More crack please!
Wait, did we just say that? Sorry. What we meant is, ahem, “More stimulus, please Sir.”
Yesterday’s retail sales figures from the Australian Bureau of Statistics show that the short sales high enjoyed by retailers in December all but vanished by the end of the February. So the government, according to today’s Australian, is already preparing another stimulus to get people back in the shops. Meanwhile, in the wider world, storm clouds are forming in commercial real estate and the corporate bond market. More on that in a moment.
The seasonally adjusted retail sales figures showed a 2% fall in sales in February. That followed January’s meagre 0.5% gain and December’s $8.7 billion stimulus-inspired 3.8% gain. It really is amazing what you can do with statistics though.
The non-seasonally adjusted figures actually show a 12.9% month-over-month fall in sales. And according to the ABS, sales at chain retailers and large stores fell by 16.3% in original terms. Yet the seasonally adjusted numbers show a fall of 9.8% for large retailers in February, after an 8.3% rise in December and 0.5% fall in January.
So what gives, why is there a huge difference between the seasonally adjusted figures and the original data series? If you look just at the original data series you’ll see that retail turnover has declined 32.1% in original terms from $24.7 billion in December of 2008 to $16.6 billion in February of 2009.That would be headline news! But the headlines show just a 2% month-over-month fall. Still news. But not earth-shattering.
To calm our troubled mind we called the ABS and found them to very helpful in clarifying the methodology of the Retail Trade Survey. The conversation was edifying. We learned that ABS phones up around 2,700 respondents each month to get a total turnover figure. It surveys large businesses and small ones, cafes and big box retailers, companies that do over $50 million in monthly turnover and those that do considerably less.
Those numbers are then seasonally adjusted using a number of “forward factors,” which frankly, we couldn’t understand. But the main goal of the adjustment, our friend at the ABS explained, is to smooth out the variability in the series to give a picture of the overall trend.
“However we’ve had to suspend the trend estimates for the series starting in November of last year,” he said.
“Why is that?”
“Well the stimulus measures are basically forcing everything way up.”
“So it’s distorting the figures?”
“And actually making it harder for you to tell what’s going on at the retail level.”
“Yes, for now.”
If you zoom back out from this level of statistical detail, what do you find? Well, the stimulus got people busy for a few months and they spent. Some of them may have saved the initial cash splash in December, only to spend it February. Judging by the number of large empty TV boxes awaiting trash pick-up over the last few weeks, Australians don’t seem all that concerned about the global economy.
But will the Reserve Bank be concerned enough about the dodgy retail sales figures to cut rates on Tuesday? And if so, by how much?
Questions and questions. Always with more questions. Our main point is that the stimulus has produced a great deal of sound and fury, but it doesn’t signify that Australians are any wealthier or more financially secure than they were a few months ago. The money wasn’t invested in capital assets. It isn’t producing anything.
Confirming the same mistakes of the last twenty years, it was more money spent on consumption. That’s just retail therapy via government handout. It hasn’t improved the nation’s economic health or its prospects. Maybe the Prime Minister ought to just shout the country a beer on the weekend. It would have the same effect. And more people would benefit!
How about prediction then? The OECD is now predicting that its member nations will see their economies shrink by 4.3% this year. This is what Treasurer Wayne Swan and acting PM Julia Gillard call “negative growth.” What’s more, OECD reckons that unemployment rates in industrialised countries will hit double digits. Note to OECD: it’s already there, but government statistics are concealing it.
What are we on about? Well, today we woke up with the feeling that a second more vicious bound of deleveraging and “negative growth” in the economy is just over the horizon. Shrinking international trade…rising unemployment…and now…according to Moody’s, which just downgraded US$1.76 trillion in corporate bonds…rising defaults on corporate debt and big problems in commercial real estate.
All of these things could conspire to send the Aussie share market to new lows. We’re in a period of calm where the crash-and any time shares fall 50% it’s a crash-has stalled. Stocks have rallied 20% world-wide. Oil is weak. Gold is idle. But is this the long and bumpy bottom?
As the chart from Doug Short below shows, the S&P 500 is down 48.9% from its all-time high. It was down as much as 56.8% before this recent rally. And at its current level, the 48.9% matches the 48.2% fall in the index during the 1973 oil crash and the 49.1% fall in the tech wreck (which drove the NASDAQ down even lower.
Obviously the scary scenario is that this twenty percent rebound has no real conviction. It is still a smaller rebound in percentage terms than the rebound in the Dow after the ’29 crash. That rebound led the Dow up nearly 50% in eight months before economic reality set in. From that point, it was long dark march to a nearly 90% decline from the highs.
So we are at moment of truth of sorts. Either this Great Depression rhetoric is hyperbole designed to sell newsletters and newspapers or it is real. If it is rhetoric (or just an inaccurate forecast, if you prefer), stocks will rock back and forth gently higher over the coming months. This implies a recovery in trade and the economy sometime late this year or early next.
If, however, it is real, then this rally is going to collapse and stocks are going to head much lower over the next two years-and maybe many more. If this were the case, then a major revision of your asset allocation would be in order, one that factored in falling share prices over the next five years.
What would that asset allocation look like? Would gold and oil hold up if assets deflate at the rate we’re discussing? More on that tomorrow.
For now, let’s be clear that if a second wave of bank write offs and loan losses from corporate bonds and commercial real estate hits, no one knows how the banks will fare. Presumably, current stress tests factor in even larger loan losses (you’d hope). But at the very least it means U.S. and European banks will need more capital. Where will they get it?
Well, they’d like to get it from China, Japan, and the Gulf States (those countries with the largest foreign exchange reserves. Maybe they’ll get it. Or maybe Australian mining firms will get it. Which brings us to what this means for Australian resource and financial firms.
If the second wave of the global financial crisis is imminent, capital is going to become an incredibly scarce commodity. Some will flee to the U.S. Treasury market. Some to gold. And some to mattresses. How much will flee to Australia?
“Australia just does not have the capital to be able develop its own assets,” says OZ Minerals CEO Andrew Michelmore. His company appears to have gotten out of jail by selling its second-tier mining assets to China and holding on the Prominent Hill gold and copper mine in South Australia.
“Companies in Australia in the resources industry have forever relied on foreign investment to be able to develop,” he added. The question this year is how much capital Australia is going to have to import to keep businesses and households functioning normally. Of course, it’s not a normal time, which means Australia could become capital starved much sooner than anyone currently expects.
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