This is all a very roundabout way of saying the global economy is destined to take an even bigger shift across the Pacific towards Asia. The urbanization of Asia nations and growing wealth – remember, they’ve been saving while the West has been spending – of individuals will compensate for lower demand out of North America.
Australia is perfectly placed to benefit. Importantly, Australia actually produces things that industry wants. Correction, that industry needs. Commodity prices may not stay at elevated prices forever. In fact they may fall lower than where they are now.
But the reality remains that the Asian economies are continuing to grow. And their demand for raw materials will grow with it.
Domestically, Australia has its fair share of problems. The inflation rate being one of them. However, it is likely to miss out on the banking blow-ups that we have witnessed in the US and the UK. Why? The 4 Pillars, and the lack of competition.
It is not cost effective for big multinational companies to establish themselves here in a market where the existing players have a dominant position. Their only alternative is through acquisitions, something which has not been encouraged in the banking sector.
Therefore the banks have not had to get too “smart” with how they finance their loan books. For the most part they can rely on deposits to fund their lending. The difference between the interest they pay and the interest they earn is profit.
Naturally they will have got themselves involved in some of the complex derivatives products emanating from the northern hemisphere, but not to the same degree.
We won’t pretend that today’s 3% fall on the market is the bottom. And we won’t pretend that there isn’t further for it to fall. But we do think it is likely when the dust settles in the US we will all discover that the Chinese economy has been trundling along doing what it does without making too much fuss.
Is The Bear Market Over?
We aren’t in the game of trying to pick the end of a bear market. That can only really be done in hindsight. But we are in the game for trying to identify significant events. More importantly how we can benefit from them.
This week is potentially one of those events. We don’t mean specific examples such as Lehman Brothers or AIG or Freddie & Fannie. We mean the collective series of events that has brought us to this stage and could be about to lead things in a new direction.
There has been an embarrassment of incompetence in international markets, especially by overpaid investment bankers. Investment bankers who now appear to have been nothing more useful than a Muppet.
The Australian market hasn’t been insulated from global markets, and we wouldn’t expect it to have been.
Buying Gold Has Been a Winner
For the past ten years nearly, our colleagues over at The Daily Reckoning have been warning about the oversized credit markets. It warned about the never ending stream of easy money. It suggested buying gold and ditching the US dollar. It warned that the collapse of the US dollar would happen either sooner or later.
The only thing they haven’t got right yet is the collapse of the US dollar. That could still happen and may very well depend on how the US gets its way out of the current hole. At the moment they don’t seem to have learned. Trying to solve a credit and debt problem by lending more money hardly seems the brightest strategy.
So, after all the gloom, why could all this be a positive for the Australian market? The temptation is to gaze into our T1000 Crystal Ball and predict the future. But we won’t, because we’ve only got a 50% chance of being right.
On the Bright Side
Is there a bright side? You would think so with everything that has been happening over the last week. Come to think of it, the last year or more.
What we can do is look at some of the consequences of what is happening. The major consequence is that the US is likely to lose much of its influence in the global economy. Why would international investors continue to pour money into a country that is becoming even more economically isolationist?
It is widely known that the US consumer contributes around 70% to the US economy through spending. Why would you invest there if the consumer has no money left, and will probably be more reluctant to use credit?
And now that the US economy relies so much on services as opposed to manufacturing, it risks losing market share due to lower barriers to entry for competitors.
Takeover Discount in Banks
An indication of the precariousness of banks overseas is the lack of a takeover premium. In fact we are seeing takeover discounts. Rather than a takeover or merger being seen as a positive to one or both of the companies, shareholders and other investors are instead asking “what is wrong with them if they need to merge?”
We have seen that with Bank of America and Merrill Lynch. The same goes for HBOS and Lloyds TSB in the UK. And then last night there were rumours that Morgan Stanley and GoldmanSachs would merge.
In all cases share prices in both parties has either fallen or remained significantly below the takeover price.
Cheers.
Kris