Say it ain’t so Wen Jiabao!
In the last week market are telling us that investors have changed their minds. Instead of pricing a second half recovery in the global economy, they’re now pricing in a recession (in the stock market) and a Depression (in the bond market). What gives?
As PIMCO bond guru Bill Gross points out in his latest missive, stocks are reflecting what he calls the “New Normal.” It’s a long period of lower than average economic growth, household and business and even public sector deleveraging, re-regulation (less leveraging in the financial sector), and de-globalisation.
It’s actually the last point that interests us most – that the end of artificially cheap capital and cheap energy is straining all the connections (trade, finance, and logistic) formed during the last thirty years. Contractions can be painful when you’re giving birth to a new world order, or so we’ve heard.
Gross makes several other worthy points. One is that debt is no longer productive in boosting living standards. When it was, households were happy to borrow and so were businesses. But each addition dollar of new debt taken on in the economy is producing less and less real growth. Indeed, each additional dollar taken on is going, at least part of it, to service previously borrowed money.
He also makes a great point about what “bringing forward” consumption does in the long run. “Consumption when brought forward must be financed, and that financing is a two-way bargain between borrower and creditor. When debt levels become too high, lenders balk and even lenders of last resort – the sovereigns, the central banks, the supranational agencies – approach limits beyond which private enterprise’s productivity itself is threatened.”
We appear to have reached those limits. Or that is the proposition investors are weighing up.
Oh, and about Wen Jiabao. His comments, reported here in the Australian, appear to have spooked anyone who was worried that China’s policymakers are trying to reign in the country’s growth. Wen said in a speech that the Chinese government will, “maintain the continuity and stability of economic policies, while making them more targeted and effective…China’s economy is currently developing in the direction envisaged by the macroeconomic adjustment and control policies.”
Actually, we’re not sure what means at all. But we’ll take it to mean that Chinese authorities are worried about inflation and a real estate bubble and will try to restrain bank lending through high reserve requirements and other measures. That is exactly the kind of news markets don’t want to hear when “aggregate demand” is so weak in North America and Europe.
And earlier today China’s Federation of Logistics and Planning reported that manufacturing activity in June still expanded, but slower than May’s rate. It was down from 53.9 to 52.1. This came a day after the U.S. Conference Board revised its China growth indicator.
Again, the more we learn about these indicators and how they’re compiled, they less convinced we are they actually tell you what’s going on, or that they’re even accurate. The compilation of statistics in a complex economy is essentially an act of statistical hubris. But the important point is that Chian woes are compounding the worries of Australian investors who must now wonder whether it’s a good time to buy resource stocks. By the way, this is why we’re convinced the underlying case for a resource super profits tax – that there are super profits to tax – will be have changed quite a bit by this time next year.
Before our one day sabbatical to write the latest edition of the Australian Wealth Gameplan, we promised to take Rory Robertson and Michael Pascoe to task for being so wrong about gold. But since we’re busily preparing to debate Rory Robertson on Tuesday night in Sydney and tell him why he’s so wrong about house prices, our colleague Greg Canavan stepped into the crease last night and hit Pascoe for six.
“First, let’s kick off with an update on gold,” Greg wrote to readers of his Sound Money.Sound Investments report. “Michael Pascoe wrote an article on Monday in The Age and SMH quoting Macquarie’s Rory Robertson saying that gold is in a bubble. As contrarians this sort of stuff is music to our ears.
“Apparently Robertson thinks that most people are buying gold simply because it is going up. While no doubt some traders are playing the momentum game, the vast majority buy gold because it is a time-honoured protector of wealth.
“Only those ignorant of financial history disparage gold with bravado. Take this piece of ignorance for example:
‘The interesting thing about gold – beyond it being a much-loved ‘pretty rock’ that several generations ago was at the centre of the global financial system – is that it has no ‘running yield’, so there is no anchor, no firm benchmark for valuation…The price will be whatever investors are prepared to pay. How long is a piece of string?’
“To many people this is a very persuasive argument against gold and we have heard it trotted out for years. But it is so wrong it’s not funny. Especially coming from a financial professional.
“No anchor, no benchmark for valuation? Gold is the benchmark. Its value doesn’t change. What changes is the value of the various fiat currencies gold is measured against. It is the error and habit of the media that gold is quoted in terms of US dollars. US dollars should be quoted in terms of gold. That is, one US dollar can now buy you 1/1245th of an ounce of gold, compared to 1/35th of an ounce back in the early 1970’s when the US was last on some sort of gold standard.
“And like the paper notes in your wallet (cash) gold has no running yield. So what? Gold is money and money in its purest form has no yield. Yield is the reward or enticement for you to part with your cash and give it to a bank. At this point it ceases to become yours. It is a liability of the bank.
“Gold is no one else’s liability. It has no counterparty risk. It therefore generates no yield. It’s simple when you think about it. Why is that so hard for seemingly intelligent people to understand?”
for Markets and Money