Australian Economy has Weathered Global Financial Storm Better Than Others

What noise does a stock market crash make? Something like “Kerplaap” we think.

Over the last twenty-odd years there have been a few so we should all have got used to the noise by now.

The warning signs are unmistakable. Lots of frenzy and excitement. Lots of claims that the market can never fall because of, well any number of reasons. Most of them emotional rather than logical.

Heck, your editor even fell for it. We thought the ‘China effect’ would provide some cushion for the resources market over the last year. We were wrong. The transition from the US economy dominating consumer spending to Asia taking over clearly isn’t a seamless transition.

Despite that, if it was possible to buy or sell shares in an entire economy, right now we’d be ’short’ USA and ‘long’ China.

And Australia? That’s much harder to work out. For the entire economy we’d have to say it’s no better than neutral.

And it gets that rating for one reason only – China.

If we’re wrong about the ability of the Chinese economy to become the global consumer spending machine then the whole global economy will be stuffed for a long time.

But the short term problem is making sure the policies knuckleheads in Canberra don’t stuff things up. China is Australia’s ‘Get-Out-Of-Jail-Free’ card. It’s the single reason why – so far – the Australian economy has weathered the global financial storm better than other countries.

Take a look at the chart on page five of today’s Australian Financial Review. It highlights that coal and iron ore comprise nearly 40% of all Australia’s exports. We think in the next few years, LNG (liquefied natural gas) will be prominent on that chart.

The fact is, if government’s want to make other Australian industries uncompetitive, then it can’t afford to do the same with the resources sector. Fortunately, as luck would have it, resources companies don’t have to worry so much about being priced out of a market by cheaper foreign suppliers.

That is the one and only reason why Australia is doing OK at the moment. Forget all the rubbish you read in the mainstream press about it being down to the stability of our banks, or the tighter regulatory rules.

That has nothing to do with it. The guys at ASIC, APRA and the RBA are no better or worse than the guys at the SEC in the US. And as for the banks. Well, you know your editor’s views on them, so we’ll leave it at that.

But in recent weeks the stockmarket cheerleaders have gone over the top. They’ve started to spruik their belief that the worst economic downturn since the Great Depression is over, and that the ‘green shoots’ of recovery have appeared.

As Peter Schiff told CNBC the other day, “there’s so much talk about ‘green shoots’ on CNBC it’s like I’m watching the gardening channel.”

On June 24th, after the S&P/ASX200 dumped by 3% the previous day, we told Money Morning readers to “buy on market weakness.” If the Aussie market follows the US market lower today then it’ll give you another opportunity to pick some good dividend payers at a discount.

But is the market in danger of re-testing the March lows? Anything’s possible. But just as the market always goes higher than some people think, but not as high as others think, the same goes for the downside.

Buying blue-chip income stocks (not the banks) that have the potential for dividend growth over the next twelve to twenty-four months makes sense right now.

So the trade for the Aussie market is: ‘long’ dividend payers, ’short’ blue-chip growth.

Other Stuff on the Markets

The S&P/ASX200 fell 3 points yesterday, while there was yucky news overnight on Wall Street with the Dow Jones Industrial Average dropping 223 points. In Europe the FTSE100 lost 2.45% and the CAC40 flopped 3.13%.

The price of gold in Australian dollars is trading at $1,172.68, while in US Dollars it trading at $928.52.

The Aussie dollar lost ground versus the US dollar and Japanese Yen, trading at USD$0.7913, and JPY75.89.

Crude oil closed overnight at USD$66.54.

For the biggest movers on the market yesterday click here…