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Resource Prices Never Lower

Long term investors have great difficulty getting value from a resource investment.

The Demographic Big Picture: Older and African

Changes in the underlying pattern of population growth will have far-reaching economic, investment and geo-political implications.

Weak Australian Corporate Profitability

The underlying profitability of the Australian economy still seems inadequate for the level of the Australian market.

Economy Not Helping US Market (and vice versa)

Weakening US manufacturing conditions are signalling further weakness in US equity markets.

Declining Commodity Prices: More Evidence

There is broad evidence of a long-term decline in commodity values.

Housing: Yes, There Will Be A Fall!

History says that the housing market will weaken but not until interest rates begin to rise.  Could some of the more dire warnings of housing price falls come to pass?  The answer is ‘yes’.

Markets: "Start Shooting or Give In"

Simply from the perspective of equity market impact, it might be better for shooting to start in the Middle east or for Iraq to capitulate.  Either would do.  The least desirable outcome is for a lengthy standoff.

Equity Valuation Guideposts

A stable or appreciating Australian dollar could persuade overseas investors that the risks from investing in the Australian market have diminished.  The prospect of the Australian market rising at a faster rate that the underlying growth in profitability might become a realistic expectation.

Inflation Statistics: What to Worry About

The question for investors is whether there is any new information which indicates that the 3% assumed in the required return calculation is no longer applicable.

Bond Yield Guideposts

Cyclically higher inflation in the USA which would tend to drive rates higher would be offset by a decline in the Australian yield premium as the relative inflation performance converges.

Developing Asia: Real Potential, Different Timing

The announcement that China is to open negotiations on a free trade pact with the ASEAN group of countries highlights that this will remain one of the most vibrant regions of the world economy.

Australia and Asia: Good News and Bad

For Australia, the changes underway in Asia are likely to provide both good news and bad news.

Monetary Policy: A Blow With a Blunt Instrument

There is an element of panic in the latest US interest rate cut by the Federal Reserve and the reaction by Australia’s Reserve Bank.  That should not be surprising at this point in the cycle. It is also better for markets than the alternative courses which were open to the authorities.

US Elections: Now Less Uncertainty

The almost unprecedented US mid term election outcome is a good stepping stone for markets because it takes away one further element of uncertainty.

Still Awaiting the e-commerce Revolution

The build-up in e-commerce sales in the USA remains slow.

Government Changes Forecasts

With prices now expected to be increasing at a rate of 2½ to 3 percent and output growth around three per cent, underlying profit growth could be expected to be 5½ to 6 per cent, substantially below the longer-term average.

Australia’s Export Performance

Export growth has stopped. Export volumes peaked in the September quarter of 2000 due to the slowdown in the international economy and the Australian drought.

Australia’s Asian Relationships: Being Secure Within the Region

Australia's interests require that Australia be secure within the region in which its standard of living will be determined rather than buttress itself against the region which will determine much of its future welfare.

Australian Profit Update

There has been above average profit growth reported for the September quarter.

Asset Allocation Review

thebigpicture asset allocation model suggests maintaining a relatively modest exposure to domestic equities at the beginning of 2003 with cash levels remaining relatively high.

The Rising Australian Dollar

The Australian dollar has been rising. In the short term, interest rates and a global readjustment by the US dollar are having an influence. But the change is also an evolution of economic events which began 25 years ago.

Parking Funds: The Risk With Bonds

Investors using the bond market as a safe harbour while awaiting a return to equities might be incurring some additional risks.  Cash might be the place to stay if short-term equity risks are perceived to be too high.

thebigpicture Themes Still Relevant

thebigpicture top ten themes reflect the views of the author about some of the longer-term trends which are affecting investment market outcomes.  The themes, originally published last year, have been reviewed with no changes.

Gold Prices: Irrelevant But Fascinating

There is probably no financial market indicator so widely reported and as irrelevant as the gold price.  Even so, it continues to fascinate.

When Will The Shooting Start?

The sooner shooting starts in the Middle east, the quicker markets will lose their excuse for inaction and governments will be able to avert a looming policy paralysis.

Whither Internet Retailing?

Use of the internet for retail transactions is growing but, having started from nothing, it is still far from making a meaningful contribution to commercial activity.

No More Debt?

The debate about the closure of the Australian bond market might have been a flight of fancy after all.

Housing: The Price Cycle Continues

The Australian housing cycle is an unintended beneficiary of Iraq failing to disarm.

Equities: The Value Gap Closes

Relatively resilient corporate profits and a weaker equity market are achieving the adjustment which was necessary to realign equity values.

At Last, The Shooting Starts

The conventional wisdom is that the attack on Iraq will be swift and, with a clear-cut result, the government can give more attention to economic matters.  But will events be that straightforward?

The Iraqi War: When Too Much Information Is Not Enough

It is probably still too early for investors to come out of their economic bomb shelters.  The implicit assumption in many financial markets that the Iraqi war would be a straightforward use of technology and military power created a danger for investors.  There are also broader economic tensions surfacing.

e-Commerce: Dominated by B2B

e-commerce has been adopted far more widely for transactions between businesses than by consumers seeking to purchase goods or services.  The extent of the difference has again been highlighted by some recent statistics from the US Census Bureau.

Iraq: Some International Political Consequences

Several of the international institutions which were once regarded as crucial to the well being of the international community – NATO, the United Nations and the European Union – are revisiting their futures.

The Very Big Picture

The events in the middle East might have obscured how long term trends underlie many of the economic and political developments which affect investment markets.

US Economy: Where To?

The US economy has been flashing mixed signals.  More positive outcomes will be critical to how US equity markets perform and how much confidence can be relayed to international markets.

Population Growth Updated

Demographic trends are a critical element of the big picture.  Just as rapid population growth in the second half of the twentieth century determined economic outcomes so too will the aging and declining population in the developed countries affect outcomes in the current and coming decades.

The Asian Growth Outlook

The Asian region is set to become an increasingly important source of global growth.  The latest forecasts show that the Asian region economies have largely recovered from the shocks of the late 1990s and have emerged onto what appears to be a more sustainable, even if slightly slower, growth path.

Japan: A Model Economy Again!

Japan’s economic situation is again becoming something of an international model … of what you don’t want to have happen elsewhere.  It is the model for the fear now being expressed by the US Federal Reserve.

The Budget: If It Looks Like A Duck…

Much of the budget is noise…and, therefore, to be ignored for investment decision-making.  Having tied itself to the rhetoric of small surpluses, there is little scope for discretionary policy shifts of any great size by the government.  As the economy has matured and the Reserve Bank has assumed greater control over economic policy the influence of a single annual budget has also diminished greatly.  

Should We Take The Government Seriously?

Does the government really want its policy changes? Or is it simply playing a political game to wrong-foot its opponents?

Using Debt: It May Be Too Late

Recourse to debt funded education significantly changes the balance of individual finances.  A higher debt tolerance might reflect the peculiar experience of those currently making policy.  It might be inappropriate for a subsequent generation.

Getting Used To A Higher Dollar

Economic conditions justify a more buoyant Australian dollar.  However, the world economy has a vested interest in a strong US dollar and, longer term, upward pressure on its value could well resume.  For investors, the stronger Australian dollar is beneficial because it makes Australia a less risky destination for offshore capital.

The Dollar: Economic Drivers

Is there a fair value for the currency? An array of economic variables may be relevant but relative inflation is one of the more important in the longer term.

Free Trade: Efficiency v Access

The Australian government is talking about a free trade pact with the USA as though it was an easy exit from a deteriorating national export performance.  Australia needs a vibrant export culture to support higher rates of profit growth. There should be more emphasis on business efficiency and international market development efforts for a sustainable improvement in overseas market penetration.

The ASX: Improving US$ Returns

The stronger Australian dollar should provide a fillip to the Australian equity market. Overseas investors will see that some of the risk from investing in Australian equities has been taken away.

Hypothecation: The Next Economic Debate?

Hypothecation might be the way to break the impasse between the need for more public sector funding of necessary services and the reluctance of government to increase general levels of taxes. Its emergence could suit all political parties but bring with it some significant implications for lifetime financial planning.

e-Commerce: The Christmas Effect

The latest report by the US Department of Commerce on the uptake by consumers of e-commerce has shown that there has been little progress.

Interest Rates: More Groping In The Dark

Interest rates are being cut in the USA and possibly in Australia. Should this make us more confident or is it a sign of policy failure and a warning signal for investors?

Housing: Too Protected?

In Australia, the housing market exerts a strong influence on monetary policy. It might be time for housing to lose its privileged position and stop disadvantaging other parts of the economy.

No, To Negative Gearing?

We told you so. Negative gearing made a political appearance last week and could well return.

Losing The Competitive Edge

Is there such a thing as national competitiveness? In arguing that there was not in its recent annual outlook, the Asian Development Bank (ADB) has signaled a growing sophistication in the region’s approach to economic development

and a challenge for Australian companies.

US Economy: Where To?

The world needs a driver for its growth and is watching the USA as the only available alternative. That makes Alan Greenspan the chief policymaker for the planet. Meanwhile, there are more red flags against some of the key indicators.

Thirty Years On: The Industry Policy Agenda

Thirty years ago this month, the Australian government announced that it would cut all tariffs by 25%. The scars would remain for many years but it proved a seminal step in giving Australia a more open economy. Importantly, industry policy was moved to centre stage.

Asset Markets: Let Them Run?

Should the Reserve Bank (or any other central bank) be concerned with asset prices or should it allow individual markets to run their course?

Inflation For Investors

Four times a year we are told what Australia’s inflation rate has been in the prior quarter. What should investors be looking for when they pore over these numbers?

Housing Affordability: Be Serious!

The decision by the commonwealth government to hold an enquiry into the affordability of housing smacks of political maneuvering. Getting lower housing prices is easy. Reduce the attractiveness of housing as an investment. But who dares do it?

Europe: Still Weak

Growth prospects within the European region economies are continuing to disappoint.

The ACCC: Is It Restraining Growth?

Aggressive application of competition policy might constrain how big an Australian company can become. Ultimately, this has an impact on the type of investments available to Australian investors.

Caught By Surprise, Again!

The Treasury Secretary made the news because of his comments that the extent of the housing boom has surprised officials. Economists, regrettably, are always being surprised.

China: Still Heading Up

China remains on track to achieve its long anticipated potential. It is set to overtake the USA as the world’s largest economy in little more than a decade. However, some anxieties are emerging: are gains coming at the expense of others?

IMF Forecasts Signal Lower Returns

The forecasts of the International Monetary Fund (IMF) are a telling backdrop to company performance. Companies will be unable to outperform the business environment in which they find themselves.

Metal Prices: Some Things Don’t Change

Higher metal prices are a respite for mining companies but no escape from the long-term pressures dogging the industry. For some, rising prices are also a sign that the international economy is about to turn for the better. This interpretation of what is happening might be too optimistic.

Housing: Moving To The Country

The solutions to rapidly rising metropolitan housing prices and diminishing populations in regional centres seem to be converging.

Monetary Policy Changes: What Impact?

Despite continual speculation about movements in official interest rates, surprisingly little is known about the effect interest rate changes have on equity market values. New analysis emphasizes the difficulty as much as it offers answers.

Older And Less Profitable

An aging population and slowing economic growth could halve the rate of company profit growth.

China And The USA: Australia’s Future

Australia had a glimpse of its future in the past week with the visits of the Presidents of China and the USA coinciding.

If The Reserve Bank Is Right….

History says some stocks should decline in value more significantly than others as the Reserve Bank pushes up interest rates. But moving interest rates this early in the inflation cycle is unusual. If the Bank is right, the future could be an attractive one for share investors.

Politics v Economics: Irrelevant Leaders

Political leadership does not matter. The Reserve Bank is the primary economic policymaker. Politicians have detached themselves from the macroeconomic outcomes.

The Property Bubble: de ja vu Again

The demise of a major property investment promoter in the past few weeks highlights how little cycles change. What is surprising is that so many people are so surprised when history repeats. Will the critical next stages which usually broaden the hardship also be replayed?

The US Economy: How Strong?

There is a more positive tone to the US economy but care should be taken to avoid overstatement.

Free Trade: What’s In It For Investors?

With the Australian economy having been opened to more competition over the last two decades and Australia's corporate regulatory regime progressively harmonised with that of the USA, the impact here of a trade agreement is likely to be quite limited.

USA-Australia Trade: Decision Time

This month marks the tenth anniversary of the North American Free Trade Agreement which has brought together Canada, Mexico and the USA in one of the world’s most important regional markets.  It is also likely to be the month Australia is admitted to the club – or decides the sacrifice is too great.

US Government Deficits: Going Up

The US government has foreshadowed that it will spend US$520.7 billion more than it raises in revenue in the 2004 fiscal year. The $757.2 billion adverse swing in its spending deficit from as recently as 2000 would be devastating for other economies but the US has a special position.

Fed v RBA: Who’s Right?

There is a difference between the US Federal Reserve Board and the Australian Reserve Bank in the conduct of economic policy. The Fed seems more investor friendly than the RBA.

Free Trade? Not Really

The Australian government has done a market access deal with the US administration. The US has conceded on matters which are not important to it. The Australian side has conceded on some of its priorities. Free trade it is not.

Interest Rates: What is Normal?

History says that Australia’s interest rates are too high unless inflation is about to surge from unsustainably low levels. This is a critical call being made by the Reserve Bank. One way or the other, there will be an impact on investment returns.

Getting Older: Dealing With The Future

The government tried to drag the aging workforce to the centre of the policy stage to recreate some political momentum in an election year. Its relatively minor amendments to superannuation barely hint at some of the momentous changes ahead.

An Australian Miracle: No Way!

References to Australia’s miracle economy miss the point.  Its relatively strong growth in recent years has been the result of considered policy changes not simply luck or divine intervention.

Economic Policy: Not For Us

The Reserve Bank is unequivocally Australia’s primary economic policymaker. Political leadership is now barely relevant to economic outcomes, a change most politicians are relishing.  They do not want to be responsible for economic policy.

US Economy: Blossoms In Spring

There are now clearer signs of a more robust US economic recovery.  Beware some equity price volatility as the market gets used to this fundamentally good news.

Family Friendly Or Voter Friendly?

Did the recent Australian government budget really favour families?  Without being able to assess the distributional effects of taxation and expenditure policies we cannot tell.

Oil Prices: Why No Crisis

Internationally traded oil prices have hit record levels of over $40 a barrel, four times the price level in the early 1970s when the world was in the midst of a ‘crisis’.  Everyone seems more sanguine now.

Russia: A Giant Stirring

Since the collapse of communism, Russia has become the forgotten giant.  There were signs in the past week that President Putin was prepared to deal his way back to a position of greater influence.

The Australian Economy: Changing Gear

According to recent economic statistics, the Australian economy is changing down a gear.  However, a slowdown with higher interest rates seems to have already been factored into equity prices.  The market appears slightly undervalued.

Corporations: Still Risk Averse

Corporations in the USA and Australia have been reluctant to employ or invest.  The new regulatory environment is aggravating the reticence to take risks.

Europe: The Enthusiasm Dims

Is a united states of Europe a lost cause? Last week’s European parliamentary elections highlighted why Europe will not rival the USA as a political institution on the global stage.  But the biggest gains in living standards were always going to be from eliminating market barriers not political union.

The Disappearing Family

Continuing structural changes gnawing at the ‘two parents and children’ family model will burden governments and eventually impose a larger financial obligation on all households.

Retailing: As Good As It Gets

Conditions for Australian retailers have been about as good as they could get in the last year.  Personal spending is likely to be facing more headwinds in the year ahead.

US Government Debt: How Scary?

The US budget deficit is pushing toward record levels. There are more frequently expressed fears that this will force the US dollar lower. This has implications for global economic conditions as well as the competitiveness of Australian companies.

Less need For Rate Rise, Says CEO

The continuing propensity of commentators to sensationalise interest rate policy by breathlessly trying to link every economic statistic to the outcome of the next Reserve Bank board meeting is pushing them to the brink of professional misconduct. 

China: The Odd One Out

Across the world there is a cleavage in corporate investment performance. In some countries, investment is very weak; in a minority of others quite strong.  The cleavage partly explains why inflation pressures are relatively subdued.

FDI: Competing For A Share

From once being openly hostile to foreign direct investment, developing nations are now competing for it on the open market.  Companies have been increasingly dictating where funds are flowing.

US: Still Expanding

The flow of US economic statistics seems to have lost some of its lustre of late especially if the reaction of the US stock market is any guide.  The balance of evidence seems to be pointing to an economy finding a more sustainable growth path and not one floundering.

Interest Rates: The PM’s Guarantee

Interest rates “always” go up under Labor governments according to the Prime Minister as he launched his re-election campaign.  Has interest rate history been thrown overboard for the sake of politics?

Government: Not Responsible

Political leadership does not seem to matter to markets any more. The Reserve Bank is the primary economic policymaker.

Australian Profits: Hitting Records                             

Official statistics are pointing to some of the best conditions encountered by Australian business in recent history. The macro-economic measures of corporate profitability showed a sharp rise in the June quarter.  

Inflation: How Everyone Can Help the RBA                    

Policy makers, with their fingers on the interest rate trigger, keep being told by the inflation statistics that their anxieties are misplaced.

The Election Upshot                                                             

Senate maneuverings may become more intense after the election despite preoccupations about the newfound power of the Prime Minister.  The Labor Party might actually be better off with a coalition majority in the Senate. Meanwhile, the Reserve Bank will continue to manage economic policy.

Growth & Rates: Too Close

The longer term prospects for economic growth in Australia suggest that interest rates might still be too high to make investment attractive.

How Misleading Is Unemployment?    

An employment rate is a more meaningful indicator of labour market conditions than the more frequently used unemployment rate which usually receives the headlines. 

Global Growth Outlook 

Official international economic agencies have been reviewing their forecasts and coming up with the same conclusions.  The global cycle is decelerating and Europe is still struggling to achieve acceptable growth outcomes.

End Of Year: Macro State Of Play

The Australian equity market is hitting record new levels as the year ends.  This issue summarises the year end bigger picture.  The first edition of thebigpicture in 2005 will look further ahead at what might unfold.

US Economy: Settling In

Recent data suggest that the US economy is settling onto a sustainable growth path.