This is one of those rare days when there are so many interesting stories in the financial world that we can hardly decide which one to write about. But we'll exercise some editorial discretion and pick the ones that are most likely to make a difference to your share market returns in 2013. But just for good measure, we promise to eat a copy of the US Constitution if Australia passes a stupid law restricting free speech. More on that in one of today's other articles.
Assuming the world does not destroy itself on December 21st (the whole Mayan calendar thing), then the biggest influence on Aussie share prices next year will probably be China's economy. Will its new leaders unleash massive stimulus? Or will China rebalance its growth model and set wallets free in a great leap towards consumer credit and consumption?
The Chinese macro data over the weekend was all promising. Industrial output was up. So were retail sales. In fact both reached eight month highs. But yesterday we learned that imports in November - including imports of Australian commodities - were flat. Exports were up 2.9%. But compared to the 11.6% rise in October, the numbers aren't great.
China's trade surplus fell 38% month over month, from $32 billion to $19.6 billion. That's an impressive decline. 'Looking ahead,' says HSBCs Ma Xiaoping, presumably with a straight face, 'China may have to rely more on investment to stimulate the economy if the US situation worsens.'
As if China hasn't be relying on fixed asset investment to drive GDP growth!
But it's not just the 'US situation' China (and Australia) have to worry about. It's the whole damn planet. Growth in all the mature industrial economies isn't just slowing. It's going in reverse. Reverse growth is otherwise known as contraction, or more conventionally, recession.
Japan's economy has entered its fifth recession in 15 years, according to data released by the government yesterday. 'Gross domestic product shrank an annualized 3.5 per cent in the three months through September, the Cabinet Office's second estimate showed in Tokyo today, matching a preliminary reading. The government revised the previous quarter to a 0.1 per cent contraction, matching the textbook definition of a recession,' reports the Financial Times.
Did Ben Bernanke get this memo? Bernanke is following the Japanese playbook when it comes to avoiding depression. Maybe the idea is to remain permanently in recession, but avoiding a full blown deflationary depression. There will be more clarity on his confused mental state when the Federal Reserve meets tomorrow to discuss how to extend Operation Twist into next year.
On that note, the Fed is on the verge of some serious money printing, which ought to be good for precious and platinum group metals, by our reckoning. Recall that in Operation Twist, the Fed sold around US$45 billion a month in short-term securities and used the proceeds to purchase long-term government bonds. The idea was to push down long-term interest rates by restructuring the Fed's bond portfolio. No new money was needed.
But the Fed is all out of short-term bonds to sell. If it wants to continue to, in Kevin Rudd's old tortured phrase, 'put maximum downward pressure on interest rates,' it will have to find the money somewhere else. Luckily, the Fed is in possession of a technology called a printing press, or the digital equivalent thereof. It can 'find' money any time it likes by flicking the 'on' switch.
Keep in mind that the Fed is already buying about $40 billion a month in bonds issued by the failing housing agencies, Fannie Mae and Freddie Mac. When you add that $40 billion to another $45 billion in long-term asset purchases, you get $85 billion in monthly money/printing balance sheet expansion. Unless the money-centre banks in New York and London are actively colluding to suppress the gold price, you'd expect it to go higher as the supply of US dollars grows faster than the supply of gold.
And of course by pursuing the deliberate devaluation of the US dollar, the Fed forces everyone else to devalue too. They will do it in Japan. They will do it in Europe. They will do it everywhere, with the exception of Australia.
By the way, none of this knee-capping of the dollar is designed to improve US export competitiveness. That is what the US government unofficially says. But don't be fooled. The US dollar is weak because US rates have to be kept low to prevent an even larger housing collapse. And now, with annual deficits over $1 trillion, the US government simply can't afford higher borrowing costs. None of this has anything to do with boosting US competitiveness. It's all about the debt.
All these inflationary monetary policies are designed to compensate for a distinct lack of real growth - a common situation when a debt bubble bursts. But if China is making and selling fewer things because America, Europe, and Japan are all effectively in recession (or headed there soon enough), that cannot be good news for companies like BHP Billiton and Rio Tinto. And if it's bad news for them, it's bad news for the Australian share market, right?
That's the bearish case for 2013 in a nutshell. But let's not forget about the banks. Since the RBA remains neutral in the currency wars, the Aussie dollar has become a magnet for global capital. Some of that capital must be finding its way into the bank stocks. And the banks stocks make up an even larger percentage of the ASX/200 than the miners.
What deflationary depression and recession takes away from the miners, RBA neutrality in the currency wars gives to the banks. Does it equal out? We'll consult our market technician and get back to you tomorrow.
for The Daily Reckoning Australia
From the Archives...
Will Lower Interest Rates Impact Australia in 2013?
7-12-2012 - Greg Canavan
Is the Australian Economy in Recession?
6-12-2012 - Greg Canavan
US Debt: Why America May Need a Bail Out by the IMF
5-12-2012 - Bill Bonner
If Profits are Falling Why are Stocks Rising?
4-12-2012 - Dan Denning
The Frontier Way
3-12-2012 - Dan Denning
- Recessions Can be Short, Medium, Long, Mild, Medium or Severe
- As the World Economy Turns
- What If the World Economy Goes Into a Long, Slow Slump
- When Emerging Markets Shape the Developed World
- China’s “Rare Earths” Exports Collapse, World Prices Soar
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.