SCOREBOARD: Confidence trap

A strong economy, lower rates and accelerating global conditions – Australia's widespread pessimism is a nonsensical disease.

There is an uncomfortable truth about confidence in Australia. The numbers yesterday showed business confidence slumped to its lowest level in almost four years, notwithstanding the fact that interest rates are at their lowest since the late 1960s (excluding the GFC). That’s lending rates as well by the way. While it is counterintuitive to many, the fact is, confidence is lower. Just like the Australian dollar is higher than before the Reserve Bank cut rates. Just last night it shot up another 40 pips or so and is now at 1.0525.

Many economists can’t get their heads around this and nor can they get their heads around the fact that the RBA’s rate cuts are not helping confidence. I don’t think it’s that difficult to understand though and in fact it is quite logical. It is the debate itself around the need for lower rates and the Reserve Bank's actions which justify that debate. This is what is destroying confidence – pick up a newspaper and what’s it full of? The end of the mining boom, Australia’s coming recession et cetera. That’s the only way you can reconcile a strong economy, lower rates, an accelerating global economy, stock market rally et cetera with declining confidence here. Pessimism is a disease in this country and like rats, lacklustre economists are playing a significant role in spreading it.

Indeed when they see the higher Australian dollar and lower confidence they mindlessly still think that further Reserve Bank rate cuts are the cure. Rate cut nuts really need to ask themselves a question. If the lowest lending rates since 1960s – 175bps of cuts over the last year – cannot lift confidence, cannot lift lending and cannot weaken the Australian dollar, why would still lower rates do it? Don’t mindlessly repeat the same pointless actions over and over again – learn to think.

The contrast with sentiment overseas is incredible. In Germany, investor sentiment surged in December according to the well-respected ZEW survey. Economic sentiment shot up to 6.9 from -15.7. This in turn helped a bid for European stocks and we saw the Dax up almost 1 per cent, while the CaC rose 1.1 per cent. The FTSE100 underperformed and was basically flat for the session. The euro was about 50 pips higher to 1.3003.

This sparked early gains on Wall Street and as I write, the S&P500 is up 0.8 per cent (1429), the Dow is 108 points higher (13,278), while the Nasdaq is up 1.5 per cent to 3030. Stocks shot up from the open, but are paring those gains as I write. There wasn’t too much US centric news for the session – the top Republican in the House of Representatives accused the White House of a deliberate go slow in fiscal cliff talks, but said he was hopeful a deal would be reached before the deadline. Other news and data was minor but on the negative side. The US trade balance widened to $42.2 billion in October from $40 billion in September as exports fell 3.6 per cent and imports fell 2.1 per cent. Similarly having shown recent improvements, the NFIB small business confidence index fell sharply on the back of Hurricane Sandy and the re-election of Obama.

Bits and pieces otherwise. The ECB’s chief economist said there is limited room for further cuts (currently at 0.75 per cent) and that instead the bank should focus on removing discrepancies in financial conditions across the eurozone. Interest rates in his view, "are not the main issue”. Then in the UK the BoE’s governor, Mervyn King, reckons that 2013 could herald an escalation of the currency wars unless action is taken to reduce trade imbalances. He noted that many countries were increasingly resorting to active exchange rate management and this would probably continue in 2013 unless the G20 could act with one purpose.

I addressed this problem some years ago. The root cause of the currency wars is the Fed’s decision to print money. Take that away and the currency wars evaporate. The Federal Reserve as an institution has failed the domestic and global economies on many occasions – it caused the US recession and subsequent GFC through inadequate supervision of the financial system; it was asleep at the wheel. Fraud, excessive lending et cetera all occurred on their watch. It held rates far too low for far too long – again ensuring a credit boom. It sparked global financial panic in allowing Lehman to collapse. And now it is responsible for a global currency war by needlessly printing money. Tensions among nations are rising.

As for price action elsewhere there wasn’t a lot. US Treasuries sold off a bit with the 10-year yield a few basis points higher at 1.65 per cent, while the 5-year is at 0.63 per cent, and the 2-year sits at 0.24 per cent. Aussie futures fell 3 and 5 ticks with the 3s at 97.365 and the 10s at 96.905. Commodities did little. WTI is up 0.3 per cent ($85.78), gold is off $4 to $1710, while copper is off 0.6 per cent.

Looking at the day ahead, the SPI suggests Aussie stocks will rise 0.3 per cent. Major Aussie data includes consumer confidence at 1030 AEDT, while the Reserve Bank governor gives speech at 1530 AEDT. Tonight we see eurozone industrial production figures and then for the US, it’s all about the FOMC. We all know they are going to buy bonds at some stage, if they don’t mention that tonight, they’ll do it early next year. I suspect they’ll wait for more cliff drama.

Hope you have a great day…

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