Unemployment Shocker

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The stock market is closed today in Australia for Good Friday. That will give us all weekend to digest Friday’s rather large rally on Wall Street. Stocks on the ASX were down for the week but finished strong on Thursday. Yet on Wall Street, it was all guns blazing with the Dow up 246 points and back up over 8,000 again.

So are good times here again? It depends on who you ask. For example, if you ask one of the newly unemployed in Australia, they will probably say that good times are definitely not here again. The ABS reported yesterday that the unemployment rate jumped from 5.2% to 5.7% in March.

That puts the jobless rate at the highest level since the 1991 recession. That’s not the scary thing, though. The scary thing is that it was also the largest monthly jump since 1991. Like a virus that jumps from one species to another, the financial crisis has jumped from Wall Street to Main Street. And if it’s as severe on Main Street now as it was on Wall Street late last year…ugh.

About the only intriguing news for investors in all this is that for now, the stock market seems to have decoupled from reality. In fact, if you missed it, the best performing sector over the last three-months on the Dow is-hang on to your hat-the non-ferrous metals index.

That is not a joke.

Gold miners come in second over the last three months. And that rally is underpinned by gold’s steady allure as the tonic for portfolios ailed by the volatility in markets. But non-ferrous metals? What’s going on there?

As we told readers yesterday in the weekly market review for Diggers and Drillers, there is a theme emerging-pushed by the World Bank with figures it released this week-that East Asia will be the world’s fastest growing region this year and the first to recover from the global slump. The World Bank argued in a report this week that Chinese stimulus had boosted consumption in its economy and would be a boon to exporters to the region.

It said that although manufacturing exports from the region fell by nearly 30% between January of 2008 and January 2009, the fiscal stimulus in China was already leading to more domestic lending and consumption growth. “In the process,” its report concludes, “China’s imports are also likely to rise at a faster pace than before, but most of the increase will probably be accounted for by raw materials, capital goods, services and increasingly sophisticated consumer products. Exporters of such goods are likely to benefit substantially.”

Australia is one such exporter of raw materials to China. And thus, if the World Banks’ predictions are to be believed, Australian stocks might be begin diverge from tracking the U.S. indexes as the East Asia affect gets priced into resource shares. But maybe that’s already happening!

As you can see from the chart above, copper, zinc, and nickel producers have all clubbed the All Ords over the past month. Kagara (ASX:KZL) is up 75% in the last four weeks. Copper producer Aditya Birla (ASX:ABY) is up an impressive 142%. And nickel producer Minara Resources Limited (ASX:MRE) is up nearly 80%. Even Alumina (ASX:AWC, but not pictured) is up nearly 50% in the last month, this while aluminium prices threaten to head lower.

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It’s a move only a trader could love. The stocks were so oversold that once all the selling was exhausted, there had to be a rebound. For nimble traders this is a lesson: you don’t have to like it on a fundamental basis, but you can always trade a bounce on assets that are deeply over sold.

But what about investors? As we mentioned yesterday, we seem to be at this interlude in the crisis. Perhaps it’s an intermission. The spectators are mingling in the lobby, munching on popcorn. But what will happen when the show starts again?

We reckon that act two is going to be a lot like act one, but worse. That puts your investment decisions today in an interesting context. In August of 2007, everyone knew that the trouble at two Bear Stearns hedge funds indicated a deeper rot in the financial system. But the path of least resistance was to do nothing and not consider what a real bear market in credit might do to the stock market and the economy.

Today, everyone admits that there will be trillions more in losses for banks. What no one knows is whether the huge declines on global stock markets in the last year reflect this reality, or whether there is still a considerable amount of self-deception among investors about stocks.

Our vote is for self-deception. It was always the default method for dealing with an unpleasant truth. And therefore we reckon that when stocks resume trading next week on the ASX, despite the looming threat to Main Street from rising unemployment (and thus, indirectly, to corporate earnings) stocks might rally a bit more anyway. But we’ll just have to wait and see, now won’t we?

Until then…

Dan Denning
for The Daily Reckoning Australia

Dan Denning
Dan Denning examines the geopolitical and economic events that can affect your investments domestically. He raises the questions you need to answer, in order to survive financially in these turbulent times.
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Comments

  1. Thanks for the holiday post Dan.

    People have been touting China as the global economy saviour since the GFC started. Even before that (especially in Australia).

    I am a doubter. I think for China to restructure it’s economy from an export model to an internal consumption model will take plenty of time. It takes time for people to change their spending habit of “save save save” to “spend spend spend”. Sure you can give them lots of credit facilities and low interest rates, but changing human behaviour takes time.

    That is why I am bearish on China in the short and medium term (1-5 years), but more bullish for the longer term. I think committing to a Chinese led recovery now is extremely risky.

    Besides, who believes what the IMF says?

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  2. Haven’t we been through all this story with China before via the Asian Tiger Economies. By now they were have supposed to taken over the world…but we all know what happened. I think you will find that China has many of the problems that caused the Asian Tigers so much pain all those years ago. Who can we count on next…Brazil, can you help us?

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  3. Haha yeah Greg, they’ll probably be looking to one of the BRIC countries at least (except for Russia, they’re not so popular with investors due to their nationalisation shenannigans)

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  4. Oh those naughty Russians :) What did they do? Surely they did not create a government enterprise with public money to compete with the private sector to say….rollout a broadband network? They could not be that crazy could they?

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  5. with all this cash been handed out by every government in the world will inflation and interest rates take off like they did in the 1970s or is deflation so bad in western countries that it does not matter can someone answer this basic question.

    Reply
  6. Of course the REAL unemployment rate is 60-70% when you count all the freeloaders

    Reply

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