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Economic mixed signals, the ASX All Ords and gold prices.

November 11th, 2009 · Greg Atkinson · 22 Comments

Despite how convincing market experts appear on television or how cleverly they put pen to paper, the truth is that nobody knows for sure how the global economy will perform next year. For every positive sign or trend there is a worrying one, and despite the Dow Jones having some strong days recently the fact is the U.S. economy is still in bad shape.

In the world’s second biggest economy, Japan, a fragile economic recovery seems to be taking hold but the auto-makers still have excess capacity, deflation looms and exports volumes are still soft especially to the U.S. Many Japanese companies also believe it will be hard for commodities prices to creep back up in 2010 as they anticipate that demand from China will be lower. This appears to differ from the RBA’s view and raises doubts about a commodities lead recovery in Australia in 2010.

At present the Chinese economy seems to be ticking along nicely but let’s not forget this is due to a massive government economic stimulus package and that Chinese exports are way below levels seen before global financial crisis struck. Can China really keep achieving economic growth of around 8% over the next few years without demand for it’s exports picking up strongly? Maybe. maybe not..who really knows?

The general consensus view from the IMF, OECD and G-20 is that the global economy is now slowly healing. If we look at oil prices, the Baltic Dry Index (BDI) and various stock markets around the world it is pretty clear that these all bottomed out in late 2008 or early 2009. But just because oil prices for example have risen off their lows does not mean the world has entered a growth cycle so we need to be wary of reading too much into trends.

To illustrate the point I am trying to make let’s have a look at the Australian stock market and oil & gas prices.

ASX All Ordinaries vs AMEX Oil & Gas 4 year chart. (Nov 09)


Over the last 4 years the ASX All Ords (XAO) and the AMEX Oil & Gas Index have followed a pretty similar path.  This is because in simple terms if the world economy is doing well then the demand for oil and gas will be up and this will drive prices for these commodities higher. If commodity prices are heading higher then our stocks market will generally get a boost since mining and financial stocks dominate both the All Ords and ASX 200 indices.

What the chart above shows is that from March 2009 both the All Ords and oil & gas prices have trended upwards but simply looking at the trend alone is misleading. What we need to factor in is that markets tend to fall too low when a major shock hits the financial system. In other words, gas and oil prices were driven to their lows not by fundamentals alone but by fear and once this fear subsides, they will creep back up somewhere near where the fundamentals suggest they should be.

So the trend upwards in oil & gas prices and the Australia stock market is at this stage simply a reversal of a correction that went to far. It might appear that the ASX All Ords is doing, well but if you stand back and look at the 4 year view all we are really seeing are stocks creeping back up to levels seen in late 2006. Yes the trend is positive, but I would not take it as a sign that we have returned to a growth cycle just yet.

What we can say with some certainty however is that the Australian stock market is unlikely to retest the March lows this year and may never get near those levels again until the next big financial crisis comes around. (yes there will be another one)

Despite a few down days over the last week or so, the ASX All Ordinaries has been on the up now for most of 2009 and seems determined to reach 5000 at some point as the chart below suggests.

ASX All Ordinaries Index 2 years chart. (Nov 09)


However as I have been saying for months now, the stock market will most probably hit 5000 (maybe even this year) but it will be tough going from that point upwards as there are still plenty of reasons to be cautious about the Australian economy.

Finally let me look at my old friend gold since I appear to be one of the few people around who is not a gold bull and bothers to look at gold prices in Australian dollar (AUD) terms. Yes gold might be a good way to get rid of some of your U.S. dollar reserves but for Australian investors let’s keep it simple and look at gold in AUD terms.

Gold price per ounce in Australian Dollars over 1 year. (Nov 09)


In one year gold in Australian dollar terms has risen by 6.57%, but remember you earn no income from holding physical gold or owning gold via an Exchange Trade Fund. (ETF) This means gold has underperformed Australian stocks over the same period and has even underperformed the Shareswatch Random Portfolio by a long margin.

But almost every day we see in Australian newspapers and on financial websites stories about how gold has hit a new high price which is true enough if you look at gold only in USD terms. But why on earth would any Australian investor simply look at gold in U.S. dollar terms during a period when the USD is losing value?

Remember for gold to continue heading up in USD then new buyers need to keep entering the gold market and the United States dollar has to keep sliding backwards.  Many investors obviously see this situation continuing but I don’t, and believe when the music stops playing a lot of people won’t be able to find a chair.

22 responses so far ↓

  • 1 Gary // Nov 13, 2009 at 6:05 pm

    Seems the stock market is picking up on those mixed signals. Not much direction either or up or down recently, the market just seems to be drifting.

  • 2 Ned S // Nov 14, 2009 at 7:23 am

    Roubini tells the story pretty nicely here I’d say? :

  • 3 Greg Atkinson // Nov 14, 2009 at 8:18 am

    Ned I reckon Nouriel Roubini might be onto something 🙂 The USD will find a bottom eventually and it looks like it might even be in a bottoming phase now. When it does bottom out and then creep back up there will be a rush for the exists. All those investors who have been riding the dollar down will then rush for the exits and some will not get out in time.

    This is why I have been ranting on about gold because the price has mainly been going up in USD primarily due to the US dollar losing value. The supply and demand fundamentals behind gold are not the major reason prices in USD have headed up. If you don’t get that point and invest in gold in AUD then I reckon you are asking for trouble.

    By the way the gold bulls won’t tell you this, but gold demand for jewellery is way down because of the GFC and also because prices are getting too high. Believe it or not, people can live without gold rings!

  • 4 Ned S // Nov 14, 2009 at 9:31 am

    This mob reckons “Since the inception of the program in January 2009, the Fed has spent $1.006 trillion in the agency MBS market, or 80.53 percent of the allocated $1.25 trillion, which is scheduled to run out in March 2010.” – That’s the “next spring” Roubini mentions I guess?
    From Roubini’s article it sounds like there was 1.8 t being poured in altogether. (With the difference being made up of Treasuries and agency debt?) But who knows; Is there any reason that can’t be increased? I seem to recall Bernanke having the attitude We’ll stimulate until it works.
    But Yes, I’m finding it pretty hard to see it not all resulting in another crash in asset prices when the party does stop. As it will as Roubini explains.

  • 5 Ned S // Nov 14, 2009 at 12:48 pm

    March 2010 is when the Fed is supposed to be finished buying 1.25 t in MBS. They are over 80% done I read. And Roubini says “its $1,800bn purchase plan will be over by next spring.”
    I suppose they could decide to stimulate some more? But either way, Roubini makes a heck of a convincing argument for expecting it to be ugly for asset prices when it blows up.

  • 6 Greg Atkinson // Nov 17, 2009 at 6:35 pm

    Ned I have sort of written off the U.S economy as a dead weight for a few years. I just hope the U.S. doesn’t implode and take us with it 🙂 Perhaps if the U.S. economy does not pick up soon maybe President Obama might get only one term?

  • 7 Ned S // Nov 17, 2009 at 7:14 pm

    It’ll take them a good while to rebuild I guess Greg? (Bernanke has even said if it is too quick it won’t be sustainable.)
    Obama – There is still lots of stimulus to be rolled out I gather – 38% of “it” (the 787 odd billion ???) comes in 2010 and another 22% in 2011 then winding down in 2012 I’ve read – Which is an important year for him. So it just could look pretty good – The full effects being felt at the same time as he puts on his fiscal conservative face? I wouldn’t write him off.

  • 8 Senator13 // Nov 18, 2009 at 6:32 am

    Looks like more reports of mixed signals coming out from the RBA:

    First they saw us rocketing along and them boosting interest rates now they seem to be back peddling just a little bit. Maybe they are trying to hedge their bets.

    Wonder if Ken Henery still thinks that him and Glen are of “one voice”..?

  • 9 Greg Atkinson // Nov 18, 2009 at 7:21 am

    Goodness me, the RBA has finally realised that the strong Australian dollar might be an issue for exporters…welcome to the world Glenn. This sounds like 2008 all over again, back then they were fighting inflation and raising rates at the wrong time and it seems they have done it again!

    Of course our economy will slip back when the stimulus is removed, because we did little to position our economy for life after the GFC. Let’s see how those school halls help the economy if commodities exports are weak next year.

  • 10 Ned S // Nov 18, 2009 at 10:29 am

    I found the following entitled “Nouriel Roubini’s 2009 Stock Market Calls Track Record” interesting :

    And Roubini might just be one of the better economists out there?

  • 11 Greg Atkinson // Nov 18, 2009 at 11:48 am

    Ned it is scary isn’t it? As I have mentioned before, it must be good to be an economist because you can be wrong most of them time and still hold down your job. The problem with the “media” economists is they have to say something dramatic to get coverage but the media does not appear yo hold them to account for past calls.

    I don’t give much credit to people who make predictions about the market and never disclose any trades etc. I prefer watching people like Buffet who are businessman and investors, rather than people who simply sit on the sidelines.

  • 12 Ned S // Nov 18, 2009 at 4:33 pm

    There are just so many issues Greg. And at the end of the day it is about finding a relatively peaceful life – To me anyway.
    How can economists come up with answers in a world where government and central banks see themselves as the enemies of the business cycle – Leastways when it ain’t in growth? Yet what they do causes it to crash harder in the future. Or wipes out savers who they reckon they want. (Might be time to come clean on that one – Do they want us in debt or saving – Or how much of each and when and why???)
    The problems are political – Which means they are people problems – people who want to live above their means. With politicians wanting to pander to that.
    It’s all gotten pretty weird.
    Yeh Buffett has a good handle on the big picture. As well as lots of the detail. And will do real well. Providing his premise that the US remains top dog hangs together – Which I’d expect to be good for 20 to 30 years?

  • 13 Ned S // Nov 20, 2009 at 9:52 am

    RBA not quite sure if they’ll pop interests rates up next month. Maybe they read Roubini’s thoughts on the carry trade and suspect there could be something in it too – I can just imagine Glenn Stevens sitting there saying Damn, outsmarted by the Yank banks again!? 🙂

  • 14 Greg Atkinson // Nov 21, 2009 at 6:46 pm

    Ned I wonder if economists will look back at the GFC and reflect on what part they played in creating this mess? Many of them seem focused on achieving GDP growth and fighting inflation at almost any cost. Maybe time for central banks and governments to have some broader economic objectives?

  • 15 Ned S // Nov 22, 2009 at 5:23 am

    The business cycle seems to be a fairly widely accepted concept in economics Greg? But our smarty economists reckoned they could defeat it. Got away with it after the dot com thing. Might get away with it again. But the cost of doing so has increased. A pessimist might be tempted to suspect they are creating an increasingly unstable system?

  • 16 Greg Atkinson // Jan 1, 2010 at 11:14 am

    Ned I think George Soros has a pretty good view about market bubbles and economic cycles etc. He reckons bubbles are a part of an economic cycle and I agree with him. The scary part is he reckons if you don’t allow bubbles to deflate when they should, then it just makes things worse further down the track. I wonder what that says about the Australian economy?

    By the way, I can’t get a post published over at the other site..seems I have been black listed 🙂

  • 17 Ned S // Jan 1, 2010 at 12:54 pm

    G’day Greg – I guess the question is what does “worse” translate into? A big bust? Or high inflation?? Or both???
    Although it would seem the general feeling in Oz is one of If happy days aren’t actually here again, they are right over the next hill and stretch on until maybe 2050 minimum! (Things can change quickly though of course.)
    Australia’s long term saving grace would definitely seem to be Asia though – Even if Asia should experience a few blips along the way. So let’s hope your lot and the Chinese know what they are doing.
    If I was smart (and I’m not) I’d steer clear of the other site for a while – A rabid PI hater has turned up there just as I’m in the process of putting together some PI plans. 🙂 But good luck getting your post through and have a top year!

  • 18 Greg Atkinson // Jan 1, 2010 at 8:20 pm

    Ned I would guess anything is possible if you keep artificially keeping a bubble inflated.

    When I look at the growth of China I recall all the hype about the “Asian Tiger” economies in the 1990’s. One day they were on an seemingly unstoppable path to world economic dominate and the next they hit a wall. I sense China will also hit a wall soon, there is only so far you can go building stuff and sucking in foreign investment. If and when that happens, Australia’s economic bubble may finally pop.

    As for the other site, well I have no choice but to stay clear for now. The discussion does tend to get heated over there for some reason, some people don’t seem to be able to detect when others are just stirring the pot as they say 😉

  • 19 Ned S // Jan 1, 2010 at 9:39 pm

    G’day mate – I’ll bear your warning in mind re “up north” – Much appreciated!
    As to the other site; Yes the thought crossed my mind many, many months ago that me mate has a big spoon!
    Course I’m not sinless in that regard either –
    Life has to have its odd care free and naughty moments surely?
    Ta and cheers … Ned.

  • 20 Greg Atkinson // Jan 2, 2010 at 10:01 am

    Nothing wrong with a big spoon Ned! As for China I am starting to get a touch nervous. I wonder how sure anyone is that they are actually achieving the growth they say there? Is China’s economy growing too fast too soon? Could the Chinese economy be the next bubble?

  • 21 Ned S // Jan 3, 2010 at 10:20 am

    I’m all at sea regarding just about everything at the moment Greg. This article by Satyajit Das is interesting (as always) though:

  • 22 Greg Atkinson // Jan 6, 2010 at 8:53 pm

    Ned I have no doubt that China will face some major hurdles over the next decade. There is only so far you can get by relying on cheap labour and turning a blind eye to copyrights before you wish you moved up the value chain.

    As I have said a few times, the rise of China reminds me of the Asian “Tiger” economies of the 1990’s. They too were supposedly on an unstoppable path upwards.

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