just in in-tray
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Week in View
By Alan Kohler
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Wall Street closed for Independence Day
FTSE 100, London — steady
German DAX — down 0.2%
French CAC 40 — up 0.1%
Crude oil — down 3.7%
Gold — down 1.1%
Americans are drawing breath this morning, with a holiday for July 4th and what a crazy 12 months it’s been since the last one. The poor shell-shocked Septic Tanks must be wondering what has hit them.
Just think about it: someone who went into a coma on Independence Day last year and woke up yesterday one would confront:
A black President who plays the late (!) Michael Jackson on his iPod,
The Fed funds rate at zero,
The Dow Jones down 27 per cent, having fallen 17 per cent in the previous 12 months,
The US dollar up 12 per cent because no one can think of an alternative,
Bernard Madoff, who was an admired celebrity fund manager this time last year, sentenced to 150 years jail for a US$65 billion fraud,
California bankrupt, unable to pay its bills, along with General Motors
Rupert Murdoch in charge of the Wall Street Journal
I’m not sure which is worse – the fuss over Michael Jackson, with tickets to his funeral being raffled off, the financial mess of the state in which he used to live or the disaster of the newspaper industry and its failure to prepare for the obvious. As for Michael Jackson – I’m sorry, but tell me when Bob Dylan dies – then I’ll mourn.
At least the name of Jackson’s ranch is almost accurate: it should be Never never land, in honour of his own shambolic finances and those of California … as well as his fan President Obama for that matter.
In a way, a headline in Rupert’s Wall Street Journal yesterday summed up the whole year in the US economy. It said: “Dollar is Buoyed by Weak Jobs Data”. Unemployment rose to 9.5 per cent and 467,000 jobs were lost in June, and what did the currency do? It jumped against the Euro.
As economist and Nobel prize winner Paul Krugman commented in his New York Times blog yesterday: It’s a weird, weird, weird, weird world.
Of course it’s all because of a profound and probably permanent shift in risk assessment and appetite after the collapse last year of Lehman Brothers and the near meltdown of the global financial system. The US dollar surged 25 per cent in three months during that period as investors and sovereign wealth funds fled risk assets and stampeded into the only asset they really trusted: the American Government.
China, the biggest external owner of US dollars, has been grumbling about it and talking about finding an alternative, but none has turned up yet, so George Washington it is.
As we sit here on July 5th, 2009, and look clear-eyed at the situation, the American economy is a total mess. Six and a half million jobs have been lost and workers are getting fired at the rate of nearly 500,000 a month; consumers have gone into their shell, so that the savings rate has jumped from zero to 6.9 per cent; the Government is piling on debt at more than a trillion a year; house prices are down 32.6 per cent nationally, and still falling, and 54 per cent in Phoenix Arizona (the worst affected city).
To quote Bob Dylan in Desolation Row:
Now the moon is almost hidden
The stars are beginning to hide
The fortunetelling lady
Has even taken all her things inside
All except for Cain and Abel
And the hunchback of Notre Dame
Everybody is making love
Or else expecting rain
And the Good Samaritan, he’s dressing
He’s getting ready for the show
He’s going to the carnival tonight
On desolation row
And maybe Michael Jackson was a bit of an economist as well:
They're out to get you, there's demons closing in on every side
They will possess you unless you change that number on your dial
Now is the time for you and I to cuddle close together, yeah
All through the night I'll save you from the terror on the screen
I'll make you see
That this is thriller, thriller night… etc
But anyway, at least we’re all right, Jack – so far. In Australia house prices are rising and building approvals are falling so that the housing shortage that is pushing prices up is likely to persist; retail sales are going up; a manufacturing survey this week showed that confidence is picking up; and Government debt is mounting but from a low base, so it’s not so bad.
We’re still almost certain in my view to have a technical recession, with two negative quarters in a row in June and September, but in any case we are already in a non-technical recession, with unemployment rising and heading for 8 per cent.
Everywhere in the world the financial crisis has turned into an employment crisis, as virtually every country’s “output gap” (the difference between potential and actual GDP) widens.
There is simply too much productive capacity in the world for the amount that consumers want to buy if they can’t or won’t borrow. Remove debt and asset inflation and people simply buy less stuff. The producers have to make less and employ fewer people. A vicious cycle begins of lower employment leading to further loss in demand and then further cuts in employment.
In Australia we have been avoiding the worst of this because of a housing shortage, which has kept property values up, large and very effective monetary and fiscal stimuli, and the fact that much of our national income is tied up with long term coal and iron ore contracts, so the impact of the drop in commodity prices is delayed.
But that started coming through this week with a near doubling of the trade deficit to $556 million in May. Both imports and exports are contracting very quickly now, but exports are doing it faster.
The main things coming up next week are the Reserve Bank board meeting, at which they will do nothing for the third month in a row, and the June labour force report, in which the main interest will be whether the unemployment rate hits 6 per cent or not. If it doesn’t, it will be close.
The sharemarket is flattening out at a new level that’s about 25 per cent above the low reached in March and 25 per cent below where it was on July 1st last year. In my view it is likely to be somewhere between 3500 and 4000 this time next year as well – that is both the economy and the market look like doing very little for a while.
We are about to enter the “earnings confession” season along with the profit reporting season. Analysts are looking for an earnings decline of between 15 and 20 per cent for the 2009 financial year, and a more modest decline in 2010 of 5-10 per cent.
I think they’ll be disabused of both illusions over the next two months: both years are likely to be 10 per cent worse than the bottom-up analysts think because company guidance remains too optimistic about the economy.
So the sharemarket is likely to correct at least 10 per cent in the months ahead to take account of earnings reports and adjusted forecasts for 2010, and a much sharper fall in commodity earnings than is currently expected.
Is the worse behind us? Probably, but that doesn’t mean that what’s ahead will be great.
Like President Obama, I find my iPod gets a solid workout these days. Music is the Great Escape (apart from Sam and Steve of course). As well as the usual Leonard Cohen and Joni Mitchell songs, I’ve been listening lately to a bloke named John Mayer: he has written some fine songs and he plays the guitar like David Gilmour and Carlos Santana. And there’s nothing like a smooth guitar to cut through the static of a day.
Have a good week, and financial year. It should be interesting, and we’ll try to help you make it rewarding as well.
Best wishes,
Alan Kohler
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