The Economic Outlook

[Danubis]

why are there so many undesirables at semaphore?? i went there today and it's lovely. cept the smelly people smoking rollies.

[ryan79]

Originally Posted by Sanj

is this true though? every single time i have tried to engage you in discussion about it in the house prices thread (because id like to know more about your POV and see if i can learn something) you do not respond. it appears that you are only keen on your POV being heard and unchallenged and doesnt that put you in the same category as spruikers?


in the last few months i have had chats with 2 different people, both highly successful in property. one is pretty damn negative about property at the moment, the other one more positive. these are people worth between 50-100m, yet the only correct opinion is yours? seems a bit arrogant to me

From what I've heard rents are on the increase and when rents start to increase (usually due to supply/demand factors) house prices start to follow lagging behind. But you know more than I do about property. Until you can get a decent return on rents you more than likely won't buy an investment property.

To me theres a long way for the stock market (which still represents good value for money investment IMO) and rents to move before property will have any real movement.

But you know the economy as we've known it for centuries is all going to go to shit because house prices might be "over valued" by 20%.

[AtD]

I agree. It's problem is it's next to Port Adelaide.

[Sanj]

Originally Posted by ryan79

From what I've heard rents are on the increase and when rents start to increase (usually due to supply/demand factors) house prices start to follow lagging behind. But you know more than I do about property. Until you can get a decent return on rents you more than likely won't buy an investment property.

To me theres a long way for the stock market (which still represents good value for money investment IMO) and rents to move before property will have any real movement.

But you know the economy as we've known it for centuries is all going to go to shit because house prices might be "over valued" by 20%.

rents in perth have definitely started to move, a place i took 3-4 weeks to rent in june just rented in 2 days for 10% more.

[crawf]

Originally Posted by Danubis

why are there so many undesirables at semaphore?? i went there today and it's lovely. cept the smelly people smoking rollies.

Originally Posted by AtD

I agree. It's problem is it's next to Port Adelaide.

+1

[Eco-rat]

Originally Posted by Danubis

Serves you right for voting green

LOL!!!!!!!!

And voting ALP or LNP has achieved anything for this country???!

[Eco-rat]

I love that website the unconventional economist - great bearish stuff.

Australia is phooked unless we can manage to find an alternative economy for the other 22 million who don't do mining for a living. Get some productivity in ta ya!

Start with government. Abolish the states and the local governments and come up with a middle tier no bigger than BCC. Small uni-cameral assemblies and staff still focused mostly on rates, roads and rubbish.

Then start educating the public about economic truths. No free lunches. No corporate welfare. What things really cost.

[Mornnb]

Originally Posted by Eco-rat

LOL!!!!!!!!

And voting ALP or LNP has achieved anything for this country???!

Now I am a huge environmentalist, but I do not know why anyone would vote for the greens.
The Greens are why we don't have an ETS, why Rudd was henceforth deposed when he abandoned it after the 3rd attempt to get an ETS through the senate. The Greens are infact why nothing has been achieved on the environment the last few years. They refuses to vote for the ETS unless they got a 40% co2 reduction by 2020, an absurdly high goal in just 10 years that would crush the economy, Labor's goal of 5% to 25% was realistic.

Also the Greens are incredibly socialist and against free market principles. They want:
Australia to withdraw from all free trade agreements.
Want a tax on all foreign currency transactions.
Abolishment of the IMF, World Bank and WTO.
Require publicly listed companies and government departments to audit and report annually their performance against economic, environmental and social criteria.
Abolish the 30% Private Health Insurance Rebate.
Return the company tax rate to 33%.
Increase top tax rate to 50% and create an estate tax.
Repeal GST.
Also especially relevant to this forum, they're a group of nimbys, who want policies such as:
Placing the onus of proof on the developer to establish that the development does not damage local amenity, heritage, environment, transport and infrastructure facilities.
Mandating the adaptive re-use of heritage buildings, not just keeping façades.
Ban on developer donations to political parties.
Reform of the Land and Environment Court to protect the rights of the community.
Restricting the Planning Minister’s ability to ‘call in’ and approve developments.

Start with government. Abolish the states and the local governments and come up with a middle tier no bigger than BCC. Small uni-cameral assemblies and staff still focused mostly on rates, roads and rubbish.

So basically you want a hugely powerful centralised government and a bunch of large LGAs, how on earth is that a good idea, you trust Canberra to do everything states do now?

[nazor]

I voted for labor cause i wanted mah fiber.

It didn't seam like any other 'issue' really mattered.

[LanceDriver]

As Dutch Disease takes hold within the structure of this country's economy we are going to get very very sick ...

Three Little Charts and the Coming End of Australia's 'Economic Miracle'
And four things I'm doing right now to cushion my personal wealth from the impact...

From http://www.portphillippublishing.com...?code=W9AMM102

By Greg Canavan
06/02/2011


So many investors, amateur and professional alike, think the credit crisis is over and everything is back to normal, at least here in Australia.

They're wrong. And I'm going to show you three charts that prove it.

You probably won't have seen them before.

Why?

Because it's becoming increasingly obvious that most Australian strategists, forecasters and economists only choose to focus on that which is seen. The unseen is ignored, forgotten or explained away.

These three charts pinpoint an imminent UNSEEN threat to Australia's economy.

This threat, eventually, is going to show up in lower stock prices... potentially much lower... possibly by the end of 2011.

If you want to protect your wealth from what these three charts hint at – you need to think about recalibrating your investment portfolio.

That's why in this article I'll also share four ways I'm rebalancing my own holdings. If you find what I'm about to show you unsettling, you may want to copy these moves...

The 'Dutch Disease':
Australia's Sub Prime?

Ask most people why we escaped the credit crisis so lightly compared to pretty much every other Western nation and you'll get the same answer: resources.

Australia's mineral wealth was – and continues to be – our Get-Out-Of-Jail-Free card.

This is a dangerous delusion.

You might have heard of the 'Dutch Disease'. It was a phrase first coined by The Economist back in 1977. It referred to the negative impact Holland's North Sea oil discoveries had on other sectors, mainly manufacturing.

Only when the oil and money started to dry up did the Dutch realise the dire affect the resources boom had on other sectors of the economy.

This is not a new worry for Australia.

Last year the Treasury prepared a paper on the Dutch Disease and the "de-industrialisation" that it can cause. It warned of the potential dangers of Australia and its government becoming over-reliant on resource revenues to the detriment of other sectors.

It read:"A policy concern associated with the Dutch disease is that a temporary increase in commodity prices (or short-lived resource stocks) leads to a sharp but temporary appreciation in the real exchange rate.

"As a result, when commodity prices normalise or when resources are depleted, tradable sectors that have disappeared might not simply reappear".

What this report did not do – and what I'm going to do here – is put the 'Dutch Disease' in the context of the current Global Financial Crisis.

I've uncovered evidence – in the three charts below – that a huge part of Australia's economy is quietly but consistently moving in reverse.

And that this reversal is being dangerously masked by a resources sector that surged ahead in 2010.

If you look at these charts and conjure up a worst case scenario... well, the Australian economy is in real, imminent trouble. And so are your investments. Unless you do something about it soon...

Why I'm Warning You Now

You might not know me, but my speciality is not macro-economic forecasting, it's value investing.

In other words, if you're looking at a stock I can tell you with fairly good accuracy if it's overpriced or trading at a discount to its intrinsic worth.

Buying beaten-down stocks trading cheaply relative to their profits and asset values is not glamorous. But it's definitely working in the current climate.

Had you been a regular reader of this publication in 2010 you would have seen an average return on all buy positions of 19.12% -- not bad for an ultra-conservative strategy in a market that LOST 1% in 2010.

That's why if you've recently seen me on CNBC, Sky Business's 'The Perrett Report' or Lateline Business, I've almost certainly been banging on about the importance of identifying value in this unpredictable market.

But every once in a while, I see something going on in the 'big picture' that's of such importance to all investors, it can't be ignored.

I'm often asked for comments in stories for the Sydney Morning Herald. To be honest, I don't think they’d print much of what I say in this article. It's diametrically opposite to the 'She'll be right mate!' attitude that seems to pervade the mainstream business pages at the moment.

And the four specific portfolio adjustments I'm going to suggest you make go against everything most pundits are advocating right now.

Conventional fund managers and brokers DO NOT want to you make the investment moves I'm about to suggest under ANY circumstances. They want you to believe that we're in recovery mode from the credit crisis (which is clearly a distant memory given the amount of speculation going on right now) and that the recovery means markets will continue to rise.

But what I see right now is a very dangerous market for Australian investors.

You might sense peril as well.

However, I'm almost positive you're not aware of the TRUE shape of the Australian economy.

And that brings me to Exhibit A...

Take a look at the chart on the next page (below) and, specifically, where Australia sits on it. This shows the performance of the manufacturing sector across a number of different countries during the month of December last year.



As you can see, most of the world's manufacturing sector is in expansion mode.

Everyone else, in fact... except Japan, Greece and Australia. In these three countries only, manufacturing contracted in December 2010. And just-released data from January shows the Australian manufacturing industry is STILL contracting.

And if you look closely at the chart, you'll notice that the speed of the contraction that month actually INCREASED. The only country in the world that also happened to is Greece.

As you read this the European Union is considering extending bailout loans to Greece to 30 years in a bid to draw a line under the country's debt crisis.

Greece's economic woes are on a different plane to our own.

Still... you should be very worried that Australia shares a key issue with the bankrupt Mediterranean country: a dramatic decline in manufacturing.

Simply put: China's economic boom, courtesy of a government mandated credit boom, means they keep buying our resources even in the middle of a Global Financial Crisis. That is putting massive upward pressure on Australia's terms of trade. And that, in turn, is killing the rest of the economy.

And, while no one might be reporting it, it's been happening steadily for months...

Take a look at the dotted line on this chart (50 points).



It distinguishes between expansion and contraction. As you can see, the sector took a huge hit after the Global Financial Crisis kicked off. Then, as central banks pumped liquidity to stimulate the global economy it came back to life.

But manufacturing has contracted in each month since September 2010.

The index, known as the PMI (performance of manufacturing index) is based on production, new orders, deliveries, inventories and employment.

It's nearly all in decline. You might be asking:

"So what? Manufacturing was a dwindling part of the Australian economy before the GFC. It accounts for less than 10% of total employment. What do I care if it dwindles a little faster in 2011? Even if it does, how can it affect my investments? It's the services sector that makes up 85% of the Australian workforce. That's what really counts. That would have HUGE knock-on effects if it went down the toilet. Come back to me when THAT happens and I'll start to worry."

Ok then. Let's see how the Australian services sector is faring...

The answer is not very good. Australia is contracting along with Spain and Ireland... hardly august company.

Compared to the rest of the world, the performance of Australia's service sector is positively awful.

I would put that down to a number of factors. The initial economic contraction in Australia back in 2008/09 probably wasn't quite as deep and prolonged as most other countries. Therefore their rebounds have been more pronounced than ours.

Then there are our rising interest rates.

Other nations have been printing money and lowering rates. Australian households are carrying loads of debt and paying MORE for it.

This is now taking its toll... people are buying less stuff and paying for fewer services.

Worryingly, the only areas in the services industry that are EXPANDING are input prices and wages. These are costs. Like their manufacturing counterparts, the services industry is caught in a margin crushing vice.

The largest cost in just about any business is labour. Higher wages means costs are rising.



If sales and production are not rising at the same pace, the logical conclusion is that profit margins are under pressure.

Here's the point...

If the US, or China for that matter, were generating figures like Australia, global markets would be in a panic.

If the US showed a sub-50 number (signifying contraction) in the US services or manufacturing sectors we would be talking another worldwide recession.

So Why Aren't These
Numbers Scaring the Heck
Out of Australians?

How can a shrinking services and manufacturing sector not herald recession?

More importantly, how can the Reserve Bank of Australia be raising interest rates in such an environment?

Well, you shouldn't be surprised to hear that all roads, and shipping lanes, lead to China.

China's demand for our natural resources is, it's assumed by all, Australia's ongoing salvation.

China's growth has, until now, effectively kept us out of recession. It's helping to maintain high levels of employment, putting upward pressure on our currency and interest rates. And it's preventing house prices from adjusting sharply lower (as would happen if unemployment began to rise).

But I think China is following an unsustainable economic growth model.

And that spells real trouble for Aussie-based investors.

I'll quickly explain why...

Why China's Credit Crisis
is Your Crisis Too

China is now reliant on continued credit growth to keep the wheels rolling.
That's why you're seeing inflation levels at around 5%... and price controls on food, subsidies for shoppers and a crackdown on hording.

THESE ARE SIGNS OF INFLATION GETTING WAY OUT OF CONTROL.

But the Chinese authorities are hamstrung. They can't fight the root cause of the inflation because they know how susceptible the economy is to higher interest rates.

All they can do is try and treat the symptoms.

Again, it comes back to what is seen and what is unseen.

You can clearly see the huge growth in China and it's insatiable demand for raw materials. But that which is unseen is the huge rise in banks loans (or credit), which provides the basis for this demand. Because the government, not the market, determines this loan growth, there is bound to be trouble brewing somewhere.

There is already evidence the authorities are losing control.

They had planned to slow credit growth by a greater amount last year. It didn't happen.

And the 'quota' for new lending in 2011 will be around 7.5 trillion yuan, higher than originally forecast.

I expect China's economic growth to disappoint this year as the poor investments created by the credit bubble begin to turn bad.

So What Investing Implications Does This Have For YOU?

Here's what I think...

The underlying weakness of the Australian economy, and the fact that interest rates are rising, explains why the local share market was flat last year and why it continues to struggle.

The risk is that we will see more margin pressure in the coming reporting season.

Given that almost every economist and strategist out there thinks we're in for a good year this year, this will come as a mighty shock.

China is the big swing factor here.

If China stumbles over all the credit it has created (and as I've explained there are good reasons to believe this is happening already) then

THE ASX WILL EXPERIENCE
A SIGNIFICANT FALL

A major China slowdown would expose Australia's fragile economy.

Much of the foreign capital that we rely on to finance our growth will flee, hurting the banks and the property market.

This will have flow-on effects for the rest of the economy... and people like you who own stocks.

It's a huge risk. It might not happen. China could continue avoiding reality for another two months or another two years. But the ramifications if this does happen are so big, you need to think about structuring your investments accordingly.

So how do you do this?

4 Easy Ways to Prepare

First and foremost, my best advice is to educate yourself on the REAL state of the Australian economy as soon as possible.

But – here's how I'm advising to prepare for such a scenario:

1) DON'T BE HOODWINKED INTO GOING FULL-FORCE INTO EQUITIES. Being fully invested at all times is a finance industry mantra purely for the benefit of the industry. No matter what happens this year, you'll still see predictions that the market is going to move higher... and that you'll miss out if you're not in the game now.

Don't listen.

I'm continuing to recommend a high cash holding to my readers.

Even in the present climate there is a lack of quality risk and reward opportunities in stocks. The dire state of the global economy is not at all reflected in Australian share prices.

As an investor I don't LIKE being mostly in cash. You probably don't either. But you should only ever swap cash for companies if the risk/reward equation is favourable.

(As an aside, holding high cash levels last year worked out well. Cash outperformed the market. Even taking dividends into account, cash came up with a far better risk-adjusted return.)

2) FOR THE STOCKS YOU DO BUY, FOCUS ON VALUE ONLY.

Investors gotta invest – no matter what the market is doing. But if your concern is wealth preservation, investing intelligently and not giving a hoot about what anyone else is doing, then you should ignore everything else at times like these and focus on value.

Good value is hard to find right now.

Always insist on a margin of safety. In other words, don't just buy shares because they look cheap, but because they demonstrate REAL value. That way you have built-in protection if your initial forecasts prove too optimistic.

3) DO NOT GIVE UP ON GOLD. As well as focusing on value, value and value, the other thing you can do to protect yourself against destructive central banking policies is own gold and silver bullion, and gold shares. I advocate a portfolio exposure of around 20%.

The recent pullback in price provides an opportunity to gain exposure or, if you already have numerous holdings, to rebalance the portfolio to your desired weightings.

Last year, as gold was reaching record highs, I advocated 'taking profits' – not by selling outright – but trimming exposures where the price had run too far.

Similarly, I now think it is a reasonable time to begin adding to your positions again with the aim of bringing portfolio weighting back to the desired level.

Gold and silver are money and are thus political metals. There are very powerful forces who want to see much lower prices and induce the very tight physical supply back onto the market.

Don't give them the pleasure.

This is a big bull market and it will be a wild ride... so hang on.

Finally,

4) GET READY TO PUT ANY SIDELINED CASH TO WORK IF THE CRISIS I PREDICT DOES ERUPT.
If we've learnt anything over the past few years, it should be that crises are becoming more and more frequent.

It's almost at the point where investors don't seem concerned about your standard crisis anymore. Portugal needs a bailout? That's old news. Equity markets are hardly reacting to the woes in Europe these days; such is the confidence in the authorities to kick the can down the road one more time.

Well, as I'm sure you well know, hope, or faith in officialdom, is not a strategy.

Waiting for the right moment to strike is.

I'm hoping you've found at least something useful to take away from this Special Issue.

These are testing times indeed.

Global stimulus efforts and the resulting tsunami of liquidity brought about by it have simply papered over the reality of Australia's deteriorating performance.

Smart Aussie investors should prepare for a reckoning day.

Greg Canavan
Editor, Sound Money. Sound Investments

Sound Money. Sound Investments. © 2011
A different way of thinking about your wealth

[AtD]

Bollocks.

http://abs.gov.au/AUSSTATS/abs@.nsf/...010&num=&view=

12 months to 30 Sept
Manufacturing production up 5.5%
Financial and insurance services up 4.5%
Professional, scientific and technical services up 6.0%

[LanceDriver]

"But manufacturing has contracted in each month since September 2010"

It's December's PMI showing the trend from the previous month. Same for "Non-manufacturing/Services" PMI.

You have disproved nothing. It would be good if you could.

Waiting ...

[AtD]

We'll see what happens when the next GDP numbers are released.

[LanceDriver]

But remember, they are using PMI not government swayed stats!

http://en.m.wikipedia.org/wiki/Purch...edirected=true

[ryan79]

So one minor sector is contacting (just) in the last few months, no where near the same rate as during the downturn and the only historical data we have to compare it against before that is during the boom times where it still had a month or two below that line.

If I was holding gold and silver and I published an article for investors I'd be spruiking gold and silver as well.

And cash will always be a great low/no risk investment when there is reasonable interest rates.

Random example. If you had have bought Rio Tinto shares 6 months ago (at a conservative $68) you would have got roughly 20% return. Yeeeeaah.

[Danubis]

buyed paladin @ 3.48 a couple of months ago. up 50% now. fuck yeah. better than meth.

[Nate Von Longneck II]

Summary of article:

Originally Posted by LanceDriver

It's a huge risk. It might not happen.

[LanceDriver]

^ The Dutch Disease is pretty much a given at current trends, ie, the mining boom continues to suck the life out of every other sector. So yes, it all hinges on what happens with China (the might/might not happen bit). I wouldn't go saying they are in great shape at the moment though. Surely you can see it is precarious and a huge risk? It's the proverbial "all eggs in one basket" scenario and the basket may be tipping.

[tic]

The article does have some valid points. Dutch Disease has struck to a certain extent. Parts of the country are already badly hit.Here on the Gold Coast, the economy is poor and the property market has been smashed. Other areas of the country have a similar problem. High $A is part of the issue. It needs to drop.

However, predictions of a market crash here are probably over the top. Our market growth in the last year has been negative, compared to some overseas indices - partic. the Dow. So, in a sense, our market has already adjusted downward, a reflection on the very patchy nature of Australia's economy.

Finally, the US will continue to slowly emerge from its worst recession in 70 years. As it does, it can only have a positive effect on world markets.

[LanceDriver]

There's a lot of people who believe America is far from coming out of the doldrums. Their latest "improvement" in unemployment figure is being regarded sceptically. About the only thing Bernanke's money printing has done is fuelled further speculation and that is causing food prices to skyrocket across the worl, especially in 3rd world countries, which has played a part in the revolts in Tunisia, Egypt and elsewhere.

I wouldn't be putting my money on America saving the world economy. Actually, I'd be betting that their economic policies are only going to de-stabalise the world further.