FYI | Jun 14 2006
I had a quite interesting email exchange last week with one of the FN Arena subscribers.
I don’t remember exactly what it was all about, but one of the comments that stood out was: surely, the central bankers are not going to spoil it for everyone.
I answered something along the lines of: to err is only human, and history is filled with human mistakes, including those of central bankers.
I forgot to mention one thing and the matter has been brought to my attention several times since the exchange: New Zealand.
New Zealand finds itself in a situation nowadays which none of the global central bankers aspires to encounter: high interest rates, a sluggish economy and still the danger of further creeping inflation. Critics say it’s the fault of the RBNZ central bankers. Too far, too high.
Whatever the cause, or the reason, interest rates are not going to go down anytime soon in New Zealand. Don’t expect an economic recovery anytime soon either.
It’s easy to pinpoint the general angst in the Australian market nowadays. If earnings forecasts are still OK, and valuations have now come down to reasonable levels again, why then are share prices not rising?
Whenever you hear a question like that, just point a finger across the Tasman Sea and say: the reason is over there, plain fear we’ll end up here like there.
OK, let’s make this story a bit more academic (only a little bit). The world as we know it today can be summarised as follows: high oil prices – rising inflation – rising interest rates – slowing economic growth.
Main question is: what role is there for the central bankers? The answer is threefold: they can undershoot, overshoot or do their job "just right".
My good friend Markus Mueller (still at Reynolds Stockbrokers) called me this week. For the first time in weeks he seemed genuinely concerned. Not because of falling share prices, although he admitted that is becoming rather annoying, but because of the hawkish tone that has become the rule among central bankers worldwide.
He said I hope Mcfarlane and Co don’t look at the wrong data in the wrong way.
The problem with Australia, Markus said, is that Queensland and West-Australia are booming, while Victoria and New South Wales are not. But how many people actually live in the booming regions?
The danger is now, Markus believes, that the booming regions are distorting the national data, possibly leading the RBA into making the wrong decisions.
Markus read on FN Arena News that some economists are now expecting the RBA to raise rates by 50 basis points over the next 6-9 months.
He believes if this happens it will be the death knell for the Australian economy.
Markus says he talks to people who own houses and investment properties in and around Sydney and "they are all feeling pain". Two more rate rises and Australia will find itself in a situation worse than New Zealand, Markus believes.
Other friends are assuring me they are buying extra shares these days. They tell me I should be telling all readers and subscribers at FN Arena they should do the same. "It’s an absolute no brainer!"
Well, I did, sort of, in this week’s Weekly Analysis. Did I not predict that share prices would bounce back in a few months from now, because that’s what the Bear/Bull Indicator is telling me?
Before I started writing this week’s editorial, I had a read through Dennis Gartman’s latest newsletter. I have not seen Dennis in such a depressed mood over the past two years.
Gartman believes share prices are poised to bounce back, because of the heavy losses recently. After heavy losses comes a bounce back.
But it’s not good news.
He believes we have now landed in a bear market. Rallies will be short, sharp and short lived. Better to sell into them, rather than hope each one will last a little longer, is his advice.
I hope he is wrong. I really do.
Another commentator (I forgot who it was) said this week equities in general had now landed in a bear market, but resources stocks would be the exception and still do well.
If I had to chose between any of the bad news scenarios that have been mentioned thus far, I would go for the last one.
Because even under a good news scenario I would still choose for natural resources exposure.
Your still not worried but I hope I am right editor,
Rudi Filapek-Vandyck
(supported by the Fabulous Four: Greg, Chris, Terry and Rob)