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This time it's no different

By Ross Elliott - posted Friday, 7 October 2011


The current obsession with all things negative makes for some pretty depressing times. The media have been scouring the globe for experts prepared to predict the end of the world (or at least the end of Europe and the USA, and some are even predicting a China fizzle) and global equity markets are showing the sorts of gyrations normally only seen on a seismometer reading of a major earthquake. Housing prices have been sliding, and consumer and business sentiment falling. Politically, we hate our national government (according to the polls) and the whole country is basically in a big downer. What good can come of this? Possibly, plenty.

'This time it's different' is the sort of fallacy that collectively we can all be fooled into believing from time to time. In the same way we were promised there couldn't be a world downturn (because 'this time it's different') the same could be said of those who deny the prospects of recovery (because, they say, 'this time it's different').

But are the signs of recovery, in Australia at least, already there? One certain sign has been the clear evidence that Australian consumers have read the tea leaves and flicked the switch from being consummate consumers to avid savers. Official ABS data released mid year showed that the household savings ratio rose to 11.5% - the highest rate of household saving in 24 years. In other words, you have to go back to 1987 to find a more conservative bunch of savers than we are today.

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That news was followed in September by reports that cash deposits are growing as businesses and consumers put money into safe haven accounts. In August alone, $27 billion was pumped into bank deposits, and between Westpac and the Commonwealth Bank, consumers pumped a combined $4billion into deposit accounts in one month.

It's been a trend noted by the Reserve Bank, and one felt acutely by Australian retailers from Myer to David Jones to Harvey Norman and JB Hi Fi. While it may be bad for shareholders of retail businesses, it's encouraging to know that consumers and business are winding down debt and increasing their savings.

Another sign is the evidence that the economy is still growing. Australian GDP rose 1.2% in the June Quarter, and this week, Australia's trade surplus recorded its second largest number ever, largely on the back of the resources economy but also with strong performance in the traded goods and services sector, and even dwelling approvals recorded a strong rebound (albeit from dismal levels).

Sure, there's a two speed economy at work, possibly three and even four speeds. But you could have said the same prior to the GFC, when urban markets were going well but regional and resource markets weren't exactly glamorous.

Searching the tea leaves for more signs for positives are the continued reports of strong company profits. Amidst all the talk of earnings downgrades, most company profits during the reporting season have been positive, and ahead of expectations. According to the AFR, two thirds of companies reported increased profits this year, while 37% were better than expected.

And when companies are making profits, people keep their jobs. The unemployment rate, as recorded by the ABS, crept up slightly to 5.3% in August. Hardly a calamity. Since 1978, our unemployment rate has averaged 7.11% and peaked at over 10% in 1992 – and we recovered from that.

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The equities markets aren't providing many grounds for positive thinking but even here, there's a clear view that markets are oversold and trading at heavy discounts. The fundamentals, my economic friends tell me, are generally all pretty good. The markets though have been rewarding good profit reports with falling prices, and the Greek/Euro position has provided the latest excuse for pessimism. Markets, as Adam Smith observed, are driven by 'animal spirits' and right now the animals have broken out of the zoo and are on the loose. But they will return to their cages at some point.

Summarising the global equities funk was this comment by a trader with ING:

''We're really oversold,'' Paul Zemsky, the New York-based head of asset allocation for ING Investment Management, said in a telephone interview. His firm oversees $US550 billion.

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This article was first published on The Pulse on October 4, 2011.



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About the Author

Ross Elliott is an industry consultant and business advisor, currently working with property economists Macroplan and engineers Calibre, among others.

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