The global economic recovery, such as it is, and the big bull run on shares and other markets might be running out of puff. And that has big implications for both the budget — just three weeks away — and for whoever gets to govern after September 14.
The collapse in gold prices since Friday is satisfying (the comeuppance of goldbugs is well overdue), but ignore the chance to gloat and focus instead on what the market moves are telling us. The plunge in other markets, especially oil and copper, tells us the reasons for the falls are far broader and deeper than whether gold is overbought and too high.
If the fall had been limited to speculative commodities, it could have been put down to profit taking and the normal ups and down in investor confidence. But the falls have been across all industrial metals, and in speculative commodities (which are favoured by hedge funds and big global investors for their liquidity), and the falls are bigger than normal — gold has suffered its biggest two-day plunge in 30 years. John Paulson, the hedge funder widely noted for picking the US sub prime crisis and the GFC, has seen his reputation pummelled by the collapse in gold, and his key fund has lost between $US600 million and more than $US1 billion in the sell-off in the past week. He won’t be alone.
These are price falls driven by the wholesale abandonment of speculative positions by investors, driven by bears who have been shorting these commodities for months and are now making hundreds of millions, if not billions of dollars, of profit. Oil fell nearly 5% overnight and 1.2% last week. Copper fell almost 3% overnight (maybe that’ll reduce the cost of Malcolm Turnbull’s Copper Magic broadband?). Tin and other metals continued to weaken.
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On Friday night our time, London-based Capital Economics issued a note that included this forecast:
“At the time of writing (Friday afternoon in the UK), equity and commodity prices and government bond yields are all falling sharply. This appears to be in response to weaker than anticipated US data on retail sales and consumer confidence. If so, this is probably an overreaction as the figures were hardly disastrous. The falls in the prices of riskier assets may have also been exaggerated by week-end position squaring after the Bank of Japan-inspired rally in the previous days.
“Nonetheless, most of these moves are consistent with our long-held view that a disappointing global recovery will cause the equity markets to run out of steam, the prices of industrial commodities to fall further (with Brent crude in particular heading below $US100) and 10 year US Treasury yields to dip to 1.5% or so by year-end. The pick up in market volatility more generally is something that we had been anticipating too.”
That’s why the Aussie dollar was sold off, losing nearly 2.5 USc overnight to fall to $US1.033 near midday today. It’s also why the US 10-year bond yield fell to 1.68%, the lowest in four months and looks set to go lower, especially if the sell-off continues today.
What’s all this got to do with the real economy?
The outlook for the global economy and Australia is now more dangerous — slowing or sluggish growth in China (China seems to be entering its lower growth future, though still stronger than the rest of the world) will damage our economy, export income and growth outlook; slowing growth will make life even more miserable for Europe in particular. That will in turn impact badly on the global economy, adding more drag to the stuttering rebound.
The global slide of the past day or so also comes at an unhappy time for the International Monetary Fund, which is due to release its updated World Economic Outlook and accompanying forecasts tonight in Washington. They could very well be more out of date than ever and meaningless compared with the rapidly worsening sentiment in markets.
It also further complicates budget preparations. The outlook for revenue over the next year is now even gloomier. And the government’s self-appointed task of identifying major savings to fund Gonski and NDIS has to be considered in the light of medium-term challenges: what if the economy needs stimulus over the next couple of years as a result of a fading China? The least-damaging “savings” at this point might be ones that make the tax base more sustainable — curbing tax expenditures over the long-term in superannuation and business welfare. The Howard-era tax cuts from the pre-crisis mining boom have left us with a more pro-cyclical tax base than we used to have, and if there is a deterioration in the global economy, we’ll yet again be looking at deep cuts in revenue, no matter whether Wayne Swan or Joe Hockey is treasurer.
From the Coalition point of view, there’s a nightmare scenario in all this — a return to government just when the global economy is turning down, and with interest rates already near-historic lows, with little extra capacity in monetary policy to provide stimulus, and the Coalition’s own fiscal hairy-chestedness in the way of any stimulus. What’s left of the Labor Party might regard it as entirely fair given the ALP walked into government with a global crisis around the corner. For the rest of us, schadenfreude won’t be much use.