Don’t give in to doomsday merchants yet
by Peter Switzer
While Google-surfing into why Canada, another mining country, has much lower interest rates than us, I was seduced into a top-rated listing that talked about the end of the Australian housing bubble in 2011.
This ended up being a 'special report' and it was 'free' provided you were happy being lured into the related website’s vortex of negativity and ‘doomsdayism’.
Worse still, this wasn’t just an academic who believed in this negative outlook for the global economy and financial markets, but it just happened to flog stocks, commodities, precious metals, etc.
So, it’s possible that the whole excessive negativity was in fact being used to get leverage to sell stuff!
Now, I guess, anyone behaving as badly as this could argue that those talking the market up — stockbrokers, advisers and investment banks — are driven by the same operating manual of talk-it-up and sell shares, financial plans, etc.
And based on the same argument, those financial institutions selling annuities and which bag the instability of shares for retirees are doing so to flog their products.
So, okay, this is a typical trick of the finance industry but it doesn’t make it right. I have to confess that I actually believe in my cautiously optimistic view that the global economy will muddle through the European debt problems and that the US will eventually tackle its debt problems. I think this will happen after the next US election in November 2012 and after that my view on stocks will be less bullish with the new president bound to implement an austerity program.
By the way, imagine if every debtor country went on a responsible austerity program as soon as the GFC ended — it would have created the conditions for another recession!
We dodged a Great Depression bullet and if it brings big US debt, which will eventually slow down the growth of the US economy and stock prices, so be it. This all sounds better than 20 per cent unemployment queues, massive small business bankruptcies and soup kitchens.
We’re talking about a heroin addict on cold turkey versus a medically controlled weaning off process. Both can work but one is a lot harder and possibly faster and it brings a lot of pain.
Those who advocate the ‘no pain, no gain'solution seem to treat the human beings, who would have to cope with unemployment and bankruptcy, which can break up families, lead to suicide and KO people for a lifetime, as human collateral in an economic war game. I might be an economist but I prefer to let my heart rule my head.
That’s why I hate irresponsible calls such as the “Aussie housing bubble to burst in 2011”. For this to happen either China would have to fall in an economic hole or the European debt problems become so big that interest rates shoot up as a new credit crunch develops.
If this happened, the Reserve Bank would cut interest rates and increase the money supply to actually help battle the fear effects of such a catastrophe. Sure house prices would fall but the lower interest rates would bring new buyers into the market.
On China falling over, it’s interesting that a world renowned doomsday merchant, Harvard economic historian Niall Ferguson, believes China is set to take over the role as the world economy’s leader.
At the Skybridge Alternative Investment conference in Las Vegas, he underlined his central thesis.
“The big story of your lifetime is that this period of Western predominance came to an end on your watch,” he said. “That happened because the developing part of the world is achieving the Industrial Revolution that the Americans experienced. This period is going to continue until China becomes the biggest economy in the world.”
He argues US debt will be a stone around the US economy’s neck. Meanwhile, the Chinese are well positioned to grow in economic stature.
His economic model doesn’t factor in a stumbling Chinese giant and that’s good for Australia and our housing sector. Our link to China should not be scoffed at — it’s a sensational economic security blanket.
That leaves the European debt problem to worry about. This is a worry and puts a lot of pressure on the EU as well as the IMF to manage this eco-political challenge.
I’m watching Spain and if it goes the way of Greece and Portugal, there could be more pain ahead but I am not prepared to succumb to negativity just yet. However, if I thought there was a good reason to turn excessively negative, I would.
Important information: This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. For this reason, any individual should, before acting, consider the appropriateness of the information, having regard to the individual’s objectives, financial situation and needs and, if necessary, seek appropriate professional advice.
Published on: Tuesday, May 31, 2011
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