Australia’s ASX/200 is back above 6,100. Despite the correction, it is the best of times. Local investors focused on Glenn Steven’s remarks yesterday that, “High world commodity prices remain an important source of stimulus to Australia’s national income and spending.” You can say that again, guv.
Stevens’ remarks show that Australia and the US may now find themselves at a point of economic divergence. In the US, the bearded Ben Bernanke denied the credit junkies on Wall Street a rate-cutting fix earlier this week. Already worried about the dollar’s six-year slide on global currency markets, Bernanke fears inflation and an even more pronounced decline in the greenback. American stocks again rallied in a strange and somewhat suspicious late afternoon trading pattern. But is the American market headed toward the worst of times?
Stevens, meanwhile, also fears inflation. But the inflation he fears in Australia is largely driven by tight labour markets, business spending on capacity expansion, and government spending on infrastructure (and lots of other election year goodies.). True, high borrowing levels by the consumer are also driving inflationary fears. But when it comes right down to it, Australia’s economy is clearly hitched to the China wagon, and that seems to be good news for the earnings potential of local shares, both financials and miners alike. Stevens is worried about sustainable growth, Bernanke about hyper-inflation and/or a credit market meltdown.
Dan Denning
The Daily Reckoning Australia
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About the Author
Dan Denning is the author of 2005's best-selling The Bull Hunter (John Wiley & Sons). He began his financial publishing career in 1997 and has covered financial markets form Baltimore, Paris, London and, beginning in 2005 Melbourne. He’s the editor of The Daily Reckoning Australia and the Publisher of Port Phillip Publishing.
Comment by Rowan on 10 August 2007:
Dan,
In your previous article "China Warns America it May Sell Treasury Bonds", you articlulated that the US economy is hitched to the Chinese Wagon. The above article also suggests Australia is hitch to that same wagon. Unfortunately, when the train wreck occurs (Chinese or US Market), Australia will derail with them. Australia is a one horse trick ie. Commodities. Whe fears sets into the US Consumer which equates to 30% of the world market, the last thing I would want to be in is commodities or the ASX. In fact when this credit expansion comes tumbling down, Zimbabwe may the best place to be as I can hardly see it's economy collapsing any further tic
Comment by Brian Wheatley on 17 September 2007:
It does not really matter which "market" you are in the train wreck will skittle every thing.
I believe that you really need to own stocks that have intrinsic value within a market.
Steel will be needed for many years, and there is a very long term need for electricity. So Uranium, BHP perhaps, Silex, for enrichment.
I would counsel against buying into consumer stocks and also banks. Get your mortgage paid off as well.