Interest rates in Australia and America are headed in opposite directions. The Fed could cut twice by Christmas. The Reserve Bank may raise twice by Christmas.
What’s that under the Christmas tree we see? It’s parity.
In fact, on this side of the planet, you begin to wonder if the economy hasn’t reached its absolute peak. The dollar is at a 23-year high. And it will be summer soon, meaning we can start working on our base tan here at the Old Hat Factory. Is this as good as it gets?
“Australia is riding the wave of the most propitious world economic conditions in half a century, with jobs and business investment booming, personal wealth at record levels, tax coffers overflowing and the global and domestic crises that dominated so many elections from the 1970s seemingly quite distant,” according to Steve Burrell in the Sydney Morning Herald.
It does make you wonder, though. Let’s say we reach parity. Let’s say someone, anyone, wins the Federal election, and spends around AU$34 billion. Oil prices rise. Food prices rise. Employment remains tight and the economy runs at full capacity. Where does the Australian stock market go from there?
Your guess is as good as ours. All we have here is our knowledge of history and market cycles. We seem to be at the apogee of a great growth cycle. But if you look around in the two main engines of that cycle—China and the US—you begin to see evidence that the cycle is at its limit. A great contraction is in order. Or even a crash.
“Crash is coming, warns top investor,” write Jason Dowling and Peter Weekes in the Age. The gentlemen have spoken with Leo de Bever, the chief investment officer of the Victorian Funds Management corporation. He thinks that when things can’t get any better, they don’t.
“The man responsible for investing AU$41 billion of the State's money has warned mum-and-dad investors to prepare for a massive sharemarket crash. He says a dramatic downturn is inevitable as the rapid rate of investment is unsustainable, and the repercussions of the US$300 billion subprime lending crisis in the US are yet to be felt fully.”
Who are you tipping for the Melbourne Cup? Just wondering…
In geopolitical news, what the heck is going on in Pakistan? President Pervez Musharraf has declared a state of emergency and begun arresting political opponents. Pakistan has nuclear weapons.
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 Brian Wheatley on 5 November 2007:
It is not a case of IF but WHEN the correction comes.
With $400 Billion of sub-prime loans to be reset over the next 12 months, it isn't over by a long shot.
The only question for me is 'When do I sell?'
Comment by unbiased on 5 November 2007:
If there's more ups than downs and the ups are bigger than the downs, then why sell?
Buy and hold. When it corrects invest more.
The question is, why do you sell?
Comment by Pete on 7 November 2007:
What about mining stocks? Won't those resources still be in demand in a crash?
What are the most crash resistant stock types? Im guessing that can't be answered...
Damn you doom sayers, ha.
Comment by rutts on 19 October 2008:
Its always interesing to look back in hindsight. Well, the crash is here, as predicted by a handful....
Comment by Greg Atkinson on 20 October 2008:
Someone has been predicting a crash every year during the last bull market, eventually somebody has to be right. Of course few people put an actual number on the size of the crash and that gives them plenty of room to claim bonus points for any bear market hit. I believe over the last 20 years in Australia the market has taken hits greater than 20% around seven times, so if you predict the market will suffer a significant hit you will eventually be right!
I think many people thought (including me) that 2008 would be tough, but I do not recall many people putting in writing that we would see the All Ords slip under 4000.
And let's not forget, if the U.S had been a little more proactive the fallout from the subprime mess could have been less painful and we probably should not have seen the All Ords dip much below 5000. (which just happens to be around a 20% hit)
Anyway, let's just hope the next bull market is a real ripper!
Comment by Coffee Addict on 20 October 2008:
Greg. I like your Shareswatch Blog.
The conditions for a global crash were around for at least 18 months before the Bear Sterns spark finally ignited. Once Bear Sterns happened it was easy to realise that the contagion would spread to the equities markets within 12 months.
The "doomers" argue that high inflation is inevitable because of money printing and that that a return to a bull market cannot happen any time soon because of central banks fiscal meddling. They would argue that saying that the best thing to do is nothing and that recovery can coly happen after losses are liquidated and the market’s own equilibrium is found. This rhetoric appeals to my logic requires a supporting analysis goes beyond classical (and Austrian) economic analysis or indeed any other “taught” school of economic thought. I try to be eclectic but the thinking ( about how, when and why) a recovery may commence goes beyond historical models that were developed to explain a different array of circumstances.
Dan (I think) argues that the “new deal” of global government expenditure will be a fraud in many countries simply because there will be insufficient funds to pay for it. All debtor governments can do is print money, tax more or borrow from the future. An L curve rather than a recovery is predicted, I guess, because private funds which could have been injected into business and the market will instead be commandeered (somehow) by Government programs that socialise losses.
Sitting in Japan, you hope for the return of a Bull market. We all do. But what must happen first? Cheers
Comment by "disaster" "recovery" on 20 October 2008:
..on a recent trip to London the family and me passed by the Tate Modern to brush up on some culture, they have an excellent book shop as I discovered. By chance I picked up a prescient gem 'The Shock Doctrine' by Naomi Klein. Given the state the world and it's economy is in, this book is a vision into past, present and future manipulation of the 'system' that is supposedly collapsing around us.. Who and how can anyone save us from 'the powers that be' - good luck to the world and hello to the 'Chicago Boys'..
Comment by Greg Atkinson on 21 October 2008:
Coffee Addict, glad you liked the blog.
To be honest I am not sure what we need to see the markets recover, however I do have confidence that eventually we will see another bull market. Of course, the next bull market will end in another crash as we tend to forget all about market bubbles when things are good. (I recall for example that the U.S financial system was supposed to be "fixed" after the Savings and Loan Crisis)
My concern at the moment is that governments and central banks will go too far in trying to encourage growth and we will end up with a inflation problem a few years down the track, mind you that sounds less scary than deflation and falling asset prices. It is also interesting to remember how Japan was ridiculed when the government went on a spending spree to try and drag their economy out of the doldrums and and yet, that is what Australia is about to do with Rudd's 10 billion. Of course the money Australia is spending is a fraction of what the Japanese spent, but the end result will probably be the same, it will build a little confidence (and a few bridges etc) but in the end it will not be "the" fix.
One thing I am watching up here in Japan closely is the property market as momentum has slowed after some years of increasing land values in the major cities. Hopefully this is just a result of the global credit squeeze and when the credit markets thaw out some life will come back into the sector.
Finally I agree with your comment that the conditions for a crash were around for 18 months before Bear Stearns ran into trouble. If this market bubble was pricked in late 2006 or early 2007 we would probably have seen less pain and the global economy would be much healthier today.