IAN VERRENDER July 19, 2012
Illustration: Rocco Fazzari.
IS IT just me, or has the world gone mad? In a burst of optimism, Wall Street inhaled deeply on Tuesday night and again pushed higher after Federal Reserve chairman Ben Bernanke confessed his growing fears about the health of America's already seriously distressed economy.
The only rational explanation to such an irrational response is that Wall Street traders are desperately hoping that things get so bad that Bernanke and his central bank colleagues will inject even more stimulants into the equation to artificially depress the greenback, push interest rates to zero, reignite inflation and kick corporate profits and asset prices higher.
If you can figure that one out, maybe what follows will make sense.
Wall Street is only a whisker from a new record, despite the American economy being on the ropes. That stockmarket bull run hasn't happened anywhere else, or at least anywhere where the economy has been sound, and least of all in the places where you would most expect it.
Just consider the following.
China - the one economic superpower driving global economic growth - has seen its stockmarket shed 30 per cent in the past 18 months, while in recent weeks authorities have been scrambling to adjust monetary policy, to deliver a kick to flagging local demand.
Australia, meanwhile, is in the midst of a resource boom, the likes of which has never been seen. If you take the official figures into account, our economy is in a rare sweet spot with solid economic growth, low inflation, a strong currency and near record low interest rates.
But for three years, our stockmarket has gone nowhere - trading between 4000 and 5000 - more often than not testing the lower range.
It has now reached the point where the traditional premium stocks attract over bonds - the premium for risk because your capital is on the line - has all but evaporated.
That's because investors have lost faith in Australian stocks. There is a fundamental disbelief in the future of Australian companies, particularly those exposed to the global economy.
What would be the worst performing Australian stocks in recent times? Well, that would be the miners, of course, the companies most exposed to the primal forces driving the Australian economy and which have saved the nation from the global slowdown.
Rio Tinto has taken a hammering this week for delivering less than impressive quarterly production figures. Andrew Forrest's Fortescue Metals was seriously belted yesterday, belatedly delivering on the production front, but revealing that cost blowouts meant it may have to borrow yet another $1 billion. Hey, what's a minor (miner) loan between old mates?
BHP Billiton, meanwhile, yesterday delivered on the production side but was slammed anyway. Australia's biggest company plumbed its lowest sharemarket levels in more than 3½ years after it fell a further 2 per cent. That's taken falls this month to 4 per cent. And bear in mind, 18 months ago, senior BHP executives were beside themselves, questioning just why the stock was being priced at global recession levels when Chinese demand then showed no sign of abating.
You know that old airline joke, the one where the captain comes over the intercom and announces: ''Ladies and gentlemen, please adopt the crash position. Put your head between your knees and kiss your arse goodbye.''
That pretty much sums up the mood on the Australian stockmarket at the moment.
Anyone who can get out, already has. And those who have stayed in the market overwhelmingly have shifted towards an extreme defensive position, focusing on yield and strong companies with a dominant market position.
You don't have to look too far in the Australian market to find that.
Our banks may have been on the nose for gouging a little too much on the interest rate margins. But that hasn't reduced their appeal to investors. Australian banking stocks have been a standout success, even if globally, a new term has been coined for those engaged in the dark arts of high finance - banksters.
Bank stocks have risen even as commentators have torn strips off them for failing to pass on Reserve Bank of Australia official rate cuts. Even the latest revelations out of London, of how banks manipulated interest rates to cushion their earnings have done little to tarnish their appeal.
In fact, it has only enhanced their position. Better to be on the winning side, to be an investor rather than a customer.
Telstra, one of this nation's most unloved stocks, has also gone on a merry ride this year, after being unshackled from its legacy wholesale system. With its phenomenal dividend yield, it has been a standout market performer for the past nine months, confounding the critics who reckoned the national
broadband deal would be an execution order. Who would have thought that copper weighed more than lead?
As with all irrational market moves, however, there comes a time when the shift has been too extreme.
The dire situation in Europe still looms large over the global economy, threatening China's economy and thwarting the American recovery.
But the political and regulatory response to the crisis is now far more sophisticated and co-ordinated than when the crisis first erupted in 2007.
Markets often represent extreme responses in their attempt to predict the future. There is no doubt that significant threats remain to the global economy. But having pushed to those market extremes, perhaps it is now time to pull back, to reassess.
Wall Street has surged while our market has stagnated and
China's has crashed. It could well be time for a reversal of recent trends, at least in the medium to longer term.