Feeling bullish about trading in negativity

Despite overwhelming evidence to the contrary, the great fear among investors is that the resources boom has passed.

Analysts pore over endless streams of numbers emanating from China, desperately trying to determine if the greatest economic transformation in human history has come to a shuddering halt.

But no amount of studiously compiled numbers nor the endless stream of bulk carriers plying the waters between the Pilbara and China's smog-choked southern ports can stem the tide of negativity engulfing our sharemarket, still 40 per cent below its 2007 peak despite an economy that is the "envy of the developed world".

The mood oscillates wildly on almost a daily basis. Wednesday bore witness to a mass sell-down of resources stocks despite BHP Billiton, the world's biggest miner, reporting record production in 10 key divisions including iron ore.

The following day notched up the biggest gains since January. But fear is in the ascendancy as investors increasingly have convinced themselves the resources boom has come to a screeching halt, threatening Australia's sweet spot in the global economic hierarchy.

Currency traders, however, beg to disagree.

As mining stocks this week headed for levels not seen since the darkest days of the financial crisis more than three years ago, the dollar continued chugging northwards, pushing through $1.04 against the greenback and breaching new records against the euro.

That's almost unheard of. The Australian dollar has long been a proxy for commodity prices and the health of the global economy.

When commodity prices drop, the dollar takes a hammering. At least that's the theory. But it doesn't seem to be working now.

There is no doubt commodity prices have fallen this year, and now are about 30 per cent below their peak. But mining stocks have fallen harder and faster than they should, mostly on fears that things will get even worse and that China's economy will crash with a thud.

And the dollar, which should have eased against most currencies, instead has defied its natural trend.

Markets are never entirely logical, and sharemarkets in particular, tend to be irrational in the short term. They overshoot in both directions, thinking the good times will never end and, upon waking to the dreadful realisation that they have paid too much for their shares, lurch into reverse.

If you want a more measured and reliable market indicator for the real story behind our economy, then look to bond markets and currency markets.

Unfortunately currency markets right now are being manipulated by central banks in the United States, Britain, Japan, Europe and, in particular, Switzerland.

And as a developed country with low debt, the dollar is attracting more buying support than it ought.

Still, it is clear that currency traders do not see the dire threat to Australia's mineral exports that stock traders fear.

China clearly is experiencing growing pains. And it has been hurt by the prolonged recession plaguing the developed world, dispensing once and for all the notion put forth by numerous economists a couple of years back that China and the Asian region had "decoupled" from the United States and the developed world.

China is now simply a bigger player in a globalised world, painfully shifting from relying solely on exports to internal infrastructure investment and gradually to domestic consumers for growth.

Europe, one of its biggest export destinations and the centre for global finance, has hampered that process.

That in turn will affect us.

There is no doubt there are a great many uncertainties overhanging the global economy, dominated by the spectre of Europe's calamitous debt position.

Slowly, however, and against all the odds, European authorities are inching painfully towards greater integration and some kind of long term solution. The US economy too, while mired by political gridlock and persistently high unemployment, has drastically improved its export performance and is weaning itself off its foreign debt funded consumption.

As for China, the driving force behind global growth and the economic engine to which Australia has hitched its caravan, the most recent estimates for its just released economic growth came in amazingly close to the official target set at the beginning of the year.

That either tells you that things aren't as bad as sharemarkets believe or that Chinese authorities start with the target set by the politburo and then work their way backwards to justify it. It is probably a little of both.

No matter how you look at it, though, China is slowing. Its most recent quarterly growth figures came in at 7.6 per cent, a cracking pace by any normal standard. But it was a good half a percentage point below the first quarter's growth and well down on last year's 9.5 per cent.

Twice this month, Beijing has cut interest rates to counter the slowdown, graphically demonstrated in a sharp drop in inflation to 2.2 per cent from 3 per cent in May. Significantly for us, import growth slowed as well, down to 6.3 per cent from 12.7 per cent in May.

For more than a decade, Australian miners have been the glamour boys of the bourse. They couldn't dig up enough dirt to supply China's voracious appetite and desperately set about finding new deposits and expanding existing mines.

Stock prices soared and the dollar entered the realm of currency safe haven.

About 18 months ago, the mood seemed to shift. Even the major league miners such as BHP Billiton and Rio Tinto watched in disbelief as stock prices began to reflect fears of a global recession. Right now, they are plumbing financial crisis levels.

And that extra supply they commissioned coupled with a reduction in China's demand is what is weighing heavily on stock traders. Iron ore dropped below $US130 ($125) a tonne this week, way down from last year's $US177 peak. Should it fall too much further, higher cost and lower grade mine operators will come under pressure.

But consider this. BHP last year earned a record $US21.7 billion, up 85 per cent on the previous year. This time around, given commodity prices have fallen, its earnings are likely to be down 20 per cent on last year.

From an historical perspective, though, the company and its rival Rio Tinto will be raking in the cash, the kind of numbers that were unimaginable just a decade ago.

Share traders, however, have little use of history. They care primarily about the future. And the irrational vision they hold before them is one of impending doom.