October 2009

posted 26 October 2009

Over the coming decades a combination of the resources boom and the high $AUD are going to radically alter what Australians do for a job. Some industries will thrive, others will wither, but all will be affected. Are you ready?

Our unique position as a resource-rich nation situated in Asia means we are literally the first port of call for China, India and other assorted Asian nations to buy the steel, coal, and assorted minerals to build the layers of infrastructure they need to become developed economies. According to a recent speech by Phil Lowe, the assistant governor of the RBA, Australia’s terms of trade (the difference between our exports and imports) were 50% higher than the average of the 1980s and 90s. In fact the only time terms of trade were better was in the 50s. This extraordinary resource-led growth path has been a big reason behind the rise of the AUD and why it will stay high for a long time yet.

Treasury Secretary Ken Henry recently described Australia’s role in building Asia as introducing “massive structure change” as the big money, and consequently the jobs, begin drifting towards industries and business that benefit from the resources boom and the high AUD. This is bad news, however, if you work in an export-exposed or import-affected business like tourism, production of international goods and services, or local manufacturing competing with cheap imports, as these will contract.

As Ross Gittens pointed out in the Melbourne Age a resource-led economy with a high currency is also in danger of what’s called Dutch Disease. No it’s not something you pick up in Amsterdam. It’s a term first coined by my favourite read The Economist in the late 70s to describe the decline of the Dutch manufacturing sector after they found a massive natural gas field there in 1960. Basically what happened was the oil discovery led to a resources boom, a massive lift in exports and a concurrent appreciation in the national currency. When the oil sales started to slow down it was discovered that large tracts of the Dutch industrial base had been decimated due to its currency being high for so long and so many jobs moved from industry into resources. But fret not, as I don’t see this as a problem because, bar world wars, unforeseen economic catastrophes or visitation by alien life forms intent on our destruction, the resources boom will run for decades, which gives us enough time to build up huge amounts of national wealth and also to see the end coming and prepare ourselves accordingly.

For now, however, you would be wise to take a look around at the growing sectors and avoid the shrinking ones before it’s too late.

In other news… the decline of the USD as global reserve currency has gone up a notch with the announcement that a few of the Arab states along with France, China, Japan and Russia are planning, when dealing with oil, to replace USD with a basket of currencies that include a new, unified currency planned for the Gulf Co-operation Council nations. Stay tuned.

Posted October 19, 2009

After surging in recent months, business confidence, according to the latest NAB Business Confidence survey, has fallen slightly. But what is business confidence and how does it affect you?

Business confidence surveys look at how the people who run businesses feel about their future prospects. Because companies are often more in touch with consumer demand than the boffins at the Australian Bureau of Statistics, their feedback can shed some very useful light on overall levels of economic activity and the general health of the economy. This is particularly so when you combine them with other surveys on things like consumer confidence.

Now to the data…

The latest NAB Business Confidence survey reveals confidence was slightly down in September due to weaker business profits and sales. There are a number of reasons for this and most involve the tapering off of the impact of last year’s cash splash. What this means for the average person is that economic activity may be slowing, which means leaner employment prospects.

The survey also found that upward pressure on wages and prices (which is another way of describing inflation) remains low. Specifically price rises of things in retail shops have slowed to the lowest rate since 1997. In other words that little black dress you spied last week will remain at the same price for a while yet. Importantly, less inflationary pressures mean less upward pressure on interest rates, which of course means lower interest payments to the mortgage beast.

The survey also found the actual intention of business to employ people is growing, particularly if you live in Victoria and NSW. This is good news and supports the recent surprise employment and job ad figures that indicated unemployment may have peaked and won’t hit Treasury’s previous forecasts of 8.5 per cent.

Away from surveys, however, I still think the things set to shape our immediate economic future remain the rising Aussie dollar, the China rebound and the stimulus. The dollar has already started cutting our export income in the form of diminished company sales and profits and this affects all of us in one way or another through lower profits being shared out in the economy. The rising Aussie dollar is also crashing the China party, which has seen us literally taking delivery of tankers full of Renminbi in exchange for coal. Meanwhile the debate around winding back stimulus continues. There is increasing divergence between the views of the RBA which wants to wind back and Wayne Swan who is not so sure. It’s complex to be sure and to paraphrase Paul Keating it’s all about managing the tillers. Spend too much and risk an inflation blow-out, but spend too little and risk killing off the recovery. Making this call requires several tonnes of fully committed grey matter so I am happy to just watch it from the side lines.

In other news..as the saying goes there’s only one thing worse than banks making truck loads of cash and that’s banks loosing truck loads of cash. With that in mind the news out of the US is good. For the quarter just gone, Goldman Sachs made a startling profit of $3.2 billion (four times what it earned last year); struggling Citigroup made a surprising $101m (it lost $2.8 billion last year) and America’s second-biggest bank JPMorgan Chase made $3.59 billion. Oh well all’s well that ends well.

Posted October 12,2009

Glen Stevens either has good communications advisors or he is much more than just a numbers man. By latching the noun ‘emergency’ to the lowest cash rate in 49 years he has set himself up brilliantly for the inexorable round of rate rises that have just kicked off.

With improvement to national job ads, housing finance figures and retail sales it was not as if we didn’t see a rate rise coming. Add to that a world economy emerging from its inertia and surely unwinding the emergency settings is the best move. Isn’t it? Not according to a chorus of economists and industry leaders like the Australian Industry Group’s Heather Ridout who argue that we are not out of those pesky woods yet and a rate rise risks skewering the recovery. NAB’s Alan Oster, writing for crikey.com.au the day after the announcement, was typical of many when he said the real risk is that “the RBA is responding to growth in the economy that isn’t really there. There’s been no growth in the current quarter and the economy is certainly not back on track. We’ve basically just dodged a bullet.” Glenn Stevens’ optimism has however been vindicated almost immediately with the latest jobless data actually showing a fall in unemployment from 5.8% to 5.7%.

The Australian economy still faces serious problems. Higher interest will drive up the $AUD as international currency investors seek higher deposit yields. Add to this our close ties to the booming Chinese economy and the humble $AUD may soon hit parity with the $USD. This is bad news for exporters and feeds our trade deficit. On the up side, the inflation genie stays in its bottle for now and that iPhone you saw on ebay out of Texas just got that little bit cheaper.

And then there are the home owners. Raising interest rates for the first time in 19 months exposes the more tightly geared or “the underdressed” as Warren Buffet calls them. Many of these poor folks will be first home buyers suckered in by the heady cocktail of free money and emergency low interest rates. Unfortunately for them monetary policy is the best counter setting up for a potential catastrophe in home values. But the party is not over yet. We still have some time to go before interests rates are back to normal levels - or trend as they call it. As Commonwealth Bank economist James McIntyre put it “the RBA isn’t looking to take away the punch bowl, just reduce the alcohol content.”

And in other (sobering) news… despite all the green shoots chatter in the US, recent data has revealed some of those green shoots may just be advanced mould. After several months of tentative improvement the latest national job figures have heightened concern that the US recovery will be long and lean. 263,000 jobs were lost in September which edged unemployment up to 9.8% from 9.7% in August. Meanwhile Peter Schiff, the bearish American economist and president of Euro Pacific Capital, who is known for spot-on predictions, told Yahoo Finance’s Tech Ticker that the stimulus is a disaster and that the US economy is now worse than it was in the crucible of March. “We are much more indebted now our phony, consumer based economy is not viable, it only exists for as long as the Chinese and Japanese lend us money.” Schiff’s view is backed by the September slump in US car sales after the Cash For Clunkers scheme wound down indicating the spike in auto sales was more a stimulatory mirage than a sustainable shift.

Posted October 5, 2009

At the moment the AUD looks unstoppable, having got close to $AU0.88 cents against the USD with some forecasters expecting it to nudge $AU0.95 cents within two years. While this may mean champagne and cigars for some, for others it’s actually pretty bad news - particularly for Australian exporters and international service providers whose products and services become more expensive.

Think of it in terms of bananas.

This time last year US buyers could get around $AU01.30 worth of Australian bananas for $US1.00. Today they can get $AU1.14 worth of bananas for $US1.00. That’s 15 per cent less money for Australia. And this does not only apply to the humble banana. DC Comics’ major feature film, The Green Lantern, was supposed to start filming in Sydney but the strengthening AUD has increased its $US200 million budget by $US25 million, halting production in the process.

Then, as if drought was not enough of a blow, the poor old farmers have come in for another belting. The Australian Bureau of Agricultural and Resource Economics (ABARE) has just released its quarterly predictions and it expects the rising AUD to cut into farm export earnings savagely. And ABARE is more pessimistic than the aforementioned forecasters. In its latest quarterly commodities outlook, it is punting that the Aussie dollar will average around $US0.83 in 2009-10, compared to an average of $US0.75 in the last financial year. More broadly, the AUD’s strength has seen ABARE trim its predictions for Australia’s income from commodities - stuff like grain, steel, coal and of course bananas - by around one billion dollars this year.

While I wouldn’t necessarily be buying the champagne and cigars for a knees-up parity party just yet, the AUD will go close, with - as noted - some forecasters tipping it to reach $AU0.95c within two years. So next time you hear Kevin Rudd say that the buck stops here, just quote Darryl Kerrigan in The Castle and “tell ‘im he’s dreamin’”.

In other news…our friends across the ditch have emerged from their long white cloud of recession. The New Zealand economy expanded by a fractional 0.1 per cent in the June quarter, allowing New Zealanders to cautiously declare an end to their five-quarter-long recession. In fact the Aussie’s very recent rally owes much to the Kiwi dollar, which reached a 13-month high of $NZ0.7187 in reaction to this result and also to the news that New Zealand dairy exporter Fonterra, the world’s largest, raised its forecast payout for the coming season by 12 per cent, citing improved market conditions.

Posted 30 September, 2009

The sun is setting on the US dollar (USD) and a new global currency order is emerging, driven by a chasm-sized US fiscal deficit, historically low US interest rates, rapid recovery of Asia and the rise of the euro.

But first, a little historical background…

The USD became the world’s reserve currency in 1944 as part of the Bretton Woods Agreement. Most international transactions have been in USD ever since, giving it great political and economic power and today, some two thirds of all foreign reserves are held in USD. But in recent years the value of the USD has declined by more than one third and central banks across the world are beginning to pull out. The United Arab Emirates reduced its holding by 50 per cent and China and Russia have also reduced theirs. And now there’s speculation that America’s AAA debt rating could be lowered.

I see four main factors driving the decline of the USD and the rise of a new world currency order.

The first is the health of US finances. Other countries’ keenness to hold USD as reserves is based on the financial soundness of the US economy. But this is being shaken by America’s massive current account and budget deficit. For me, an interesting statistic that sums it up is the fact that there are only some 10 million factory workers actually producing anything in the US. In other words, to stop this massive imbalance between exports and imports the US must produce more and consume less, because currently its main export is bits of green paper. Then there are its debts which have grown by five times since 1980 from $8 trillion to 44 trillion. Every day the US borrows $3 billion just to keep going, and in 2009-10 its budget deficit will exceed $1.5 trillion. This is unsustainable.

Second, many economists worry that over the past decade the US Federal Reserve has put too much money into the economy to keep interest rates low. This weakens the value of the currency and thus decreases the value of other central bank reserves.

Third is the growth of Asia. As Ambrose Evans Pritchard writes in the UK’s Daily Telegraph: “China and rising Asia have reached the point where they can no longer keep holding down their currencies to boost exports because this is causing mayhem to their own economies, stoking asset bubbles. Asia’s ‘mercantilist mindset’ of recent decades is about to be broken by the spectre of an inflation spiral. The policy headache was already becoming clear in the final phase of the global credit boom but the financial crisis temporarily masked the effect. The pressures will return with a vengeance as these countries roar back to life, leaving the US and other laggards of the old world far behind.’

The final factor is the rise of the euro as a better bet. Today around 25 per cent of global reserves are held in euros, and this is growing. OPEC nations along with Russia and China are pushing to redenominate oil payment into euros and Iran now trades more than 60 per cent of all oil trades in other currencies. This means the euro is now big enough to become the new global reserve currency if things go that way. Alan Greenspan said a little while back: “It is absolutely conceivable that the euro will replace the dollar as reserve currency”.

But this could take years. While you can bet your bottom dollar that the USD is stretched to its limit, it remains the currency of the world’s largest economy, and it has no immediate rival as the global reserve currency…for now at least.

Posted September 18, 2009

The August minutes for the meeting of the RBA’s Martin Place mandarins reveal that while the Board may have kept the cash rate steady at 3%, all eyes remain firmly on how sustainable this recovery will prove to be.

To quote directly ‘as at the previous meeting, members noted that the policy decision in the near term involved balancing the risk of over-staying an accommodative stance, and that of prematurely tightening and adversely affecting confidence and demand’. In plain English: we’re holding rates steady until we’re sure this recovery is really on.

Interestingly, the minutes revealed a sharp divide between board members who believe Australia’s impressive performance is stimulus driven and those who believe otherwise. Those in the otherwise camp have effectively challenged Wayne Swan’s account of the success of his stimulus measures and noted that ‘it was hard to disentangle the contribution that Asian demand, fiscal stimulus and easier monetary policy had each made to the better-than-expected outcomes’.

And they have a point; for starters RBA interest rate cuts have boosted household budgets by quite a lot more than the Government’s bonus payments. In dollar terms cutting the standard variable mortgage rate from 9.45% to 5.8% sliced $750 a month off the cost of servicing a $300,000 mortgage. And strong growth in China, our biggest trading partner, has dragged up both the commodity markets and regional economies.

On the all important inflation front the Board expected the genie to stay in its bottle for now though governor Glen Stevens warned the likelihood of inflation staying below target ‘looks low’. In other words, the RBA expects inflation to become an issue and that means interest rate hikes. But this won’t happen for a while yet as they’ll probably want to see at least another full quarter of positive GDP growth first.

For now we all await the outcomes of the next RBA board meeting on 6 October. Until then many of us have much more pressing issues to concern ourselves with as the footy final season gets underway.

In other news… in his most rationally exuberant utterance on the global financial crisis yet, US Federal Reserve Chairman Ben Bernanke reckons the US recession, the worst since the 1930s, is probably over. And on the Russia front, a year after the onset of a crisis that has literally hammered it, Russia’s Finance Minister declared his country is also emerging from recession. Nostrovia!

Posted September 16, 2009

With a solid banking system, good economic management, political stability, healthy public finances, an open economy situated smack in the middle of Asia’s growth path, we really are the lucky country.

Just ask our top ecnocrat the Secretary of the Department of the Treasury Dr Ken Henry. The good doctor sees a very bright future for Australian as the world economy gathers itself, shakes off the dust and gets back on the horse. “The Australian economy will be seen as possessing the best of the qualities - of governance and flexibility - of the developed world while also offering an abundance of real investment opportunities usually found only in the developing world,” he recently told the Australian Industry Group’s annual conference.

Dr Henry’s upbeat assessment of the medium term for Australia is thanks to a range of factors. We were saved by a US/Europe-style banking meltdown, among other things, thanks to our prudent regulatory system and the fact that we had a relatively smaller pool of non-bank lenders to go bust. As a result the banking system can more quickly rebuild itself and start lending money to business and hence oil the machinery of capitalism. In addition the Federal Government’s swift stimulus packaging has spurred GDP growth. And employer flexibility in limiting job cuts so far has helped unemployment stay below forecasts. Meanwhile, Australian household wealth hasn’t been smashed by collapsing property prices and our budget deficit (when a government spends more than it receives) is not running overseas levels like 11.2% in the US. Also the fact that we predominantly export essential commodities, instead of higher value manufactured exports, has seen us avoid much of this year’s record 10% plunge in world trade. In fact, according to the RBA export, volumes are actually up 3-4%. Also as our economy has decoupled from the US our fate is not so tightly linked to theirs. The most important thing, however, is that the crisis has not greatly changed the unfolding narrative of the great Australian China boom/coat tails story.

As the tide of the crisis recedes, we are being revealed to the world as economically strong and a great place to settle for foreign capital. In fact, according to Ken Henry, it was “quite likely” that Australia “might attract an even greater share of global capital flows, and quite possibly even larger capital flows in aggregate”. What this means is that our growth prospects are less likely to be “constrained by a reduced capacity to attract foreign capital”. Further to that, Dr Henry suggests that foreign capital inflows, attracted by Australia’s China success, will allow us to finance a bigger current account deficit.

In other words we are on the verge of becoming the preferred destination for international capital keen to find a nook over the next five years or so and if that transpires we had all better get used to the attention.

In other news … the Australian economy has again shown its resilience with the unemployment rate last month steady at 5.8%, as it was for June. Our labour market hasn’t fallen in a heap like the US’s where the August rate was 9.7% - a level unseen since the 1982 recession. On one estimate I read in the New York Times there is currently one job opening in the US for every six people looking for work. In other words, we really are the lucky country at the moment.

With a solid banking system, good economic management, political stability, healthy public finances, an open economy situated smack in the middle of Asia’s growth path, we really are the lucky country.

Just ask our top ecnocrat the Secretary of the Department of the Treasury Dr Ken Henry. The good doctor sees a very bright future for Australian as the world economy gathers itself, shakes off the dust and gets back on the horse. “The Australian economy will be seen as possessing the best of the qualities - of governance and flexibility - of the developed world while also offering an abundance of real investment opportunities usually found only in the developing world,” he recently told the Australian Industry Group’s annual conference.

Dr Henry’s upbeat assessment of the medium term for Australia is thanks to a range of factors. We were saved by a US/Europe-style banking meltdown, among other things, thanks to our prudent regulatory system and the fact that we had a relatively smaller pool of non-bank lenders to go bust. As a result the banking system can more quickly rebuild itself and start lending money to business and hence oil the machinery of capitalism. In addition the Federal Government’s swift stimulus packaging has spurred GDP growth. And employer flexibility in limiting job cuts so far has helped unemployment stay below forecasts. Meanwhile, Australian household wealth hasn’t been smashed by collapsing property prices and our budget deficit (when a government spends more than it receives) is not running overseas levels like 11.2% in the US. Also the fact that we predominantly export essential commodities, instead of higher value manufactured exports, has seen us avoid much of this year’s record 10% plunge in world trade. In fact, according to the RBA export, volumes are actually up 3-4%. Also as our economy has decoupled from the US our fate is not so tightly linked to theirs. The most important thing, however, is that the crisis has not greatly changed the unfolding narrative of the great Australian China boom/coat tails story.

As the tide of the crisis recedes, we are being revealed to the world as economically strong and a great place to settle for foreign capital. In fact, according to Ken Henry, it was “quite likely” that Australia “might attract an even greater share of global capital flows, and quite possibly even larger capital flows in aggregate”. What this means is that our growth prospects are less likely to be “constrained by a reduced capacity to attract foreign capital”. Further to that, Dr Henry suggests that foreign capital inflows, attracted by Australia’s China success, will allow us to finance a bigger current account deficit.

In other words we are on the verge of becoming the preferred destination for international capital keen to find a nook over the next five years or so and if that transpires we had all better get used to the attention.

In other news … the Australian economy has again shown its resilience with the unemployment rate last month steady at 5.8%, as it was for June. Our labour market hasn’t fallen in a heap like the US’s where the August rate was 9.7% - a level unseen since the 1982 recession. On one estimate I read in the New York Times there is currently one job opening in the US for every six people looking for work. In other words, we really are the lucky country at the moment.