Green Shoots

[WinstonWolfe]

My perspective is that, yes, many countries have seen an upturn in leading economic indicators since March/April.

The US Conference Board has excellent composites of leading and coincident economic indicators for most countries.
Some LEIs for major world economies for May 09:
Uptrend: US, UK, Euro (overall), Korea, Mexico
Downtrend: Germany, France, Japan, Spain.

The OECD also has pervasive monthly leading indicator collections, the latest figures are April09...though I am still trying to get my head around the various permutations. For a concise global overview, try their June09 summary.



Nevertheless, leading indicators are a consequence of more funamental forces...and my focus for some time has been to try and understand these.

In my view, the leading indicators are subservient to decisions made by some nations to fund other nations' trade deficits. Understanding trends in this 'vendor financing' of consumption and asset values is extremely pertinent at this point in economic history.

For cashed up producer nations to continue to finance western trade deficits, they have to have sustained confidence in the West's capacity to grow their economies and repay the debt they accumulate.

Repaying this debt can occur by only two means:

- the sale or part sale of Western assets (property, companies) to producer nations

- a reduction in Western trade deficits and consequent savings used to reduce foreign debt.

I am currently reading the arguments regarding the sustainability of Australia's current account deficit. The Pitchford Thesis holds that sustained CADs are not necessarily bad if run by the private sector, not the public. However, the higher the CAD, the higher Australia's external vulnerability. An example of this vulnerability is the increasing reliance of Aussie banks on sourcing foreign funds to lend to Aussies to buy houses. The CBA's increase last week of the variable rate and all banks' recent increase of fixed rates, is a consequence of Australia's ongoing CAD and increasing reliance on foreign capital to fund our lifestyles and asset values.


IMO, the turnaround in leading economic indicators in the last few months has had two primary causes:

- a massive increase in vendor financing of future western consumption by way of unprecedented bond issuance = public debt sourced offshore.

- China's self stimulation and rebalancing of investment away from US bonds in favour of commodities and domestic consumption growth.


The upturn in leading indicators might be sustainable for some time, 6mths or maybe 6 years......but ultimately, more economists (and me) are questioning exactly how the west can reverse the trend towards the West's ever higher foreign debt, or foreign vendor financing (much of it now public debt). Hopefully, debt reduction will not come as an external shock, but a gradual increase in the pricing of capital lent to Western nations, which will act as a stronger incentive for the west to awake from its overconsumption.....and arguable overvaluation of property.

 

[boz]

My perspective is that, yes, many countries have seen an upturn in leading economic indicators since March/April.

The US Conference Board has excellent composites of leading and coincident economic indicators for most countries.
Some LEIs for major world economies for May 09:
Uptrend: US, UK, Euro (overall), Korea, Mexico
Downtrend: Germany, France, Japan, Spain.

Hi WW,
you have to be carefull reading those leading indicator. I thought was a bit odd to see Germany, France and spain negative and Euro positive, I looked a bit more into it and thse leading indicators are not the same and even taken at different dates.
You might be interested in the latest COT (commitment of traders in the future markets), there is a huge speculation on the AU$ at present link, you can see position open on the AU$ are second only after the euro (less then GBP and JPY), if, for some reason, the speculation unfold there will be extreme pressure on the AU$ destabilising the AU$ and the economy (you can see charts at this link ) I hope the RBA is building some foreign reserve safety cushion.

 

[joanmc]

Hi Evand (sorry I can't work out the quote thingy yet)
Can I please clarify? Do you mean that you are looking for an established upward movement and if that means you may have missed some opportunities at the bottom, you are prepared to wear that as part of your personal risk management strategy? Is that what you are saying?

I don't care either way I am just trying to follow this thread as I find it interesting
thanks

 

[Aaron Sice]

My perspective is that, yes, many countries have seen an upturn in leading economic indicators since March/April.

The US Conference Board has excellent composites of leading and coincident economic indicators for most countries.
Some LEIs for major world economies for May 09:
Uptrend: US, UK, Euro (overall), Korea, Mexico
Downtrend: Germany, France, Japan, Spain.

The OECD also has pervasive monthly leading indicator collections, the latest figures are April09...though I am still trying to get my head around the various permutations. For a concise global overview, try their June09 summary.



Nevertheless, leading indicators are a consequence of more funamental forces...and my focus for some time has been to try and understand these.

In my view, the leading indicators are subservient to decisions made by some nations to fund other nations' trade deficits. Understanding trends in this 'vendor financing' of consumption and asset values is extremely pertinent at this point in economic history.

For cashed up producer nations to continue to finance western trade deficits, they have to have sustained confidence in the West's capacity to grow their economies and repay the debt they accumulate.

Repaying this debt can occur by only two means:

- the sale or part sale of Western assets (property, companies) to producer nations

- a reduction in Western trade deficits and consequent savings used to reduce foreign debt.

I am currently reading the arguments regarding the sustainability of Australia's current account deficit. The Pitchford Thesis holds that sustained CADs are not necessarily bad if run by the private sector, not the public. However, the higher the CAD, the higher Australia's external vulnerability. An example of this vulnerability is the increasing reliance of Aussie banks on sourcing foreign funds to lend to Aussies to buy houses. The CBA's increase last week of the variable rate and all banks' recent increase of fixed rates, is a consequence of Australia's ongoing CAD and increasing reliance on foreign capital to fund our lifestyles and asset values.


IMO, the turnaround in leading economic indicators in the last few months has had two primary causes:

- a massive increase in vendor financing of future western consumption by way of unprecedented bond issuance = public debt sourced offshore.

- China's self stimulation and rebalancing of investment away from US bonds in favour of commodities and domestic consumption growth.


The upturn in leading indicators might be sustainable for some time, 6mths or maybe 6 years......but ultimately, more economists (and me) are questioning exactly how the west can reverse the trend towards the West's ever higher foreign debt, or foreign vendor financing (much of it now public debt). Hopefully, debt reduction will not come as an external shock, but a gradual increase in the pricing of capital lent to Western nations, which will act as a stronger incentive for the west to awake from its overconsumption.....and arguable overvaluation of property.

and "the west" being....?

you can't group the US, UK and AUS anymore. regionally completely different.

 

[evand]

Exactly. I cant pick the bottom or the top so as long as its heading up will do me.
I'll get in early anyway as property is a pretty slow moving target.

Hi Evand (sorry I can't work out the quote thingy yet)
Can I please clarify? Do you mean that you are looking for an established upward movement and if that means you may have missed some opportunities at the bottom, you are prepared to wear that as part of your personal risk management strategy? Is that what you are saying?

I don't care either way I am just trying to follow this thread as I find it interesting
thanks

 

[keithj]

My perspective is that, yes, many countries have seen an upturn in leading economic indicators since March/April.
...
Nevertheless, leading indicators are a consequence of more funamental forces...and my focus for some time has been to try and understand these.
...
Repaying this debt can occur by only two means:

- the sale or part sale of Western assets (property, companies) to producer nations

- a reduction in Western trade deficits and consequent savings used to reduce foreign debt.

They will be likely to be repaying in deflated dollars..... the question will be Deflated by how much ?

IMO, the turnaround in leading economic indicators in the last few months has had two primary causes:

- a massive increase in vendor financing of future western consumption by way of unprecedented bond issuance = public debt sourced offshore.

- China's self stimulation and rebalancing of investment away from US bonds in favour of commodities and domestic consumption growth.

I think the two primary causes of the upturn you mention are probably valid. And they appear to have dug the global economy out of a hole in the short term. The synchronised global depression has been averted for now.

The Pitchford Thesis holds that ....

The upturn in leading indicators might be sustainable for some time, 6mths or maybe 6 years......

This is all v. interesting, but that sort of timeframe doesn't help me much with investment decisions. For now, it's sufficient to know that there may be a problem at some time in the future. I'm not prepared to move to Thailand or Singapore to reduce that risk. I lump that scenario in with all the other potential Doomsday scenarios. And I acknowledge that you feel that scenario to be more likely to occur than many others.

OTOH I also lump together many other potential extremely good scenarios that will improve productivity & increase disposable income - like free renewable energy & no dependence on oil.

but ultimately, more economists (and me) are questioning exactly how the west can reverse the trend towards the West's ever higher foreign debt, or foreign vendor financing (much of it now public debt). Hopefully, debt reduction will not come as an external shock, but a gradual increase in the pricing of capital lent to Western nations, which will act as a stronger incentive for the west to awake from its overconsumption.....and arguable overvaluation of property.

I too see the West (US & some Eurozone) eventually becoming a spent force & BRIC becoming more relevant. Australia is v. lucky to be a major supplier in the backyard of the aspirational nations. It's quite possible that we'll be last into a recession & first out.

 

[willair]

However, as an investor it's critical to look some way ahead, while still taking the expected bad news into account. After 18 months of unrelenting bad news (including factoring in a depression), there are signs that the economic cycle in Australia has turned the corner, and far-sighted investors are pricing in a recovery.

Everything looks good on paper,ASX200 is in a holding pattern around the 4000+mark,there was a few a while back in this site who thought the ASX was bound for below the 2000 mark,and property 40% down in value so much for professional predictions,the only item that i think may worry some out there is,if China is threatening to reduce its buying of U.S. Treasury debt if the U.S. dollar slides further, then we may well see the greenback as the world's main reserve currency not exist in the way we know it as today..imho..willair..

 

[WinstonWolfe]

Hi WW,
you have to be carefull reading those leading indicator. I thought was a bit odd to see Germany, France and spain negative and Euro positive, I looked a bit more into it and thse leading indicators are not the same and even taken at different dates.

Thx for that Boz. I had noted that ambiguity and meant to explore at some stage. I think the same thing applies to the OECD data as well. Many countries apply their own interpretation of The System of National Accounts (SNA93) put out by the UN,IMF,OECD, and World Bank......therefore, all gdp figures (for instance) do not represent the same thing in the same time frame.

You might be interested in the latest COT (commitment of traders in the future markets), there is a huge speculation on the AU$ at present link, you can see position open on the AU$ are second only after the euro (less then GBP and JPY), if, for some reason, the speculation unfold there will be extreme pressure on the AU$ destabilising the AU$ and the economy (you can see charts at this link ) I hope the RBA is building some foreign reserve safety cushion.

Do you think Commitment of Trader data is beyond corruption?
I have used COT data for gold trading....will look at the currency data later tonight.

I am starting to understand the importance of a free float currency valuation. An unfixed currency replaces the need for a Govt Financing Account when calculating an economy's Balance of Payments....and the risk associated with a current account deficit or capital account surplus, is priced into the currency value.

I'd love to spend a couple of hours with a good economics lecturer who could explain this stuff.....many of the resources available from universities on line seem to cover the same material to the same depth, and don't go deeper. I might have to wander over to Uni of Qld one day and browse a few 2nd year text books.

 

[WinstonWolfe]

and "the west" being....?

you can't group the US, UK and AUS anymore. regionally completely different.

I agree to an extent......I am not that familiar with the national accounts and BoP of each. Ultimately the nature of what each exports and to whom, how much they import, foreign debt, and what they spend gdp on domestically, will reveal all......my rationale for lumping them altogether is that it is western democracies that got hit hardest by the GFC and have had to borrow to keep their economies solvent......

They will be likely to be repaying in deflated dollars..... the question will be Deflated by how much ?

and this is where today's problem differs from historical precedents. Today, CAD surplus economies have growing options to invest in... i.e. growing their own and producer nation means of production and domestic consumption, and vertically integrating production inputs by buying cash strapped nations' miners, like RIO Fortescue etc etc.

It is possible the ageing West is becoming less relevant to the economic health of producer nations.....if not now, certainly once our currencies have been priced down accordingly.....and our assets stripped at lower cost (thanks to deflated dollars)....sure, the West might have intellectual capital, but if we keep emphasizing the welfare state, the intellects will soon not have enough capital to do anything productive with.


This is all v. interesting, but that sort of timeframe doesn't help me much with investment decisions. For now, it's sufficient to know that there may be a problem at some time in the future. I'm not prepared to move to Thailand or Singapore to reduce that risk. I lump that scenario in with all the other potential Doomsday scenarios. And I acknowledge that you feel that scenario to be more likely to occur than many others.

I only entertain the downside because I see too many of Gen BB and XYZ mesmerized into economic insouciance, and cajoled and conned into believing socialism will preserve the std of living (and asset values) many of us have become accustomed to.

Eventually, the west has to increase real production....and swinging 3 generations habituated to life at a keyboard or games console and a bouncy welfare net, towards self reliance and producing stuff of economic value, is a big ask.


OTOH I also lump together many other potential extremely good scenarios that will improve productivity & increase disposable income - like free renewable energy & no dependence on oil.

I look forward to seeing Australia benefit from the rivers of export income from these endeavours.

I too see the West (US & some Eurozone) eventually becoming a spent force & BRIC becoming more relevant. Australia is v. lucky to be a major supplier in the backyard of the aspirational nations. It's quite possible that we'll be last into a recession & first out.

That might certainly apply now......However, as I alluded, the gnarly question for Australia relates to how we fund a perpetual CAD (and sustain our non income producing asset prices) once foreigners own an even more significant portion of our income producing assets.

In a post several weeks back, I listed more than a dozen Aussie miners that have acquired significant Chinese ownership during this downturn. A sustained downturn would see an even more drastic sell off of the farm and mine.

Whether one is a property bear or bull will depend on their time frame and views on the economics of that period. As things stand, I don't see significant sustained growth in resi property over the long term. Sure, we'll see growing pressure on rents and tighter lending criteria funnel property moreso into the hands of disciplined investors. Though ultimately, a Labor govt will not let the pendulum swing too far.....eventually, an economic rationalist like Rudd will be screaming 'it's the economy stupid'.....and write policy that directs more of Australia's gdp towards income producing assets (export businesses), away from the non income producing variety (housing)

 

[Aaron Sice]

It's quite possible that we'll be last into a recession & first out.

this is my standing along with a few economists i subscribe to.

 

[Aaron Sice]

I agree to an extent......I am not that familiar with the national accounts and BoP of each. Ultimately the nature of what each exports and to whom, how much they import, foreign debt, and what they spend gdp on domestically, will reveal all......my rationale for lumping them altogether is that it is western democracies that got hit hardest by the GFC and have had to borrow to keep their economies solvent......

lol yeah true - it's just AUS gets tarred with the same brush when it's now blaring-ly freaking-ly obvious that we do not conform to standard US economic predictions and models.

but yes - borrow more we did, pay the price we will....

 

[chilliaa]

I suggest people stop trying to take such a short term view, and instead try to estimate whether an asset class represents good value on firstly a 5 year view point and secondly a 10 year viewpoint.

Funny, but i remember when the stock market was in free fall, all those posters that confidently predicted whilst they wouldnt be able to time the exact bottom, they would be able start piling back in when it was 25% off the low, whatever that would be, because by then the trend would be showing a strong upwards indicator.

Well the market is more than 25% off its low, i wonder how many people actually followed through with that, and more to the point, do they dare hold to that position now??????

Unless you are a serious trader, again i emphasise, i think trying to time short term positions, whether its shares or property (even more foolish with the inclusion of transaction costs) runs the risk of incuring substandard returns, not because of the asset class, but because you are spending too much time, trying to time it.

Again, my normal yaak, i dont know where the markets will move in the short term, and nor do i really care.

 

[chilliaa]

Hi Keithj,

I've been thinking, whether there's any possibility of China stop stockpiling commodities (since allegedly they have enough stockpiles to work through for a long while anyway) to "punish" BHP and RIO and cause another wave of correction?

This is investing based on speculation/fear rather than calculated probability.
Maybe next year an massive asteriod will come out of no where and hit the earth, and the GFC/credit crisis/international trade imbalances etc will seem like small bickies.

Yes i here people saying, thats not likely to happen, so dont worry about it.
But if it did happen, then suddenly the 'risk' of it happening again would suddenly be reflected in the asset class.

 

[boz]

Do you think Commitment of Trader data is beyond corruption?
I have used COT data for gold trading....will look at the currency data later tonight.

the COT could be corrupted, but even if it is, you can't hide the huge number of position on the AU$ either if it is speculation then if someone is playing the market (they are even higher then last July at commodity peak).
EDIT: I just wonder if RBA is building up forex reserve to eventually stabilise the market weather speculator exit the market at same time

 

[Aaron Sice]

Funny, but i remember when the stock market was in free fall, all those posters that confidently predicted whilst they wouldnt be able to time the exact bottom, they would be able start piling back in when it was 25% off the low, whatever that would be, because by then the trend would be showing a strong upwards indicator.

Well the market is more than 25% off its low, i wonder how many people actually followed through with that, and more to the point, do they dare hold to that position now??????

i was one of these people and i did take a spoonful of my own medicine, with much success. i took a CFD on XJO (well, STW actually...) with a reasonable stop (i got in at $32.50) because of the convergence (i couldn't find the pic for reference, here's a basic google line chart) anyhoo, i think i got in a little early, shoulda waited for the $33.50 entry confirmation, but i just had "that gut feeling that i know i shouldn't ignore" moment and took the trade.

STW currently trading at ~ $37.80 so that's a very healthy profit with stops moved up to secure a profit should the market correct again. i'm letting this ride, but i did take 25% of my position off at the touch of 4000.

i don't see anything rocket science about this. it's just a situation where everyone was following the upper trend line and not looking at the lower trend line, so it was sold underneath. at convergance we saw a buy back, so i was watching with baited breath. when it broke above the old resistance line, i was in like a shot.

 

[WinstonWolfe]

Here's an admirably realistic appraisal of what the US must do to save itself, by Citigroup's CEO Vikram Pandit. Video ~10 mins

There's an initial minute of self aggrandisement, but then he cuts to the chase.

The same applies to Australia I think.

 

[MichaelW]

Hi Guys, more green shoots emerging...

Not sure if this one is covered yet (probably was), but here's the hard facts from the ABS behind it:

5609.0 - Housing Finance, Australia, Apr 2009

In seasonally adjusted terms, the total value of dwelling finance commitments excluding alterations and additions increased 3.6%. Investment housing commitments increased 8.9% and owner occupied housing commitments increased 1.9%.

And look at the shape of those housing commitment charts. Definately looks like we've turned the corner. The 9% odd increase in investor commitments is also very encouraging as it suggests once FHB demand abates we'll get the kick up in investor demand we need to propel the market forward.

Here's some commentary on these stats out too:

First home buyers peaked – investors returning

In this month’s figures from the ABS, the value of investment rose by about 9 per cent. This is hardly surprising with people that are looking at the money they have saved in loan repayments from low interest rates over the past nine months or so who have realised that this saving easily funds an average negatively geared investment property with money left over. I would expect more investors in the market in the next year.

Cheers,
Michael

 

[contrary]

50% shares, 50% cash.

Property at 40% LVR.

I'm conservative. Like to keep some powder dry.

No one can predict the future. I still think that property is horrendously overpriced in this country. It's production potential is minimal, but households are leveraged to their eyeballs on it. Net yields are still poor. Not exactly enticing me to buy more.

I'd buy REITS rather than direct property at the moment. Still don't think they have bottomed though. A bear market bottom at the end of a bubble takes time. Things don't bubble again a year later. Same applies to ASX. This is still a bear market rally to me.

I think Boz is right lot of hot money piling into AUD (and hence also AUD assets). AUD is a bet on global risk appetite and normalization of credit markets. Also interest rate and fundamental factors.

Australia has been preserved because there has actually been adequate prudential regulation of banks, commodities have not cratered as much as expected and government debt is low.

With ASX, I'll be buying some more at 2700.

Property whenever it stacks up for me. Just my opinion.

 

[kum yin lau]

Hi, I'd set my sights on 2900 [no particular reason except it seemed a reasonable low] but it never came. At one point, it really looked possible.

Now, surely it looks rather improbable?

I actually tested the waters at just under 3200.

Will be interested if other people think sub 3000 is probable.

KY

 

[VYBerlinaV8]

I think sub 3000 is possible, but very unlikely.