don’t include _you_ in that group… .

    Biker, Bluff, Utah

  • 18 Greg Atkinson // Sep 20, 2011 at 8:57 am

    Biker if nobody tried to forecast what will happen over the next 10 years the the economy would grind to a halt.

    The fact that companies and individuals do actually make long term plans means that investors can look at these and try to get a feel for what sectors/areas might be worth investing in.

    That doesn’t mean money has to stay locked into a particular stock or asset class. As events unfold we need to be ready to deal with the new ‘reality’ and adjust our investment plan the best we can.

  • 19 Biker // Sep 21, 2011 at 8:05 am

    Yer right mate, but there’s some really w-i-l-d forecasts out there. It’s important to record these and review them from time-to-time. πŸ˜‰

    Scaremongers need to be called to account! πŸ˜€

    Biker,
    Bryce Canyon, Utah

  • 20 Ned S // Sep 21, 2011 at 9:37 am

    Well I remember thinking that something seemed a bit strange with the price of gold after it had gone from about USD 250 per oz to maybe USD 600. And USD 2K would have seemed quite laughable. (To me.) But it really wasn’t that long ago.

    I’m still not sure I can my head around the USD 6K prediction I was squabbling with a bloke over back then though. But in this weird world, one actually can’t write such forecasts off altogether – I think? (Haven’t checked his stuff for ages but it wouldn’t surprise me at all if he’s increased his forecast since.)

    Best of luck to all those who are trying to plan 10 years ahead at the moment. We’ll either be lucky or wrong I suspect? πŸ™‚

  • 21 GoWest // Sep 22, 2011 at 1:36 pm

    After being away for a months holiday it is reassuring that nothing has changed, except I love that “at home with julia” (last nights angry kevin dumping on jules and bill the dog actions were psychic it seems). Anyway commentators are already predicting that (now the banks have protected themselves) the Greek default is imminent. The latest temporary layoff plan for the Greek public service is evidence that the free money is off the table. Europe is still desperate to protect the euro and the Americans are still working to keep the dollar down to boost their economy, so the trade wars continue. Our RBA seems to be relying on this to drive our dollar back down, so it does not have to save swanny’s govt AGAIN.

    Observation1: Aussie bauxite shipped to Iceland for treatment with cheap geothermal power. Example of how jobs are created in the carbon tax economy? Yes and no – the locals are up in arms about the smell – yes lovely green energy stinks Flannery! I kept thinking I was back near the nickel smelter. Cant wait to see geo-thermal energy piped to a city near you — ;)LOL

    Observation2: Conrad Black’s interview after leaving jail. Read it if you can find it. Private companies for him from now on it seems. Increasingly the way forward for those with capital?

  • 22 Greg Atkinson // Sep 22, 2011 at 5:00 pm

    I wonder when Greece and other highly indebted nations will start to sell of their gold like South Korea did when they got into strife? Seems to me that now would be a good time to make some space in the vault and pay off the national credit card.

  • 23 Ned S // Sep 22, 2011 at 5:45 pm

    The Greeks reckoned that as the Germans pinched their gold in WWII, Germany should now bail Greece out don’t they Greg? (And yes, I do believe they were serious.)

  • 24 Ned S // Sep 22, 2011 at 10:52 pm

    I’m off to bed – Now might be a handy time for the “Plunge Protection Team” to prove it isn’t an urban myth?

  • 25 Biker // Sep 23, 2011 at 2:06 am

    Things are lookin’ shaky in the US today (Thursday 10:11 am)…

    Your Friday might be very interesting. Good luck! πŸ˜‰

    Biker,
    LV Airport

  • 26 Plornt // Dec 19, 2011 at 8:50 pm

    “I agree with stillgotshoeson, that we might not see rates move much despite a rate drop by the RBA. I have just locked in a 6.99% for five years.”

    Wow Leigh that was a great lock. I’ve only been casually / part time investing / trading since 2008 so I wasn’t sure how long I needed to lock my funds away for, or what mix I needed to have, as I am levered at times and need access to cash to keep tabs on margin requirements. Most of my term deposits are locked at 6-6.5% though, but only on 6-9 month locks.

  • 27 Ned S // Dec 19, 2011 at 10:52 pm

    I agree with Greg that term deposits very well may be the best place for Mrs. S’ little boy to be – For the next two years maybe. Though pretty much certainly for the next year anyway – As I’m not much good at gambling. πŸ™‚

  • 28 Greg Atkinson // Dec 20, 2011 at 8:44 am

    Despite all the gloom and my pessimistic tone I do feel my contrarian urges stirring. The markets seem to be pricing in a 2008-2009 like implosion which I think is not going to happen.

    Much of the panic is being caused by the mainstream media playing catch-up and so called media “market experts” rushing to cover their backs after making overly optimistic forecasts at the start of the year.

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