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The crossroads – despair or extinction?

Mark this date down —the beginning of March 2012 — as it’s a crucial month where one day we could look back and say that’s when the worst of the GFC ‘à la Europa’ was put behind us. On the other hand, it could be remembered as a time of lost opportunity.

In many ways what I’m seeing now reminds me of my favourite Woody Allen line, which was crafted as a response to the Cold War of the 1960s when the nuclear bomb threat even gave rise to a top-of-the-charts song entitled “Eve of Destruction”!

This was Allen’s take on the choices for the world’s politicians: “More than any other time in history, mankind faces a crossroads. One path leads to despair and utter hopelessness, the other, to total extinction. Let us pray that we have the wisdom to choose correctly.”

Similarly, the European Union’s (EU) politicians are at a critical point in time where they can transition positivity created and the work done with the Greek bailout to ensure that the rest of the PIIGS countries – Portugal, Italy, Ireland and Spain – are seen as potentially more reliable debtors than the Greeks.

Good move

World financial markets need to believe that the debt management of the EU stockpile of government-related debt will be manageable.

Thankfully, the European Central Bank (ECB) has embarked on a monetary easing strategy, much like the Federal Reserve in the US, which means it’s now throwing money at the problem with its longer-term refinancing operation (LTRO). This was an overdue masterstroke and it followed the retirement of Jean-Claude Trichet, the old ECB boss, and the arrival of Mario Draghi, who knew a lack of liquidity in the eurozone could not only create a devastating recession but could infect the world’s banking system!

Believe it or not but companies such as Wesfarmers can borrow money overseas cheaper than our Big Four banks and that’s because of the interdependence of banks. If European banks got into trouble because the Greeks welched on their bonds, then there could be a knock-on effect right around the world with overseas lenders calling in funding from our banks which then could see them calling in loans from their customers — us!

The right choice

That’s why when Draghi faced the crossroad on whether to increase the EU’s money supply by lending three-year money to the banks, especially those exposed to Greece, he did have the wisdom to choose correctly.

Since this happened in December, the stock market has reacted positively. From the beginning of 2012, the Dow is up over six per cent and our market is up around five per cent. Both have been helped by the progress of the Greek debt deal.

And all of this has been underpinned by an increasingly better economic story coming out of the US. 

News recap

Let’s just recap the better news coming out of the wider world:

  • The Dow Jones index has beaten the psychologically important level of 13,000.
  • US consumer confidence hit a 12-month high at 70.8 in February compared to 61.5 in January, according to The Conference Board.
  • US unemployment fell to 8.3 per cent in January, which beat economists’ expectations.
  • Pending home sales in the States were up two per cent to a reading of 97 and that’s a two-year high! The experts had tipped a one per cent rise.
  • Warren Buffett says property investors should look at investing in housing. When this guy starts to see value in US housing, it’s a nice omen.
  • Bond yields coming down in Europe is another good sign.
  • And China easing monetary policy adds to my guarded optimism.
Break the promise

Of course, I’m concerned about the unreliability of European politicians, especially with elections looming in places like Greece and France this year, and the Iranian threat to global oil supplies that has seen the oil price head over US$108 a barrel, which could hurt global economic growth rates and spook stock markets.

But I do like the US economic comeback and Fed boss Ben Bernanke’s promise to keep interest rates on hold until 2014, which should keep the US economy growing.

By the way, I hope he breaks his promise in 2013, which will show that the US is again beating expectations.

Left-field indicator

One final heartening sign comes from left field, in fact, from grape vine fields in the Napa Valley.

In a nutshell, when restaurateurs, wine retailers and heavyweight business types feel good about their businesses they spend up big at Napa Valley at a high-end wine auction and this year sales were up 29 per cent.

So when retail and the big end of town feel better about the economy they go long expensive wine, like artwork auctioned at Christie’s, which has been doing well lately.

So taking all of the positive and the worrying signs together, and making allowances for the kinds of things that can go wrong especially in this important month of March for the EU, I remain cautiously optimistic about the global economy and stock markets generally and I’m very happy to wisely choose to drink to that!

For advice you can trust book a complimentary first appointment with Switzer Financial Services today.

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: Friday, March 02, 2012

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