If fear and greed are the dominant emotions in financial markets, hope reigns supreme in the field of politics.
Less than a week after Malcolm Turnbull’s coup to win the Prime Ministership, the country is infused with hope. That’s not terribly surprising given what we’ve just been through.
Tony Abbott’s conservative reign suddenly seems like something out of the Dark Ages. His economic ignorance was his downfall. For me, that will be forever captured in his response to a question about the risk to Australia from China’s economic slowdown. According to Abbott, the Grocery Code of Conduct would insulate us.
No wonder we’re hopeful. Turnbull at least recognises the economic challenges Australia faces. That’s why Abbott and Hockey, the Treasurer, are both gone. Australia’s former economic team was a disaster.
Still, Scott Morrison, the new Treasurer, has a massive task in front of him. The reality of the situation may be plain to see, but the politics of generating change and reform will be very difficult.
The other shining light in Turnbull’s cabinet restructure over the weekend is the handing over of defence responsibilities. Marise Payne is the first women to ever hold the job of defence minister. Good on her. I’m guilty of succumbing to hope and gender prejudice here, but I’d much rather a women in the defence portfolio than a conservative male.
Once the enormity of this political coup settles down though, the big question is, can Turnbull bring the electorate along with him. This will be the big challenge. Australia has had it good for a long time. The current house price boom in the face of economic decline just confirms for many people that there isn’t a problem.
Although RBA boss Glenn Stevens doesn’t seem to think we’re in such a bad state either. In his semi-annual testimony to the senate on Friday, he was relatively sanguine about the prospects of the Aussie economy.
Keep in mind one of his roles is that of confidence maintainer. When growth is fragile, you can’t have the boss of the RBA showing signs of concern. In Friday’s Q&A session following his speech, a school student asked how the economy will achieve 3% growth by 2017. Steven’s answer is, well, nothing more than hopeful.
‘Growth of over three per cent is wanting to be achieved by 2017, according to the overview of the RBA. But with fewer mining projects going ahead, falling commodity prices and deteriorating terms of trade, how do you predict this growth will be achieved?
‘Mr Stevens: It has to come from other parts of the economy than mining. The big question, of course, is as mining slows down does the non-mining pick up? It is picking up—it is picking up a little bit more slowly than I would have liked but it is, I think, picking up. We need that to keep happening and strengthen further over the next several years. I think there are reasonable grounds to think that it will do that, and our policy settings are certainly designed to accommodate that and encourage it. What are those non-mining things?
‘We build houses, we build things other than mines, consumers do okay and so on, and hopefully some of the export industries like tourism, education, business services, even some parts of manufacturing grow faster as they get help from the lower exchange rate. I think all those things are starting to happen. But of course it is just a forecast, so we have to wait and see how it turns out. I think there are reasonable prospects we will get those outcomes.’
As I pointed out in the monthly issue of Crisis & Opportunity last week, this pick up in the non-mining part of the economy is very fragile indeed. The message from the stock market is that these non-mining industries point to a slowdown ahead.
I showed two crucial charts that hold the key to the Aussie economy. If they break below their support levels, we’re staring at our first recession in nearly a quarter of a century.
That’s the other challenge that Turnbull faces. Bringing about tough reforms in a changing market environment will make things more difficult. Global markets are in the process of changing from a bullish to a bearish mood.
For example, the US Federal Reserve left interest rates on hold last week. The decision resulted in a sell-off. What used to be bullish news is now bearish.
I pointed out on Friday how trading volumes fell as the US market attempted to rally from its previous steep falls. That was a sign of unwillingness to buy at higher prices. And guess what? Volumes picked up again in Friday’s trading session in the US, as prices fell heavily. That points to a desire to sell the rallies, and a lack of buying enthusiasm.
This is how sentiment changes. It’s flowing through to the Aussie market this morning. At the open, the ASX 200 is down 100 points, or nearly 2%. The important support level of 5,000 points remains intact for now, but gravity seems to be getting the better of Aussie stocks.
Alas, there is no hope-fuelled Turnbull bounce this morning. Greed is giving way to fear amongst stock market investors. Is this the end of Australia’s economic golden run?
Editor, The Daily Reckoning