Can we just fast forward to February third already? That’s when the Reserve Bank of Australia meets next to determine the price of money (interest rates). Based on recent data, rates should be headed down again. How low can you go?
It reminds us of the old song that played on the juke box from our days as a soda jerk at the local Malt Shop. “Every limbo boy and girl, all around the limbo world, gonna do the limbo rock, all around the limbo clock.”
Data released yesterday by the Commonwealth Bank and the Australian Industry Group showed the ninth consecutive month of contraction in the service economy. Last week, a similar survey of the manufacturing industry showed a seventh consecutive month of contraction. If Aussie interest rates are headed lower, you’d expect an end to the brief but respectable recent rally of the Aussie dollar.
A weaker Aussie dollar wouldn’t be that unwelcome to exporters, especially if it meant that the decline in the nation’s economic fortunes could be reversed. But frankly, what happens to Australia’s economy at this point is beyond the control of the government and the Reserve Bank. If global demand further collapses in 2009, it is going to be a grim year for the Aussie economy and Aussie stocks.
The economy is not a car. You can’t simply tap the breaks, change gears, put on an indicator, and drive off into the sunset. It is not nearly as mechanical as unimaginative economists would have you believe.
No. The problem Australia faces, along with the rest of the world, is that the whole global economy is oriented toward producing goods bought with credit. With a savage bear market in credit, there is entirely too much productive capacity to match the steep decline in aggregate global demand. Too much stuff being produced, not enough people buying it. The government answer is to get people to buy more stuff by giving them more money. This is, to use a precise term, really lame.
If you’re the anti-materialistic type, the bear market in credit and the fall in demand for “stuff” is a good thing. Stuff is clutter. If you get too much of it, you have to rent a shed to store it in. George Carlin once did a great skit on this. Warning, you’ll find some profanity there. People should probably have listened to Carlin, by the way, before buying houses. “That’s all your house is. A place to keep your stuff while you’re out getting more stuff.”
Stocks are stuff too. And yesterday, in New York at least, the stuff owned by investors didn’t do too well. You can sense the indecision investors have. It’s hanging in the air over the entire market. It would be nice to believe that financial markets have bottomed and that the economy, even though it won’t recover in 2009, won’t get a lot worse.
The so-called experts disagree on this matter. Economist Jeffrey Sachs told the Spanish daily El Pais that the world faced a severe recession but not a Great Depression. He’s right in at least one sense. This will not be the Great Depression. That already happened in the 1930s. This would be the Greater Depression, as our friend Doug Casey calls it.
Sachs would like to reassure people. Recession? Yes. Depression. Not a chance. But why not? San Francisco Fed President Janet Yellen says this recession will be no “garden variety” recession and will be “longer and deeper” than normal. But what does that really mean? It probably means continued contraction in employment, services, and production.
“The current downturn is likely to last much longer than previous downturns… We will be lucky to see the recession end in 2009,” says Martin Feldstein, former head of the U.S. National Bureau of Economic Analysis. Feldstein added that the government is going to have to step in and spend in a big way to make up for the collapse in consumer spending and business investment.
Here’s a thought, though. Maybe governments are trying to prop up a whole economic system that’s simply not fit for purpose any longer. We predict a tipping point in mass psychology where people stop thinking of themselves as consumers…and start thinking of themselves as people. What’s more, they might even think of themselves as creative producers…of their own food, or work that does not produce a feeling of alienation.
Not that we have any idea what all of that means for stock prices. But we’re sticking with our prediction from last year. The U.S. Treasury bond bubble could still go Nasdaq (soar to utterly irrational and unimaginable heights). But you may see a first quarter shift out of cash and government bonds and into equities.
It’s the stock rally we have to have, just to preserve our emotional well being. It’s not hard to see how it happens. People tend to buy stocks because they’re rising and sell them because they’re falling. We are due for a counter-cyclical rally.
After that? You’ll see the long reorientation of global economic life. Scarcity-of capital and raw materials-will reassert itself. Excess productive capacity will rust, idle, and otherwise gather cobwebs. There will be real work to do with your hands. More on that tomorrow.
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