With David Potts
Best not speak too loudly should somebody in the sharemarket hear, but the economy is officially in a fairly sorry state.
Hardly anybody noticed the December quarter national accounts because on first impressions it was growing by 3 per cent, though even that wasn't really anything to write home about, nor the stuff of a booming sharemarket.
Especially when most of that was in the early part of last year and it's been downhill since, apparently flattening out to about 2.6 per cent growth as we speak, which is too low to generate new jobs and perhaps save some others. Unfortunately, it's not enough to make everybody better off, either.
You may think this divergence strange, and I would, too. But the fact is the sharemarket and economy often go in different directions, and for longer than seems to make sense. So here we are again, with the sharemarket up about 20 per cent in six months, oblivious to the state of the underlying economy.
As it happens, the gap on this occasion may not be as great as it seems and the statistics are dated anyway. Christmas feels ages ago and the December quarter has October and November occupying valuable space. Besides, the sharemarket's job is guessing the future and, apparently to make a point, perked up in the middle of the quarter, to the day. Fortunately there are straws in the wind suggesting the economy is on the mend.
The mining investment boom looks like lasting longer than economists expected - curious considering the enormous cost blowouts in the big gas projects - and commodity prices have not only stopped falling but, in some cases, are rising again.
Although not much is happening to suggest profits are about to surge, the fact is companies did all right last year as the economy slowed. Even allowing for all the cost-cutting and downsizing (and I speak with some familiarity here), overall net operating profits in the non-mining sector rose last year.
True, there were a lot of write-downs, but they're a book entry and perhaps a comment on management, not a cash drain.
So the issue is whether the sharemarket was overly gloomy last year rather than it going over the top this year. Or a bit of both, maybe. As if the apparent contradiction between the sharemarket and the economy weren't enough, here's another. Business owners and managers are getting gloomier judging by an NAB survey, while everybody else is becoming more confident according to the Westpac-Melbourne Institute sentiment index.
I'd say the market is looking above the parapet to the two biggest economies - the US and China - and taking its cue from them. Just as our economy was slowing, theirs were picking up. Eventually their recoveries must lift us.
The US has near-zero official interest rates and a central bank promising to print as much money as it takes to boost the economy. That's music to Wall Street's ears.
Mind you, there's a debate over whether it's easy money or Wall Street's record run of profits during the past three years, itself mostly due to the collapse in value of the US dollar, that has spurred Wall Street on, but who cares? And China is emerging from its engineered slowdown, which still had it growing more than twice as fast as us.
Just don't mention Europe. Or debt. Or deficits. But this combination of easy money and improving growth sure is a heady mix.