The Sunday Mail (Queensland)

US and China hold key to the im­me­di­ate fu­ture


A WEEK ago it looked as if the world was tee­ter­ing on the edge of the cliff. In­deed on Mon­day we stepped over when our mar­ket plunged by about $60 bil­lion.

Yet by Fri­day we had clawed our way back, at least to the edge. All those losses and a bit more had been re­cov­ered.

But were we re­ally only back up to the edge, or had we moved more se­curely up, over and back from it?

Ob­vi­ously that is quite lit­er­ally the $64 bil­lion ques­tion for in­vestors. For was last week a great “buy­ing” op­por­tu­nity or has the re­cov­ery just made for more prof­itable selling? It looks like a bit of both.

Clearly for those in­vestors pre­pared to hold shares for the long term, the plunge did open up buy­ing op­por­tu­ni­ties.

If you want to buy, say, Com­mon­wealth Bank shares, bet­ter to be buy­ing them at $73 as against the $80 and more of a few weeks ago.

But equally, the ex­act op­po­site also ap­plied. If you did not want to just ride through the volatil­ity, you get a chance to sell at higher prices.

In terms of the core ques­tion – has the “end of the world” been con­signed to history, or only been post­poned? – for the im­me­di­ate fu­ture, the an­swer is in the hands of the Chi­nese gov­ern­ment and the US Fed.

Sug­ges­tions that the Fed would not start rais­ing US in­ter­est rates com­bined with good news on the US econ­omy to send in­vestors back into the mar­ket. In China the gov­ern­ment and the Peo­ple’s Bank moved to halt its mar­ket slide.

But what is re­ally hap­pen­ing to the Chi­nese econ­omy? One an­swer came from BHP Bil­li­ton chief An­drew Macken­zie. He said their on-the-ground in­tel­li­gence told them it was grow­ing at the 7 per cent line-in-the-sand and that the sec­ond half was do­ing bet­ter than the first. You could prob­a­bly trust that more than the of­fi­cial sta­tis­tics.

But we are re­ally go­ing to find out over the next year how much iron ore they ac­tu­ally buy and at what price.

Far from calm­ing things down, what hap­pened in the US ac­tu­ally in­tro­duces a whole new volatil­ity.

Will the Fed blink ev­ery time Wall St throws a 1000point tem­per tantrum? Or is the com­bi­na­tion lead­ing Wall St into an even more dev­as­tat­ing trap, when the Fed does raise rates?

For Aus­tralian in­vestors this is not a time for panic, but equally you should not as­sume global mar­kets are now sail­ing in clear air. Our econ­omy is still poised dan­ger­ously be­tween the wind­ing down of the re­sources boom and a post-boom … what ex­actly? There are some en­cour­ag­ing signs that the lower Aussie dol­lar is help­ing non-re­sources sec­tors like tourism, ed­u­ca­tion and even man­u­fac­tur­ing.

Sub­stan­tive and sweep­ing re­form of all the “usual sus­pects” like tax, red tape and in­dus­trial re­la­tions be­comes even more ur­gent.

It’s not just the pol­i­tics and the politi­cians. Some things ac­tu­ally are dif­fi­cult and con­flict­ing. Do we lift the GST and if we do, what do we do with the money?

Do we use it to cut the bud- get deficit? To “fund” per­sonal tax cuts? And if so, what about com­pany tax? To pay for hos­pi­tals and health?

And then back to the pol­i­tics: Does any­one think the Prime Min­is­ter and Trea­surer are in a good po­si­tion to ar­gue for “coura­geous” re­form? That the Op­po­si­tion leader will “do a John Howard” and sup­port the two of them if they did?

This is the per­fect recipe for cau­tion and un­der­per­for­mance to be­come self-re­in­forc­ing. On an in­di­vid­ual ba­sis it’s also a good ar­gu­ment for risk-avoid­ance rather than risk-tak­ing.

China has prob­a­bly sta­bilised for now. This makes the Fed meet­ing in mid-Septem­ber the next big trig­ger point.

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