After a period of remarkable stability where the All Ordinaries ranged between 4300 and 5000 points for almost two years, we are now decisively into a bear market after the biggest global sell down since 2009.
Resource stocks and financials led the decline as Wall Street tumbled 5% overnight. Indeed, Apple is now within reach of becoming the world’s most valuable company as its market capitalisation only fell 3.8% to $US350 billion last night, whilst Texan oil giant Exxon Mobil lost 5% to be worth $US359 billion.
The All Ords peaked at 5069.5 on April 11 and was at 4717 as recently as July 8. This morning it plunged 4.3% to a two-year low of 4170 at lunch time.
The latest wobbles have been triggered by governments in the major democracies slashing spending and raising taxes in an attempt to contain ballooning government debt after the global financial crisis frightened bond holders and exposed years of unsustainable budgeting.
Australia’s three great advantages in this situation are our relatively high official interest, the best ever terms of trade and gross federal government debt of only $195 billion.
Here is where official interest rates currently sit in the world’s 15 largest discrete monetary policy zones:
- Japan: 0.1%
- US: 0.25%
- UK: 0.5%
- Canada: 1%
- Euro zone: 1.25%
- Switzerland: 1.25%
- South Korea 3.25%
- China: 3.5% (up from low of 2.5% in November 2009)
- Mexico: 4.5%
- Australia: 4.75%
- Turkey; 6.25%
- Indonesia 6.75%
- India: 8%
- Russia: 8.5% (after five increases this year)
- Brazil: 12.5% (8 increases this year after inflation hit a five year high)
Unlike most other countries, Australia has heaps of flexibility and all this bleating about the Reserve Bank at the moment ignores the fact that official interest rates were above 7% for more than half of 2008.
While Kevin Rudd was obsessed with fiscal stimulus during the GFC, a more effective tool is interest rates given Australians have debts of more than $1 trillion secured against their homes. Official interest rates were slashed from 7.25% in September 2008 to a low of 3% in April 2009, after the All Ords hit a low of 3091 points in March 2009.
Exactly the same sort of stimulus is open to the RBA now, and such a move would also provide enormous relief to those businesses which are being hammered by the high Australian dollar.
The biggest risk for Australia right now is a collapse in commodity prices after the RBA’s basket of commodities soared to be 20% above the pre-GFC peak. But that will only happen if economic activity in China crashes and the Chinese Communist Party is the world’s most liquid institution with $US1.3 trillion of US government bonds and overall foreign reserves of $US3.2 billion.
The Australian dollar generally moves with commodity prices, but also gets hit when investors become risk averse and retreat to holding US dollars or gold. This explains the US6c drop to US1.04 over the past week, including a US2c drop today.
The soaring Australian dollar has protected motorists from petrol prices topping $2 a litre and also triggered record offshore travel by Australians. It also makes us look bigger on the world stage. At $US1.10, the Australian economy was suddenly only 10 times smaller than the US, as opposed to 30 times back at the time of the Sydney Olympics when the local currency hit US49c.
Indeed, rather than Australians being unable to afford a stay in London, suddenly Eton was cheaper than Australia’s elite schools and Australian GDP in 2011 was headed for a result which was two-thirds the size of Britain’s economy even though the mother country has three times as many people.
While GDP measured in US dollars is the most common yardstick of economic strength, gross sovereign debt is increasingly on the radar of investors. Here is how some of the big boys rank on federal government debt:
- US: $14.3 trillion (with political approval to go to $US16 trillion)
- Japan: $US10 trillion
- Germany: $US2.9 trillion
- Italy: $US2.5 trillion
- UK: $US1.7 trillion
- Greece: $US450 billion
Contrast those figures with a country like Norway which has negligible debt and the world’s third-biggest sovereign wealth fund worth $US750 billion, courtesy of its budget surpluses which peaked at almost 30% of GDP as it saved North Sea oil profits.
The figures can be misleading because sovereign debt should consolidate all tiers of government. For instance, Chinese local governments are estimated to have $US2 trillion in debt. This is very different to Victoria’s 79 local councils which have assets of more than $60 billion, combined debts of less than $500 million and fully-funded public service super.
The biggest problem over the past few years has been banks and governments in western democracies borrowing far too much money so that private citizens and businesses could consume and invest beyond their means.
The expectations of their citizens will have to be scaled back, which is an enormous challenge given the demands of ageing baby boomers.
It won’t be easy, but the Greeks will have to get used to lower pensions and wealthy Americans and companies will ultimately have to pay higher rates of tax.
Will someone please tell the Republicans.
Thanx for this, which I found a most useful macro summary of Australia’s position in comparison with the big economies.
Another economic optimist. Generally try and avoid them when the markets crashing, but GG anyways.
Howards cash is gone this time, Labor is highly in debt and promised a 2012 surplus.
The lefts approach to getting out of debt troubles seems to be “spend more”. Hows that working out for Greece and the U.S?
Australia got through GFC Part 1 through spending of Billions saved up by the Howard Government, this time round the coffers are bare and someone has to feel the pain(and you can bet it’ll be Aussie taxpayers).
All this wonderful advice from a bloke who lost his house to a Shock Jock and is probably worth the price of a bottle top.
Mayne, when it comes to business and economic issues you know about as much Lassie.
Australians can only hope that your analysis and prediction proves to be correct, Stephen. A more pessimistic analysis might look beyond market economics and consider possible behavioural outcomes: what happens when the herd panics?
Most of us take for granted the relative stability and orderliness of group behaviour but in doing so underestimate its fragility. In the western world we have had only occasional glimpses of what can happen when a community experiences an extreme “loss of good authority”. One of those examples occurred in 1992 in Los Angeles when a jury acquitted four white police officers accused of beating up of black motorist Rodney King (the truth of video could not be denied). Thousands of people rioted, 53 people died and property damages were in excess of $1 billion.
More recently we have observed uprisings in various middle eastern nations…..again, in response to a perceived loss of good authority. Most analysts attribute the influence of improved communications through social networking websites as the most significant catalyst. In so doing they underestimate the impact of the price of wheat. Nothing sharpens the focus of human endeavour and strategy like an empty stomach…..especially a stomach craving cheap carbohydrate, when it is not available.
The loss of good authority in the governance of the world’s economy probably started in the US……a country whose culture enshrines “independence” at the expense of “interdependence”. The Washington consensus, or what we call “rational economics” in Australia, took hold like an economic religion. Keynes was ridiculed. Schools of economics preaching anything other than the “free market” mantra found themselves irrelevant. Too much government intervention in markets gave way to too little, especially as it turned out, in the financial markets which, left untended and inadequately supervised by government, found new ways to leverage debt. This leveraged debt started causing problems which required central governments to start printing money…..publicised as “monetary stimulus” after 2008, but probably occurring from as early as 1997 in less obvious ways and through creative accounting practices after September 11, 2001 (such as leaving the cost of military expenditure out of government current account figures because the US was on a “war footing”).
The world is now staring into the face of a possible depression with the potential to be much worse than that of the 1930’s. How so? There are already too many people in the world for the earth’s biomass to sustainably feed. Billions are already hungry…..and that’s with the world’s economy fully functioning. Imagine what could happen if the human group loses confidence in the very financial system that it depends upon to supply food? During the 60’s, 70’s and 80’s the world had huge stockpiles of food….”grain mountains” as they were called. In 2011 the world has less than 15 days of soybeans, 20 days of corn, 27 days of rice and approximately 127 days of wheat (source USDA).
Put more simply, the world’s unsustainably high population is being fed (already indequately) by a financial system that seems very badly damaged as the result of governments inadequately managing that system. Worse yet is the fact that there is no system of global government with the authority to tackle the global problem (as we have already seen with global warming and Copenhagen etc).
So Stephen, Australians will be hoping that you are correct in asserting that we are “well placed to ride out the storm”. Certainly we should have enough food for ourselves…..but what about the rest of the world?
I wonder how many storm troopers Julia Gillard will need on Christmas Island by 2015?