SCOREBOARD: US lethargy

Wall Street slipped as fiscal cliff fears nagged, despite suggestions US banks had their best quarter since the GFC.

Many Australians may be wallowing in a ‘Claytons’ recession – the psychological substitute for the real thing – but over in the US, things aren’t too bad. Well, they're as bad as here. Car sales surged in November, up almost 9 per cent for the month, and then the FDIC suggested that American banks had their best quarter since the GFC. Unsurprisingly, auto loans were strong.

Unfortunately US equities were unable to find a bid from those developments and a spike in the ISM New York to 52.5 from 45.9. So with about an hour to go, the S&P500 is down 0.2 per cent (1407) and the Dow is effectively flat (12,967) while the Nasdaq is off 0.3 per cent (2993). Well I should say hold a bid, because equities actually rose at the open (0.5 per cent or so) before the offer came on. The only news I can see that would have driven this change in fortunes concerns the fiscal cliff – although I can’t see any new news as such. The Republicans put up an offer, Obama said that won’t do, so we’re back to where we were. Obama wanting to lift taxes on the wealthiest Americans and the Republicans not wanting this so much. But that has always been the problem.

Outside of that there was some interesting price action in the commodity space. Gold fell another $24 to $1696 which is the lowest price in about a month. The speed at which the metal fell actually triggered a trading halt, albeit a brief one, and opportunistic trading in a thin market is being blamed – ie a handful of bearish bets taking advantage of low volume trading. Price action wasn’t much better elsewhere, with crude down 0.6 per cent ($88.52), while copper was flat.

In the forex space, the US dollar weakened overnight and we saw euro up 45 pips to 1.3010, while the Australian dollar extended gains made after the RBA cut rates and now sits 30 pips higher than at 1630 AEDT to 1.0477. The British pound and the yen then sit at 1.6106 and 81.83 respectively. Finally, US Treasuries did little, yields down a bit with the 10-year at 1.615 per cent, the 5-year at 0.62 per cent and the 2-year at 0.25 per cent. Aussie futures did little as well, with the 3s at 97.39 and the 10s at 96.91.

Looking at the day ahead, the SPI suggests that Australian stocks will rise by about 0.3 per cent. Then for the data, we get third quarter GDP for Australia. This is one of those quarters where the result is subject to a high degree of risk (around the consensus). The number could conceivably and easily be anywhere between 0.4 per cent or over 1 per cent. Don’t be concerned if the number is on the low side though, this happens. Numbers are volatile – it doesn’t mean the economy is slipping into recession or slowing markedly.

I know the Reserve Bank and others in the market are doing their best to create a sense of fear around the outlook but I think this is wrong – and in the RBA’s case quite simply bad policy. There is obviously a big push to get rates lower no matter what the true state of affairs is – and the RBA board is really clutching at straws in order to justify why they are cutting rates. You can see this yourselves if you go through their past statements. Look at the reasons they offered for cutting rates and then ask yourself what happened subsequently. They get away with it is because there are too many who have an interest in seeing rates at extremely low levels – no one questions it.

What none of these people understand is that the price of money is not the problem. They are the problem – it's all about confidence, or a lack of it. The reasons policy is being abused in this way vary – lift election prospects, weaken the dollar, force a switch out of cash and into equities. But the root cause is the same – a lack of understanding of current economic forces and the inability to cope with the new normal. The absence of boom conditions is the real affliction facing this country. Two things happened after the RBA cut rates yesterday, which highlight why the economic consensus is unreliable. The Australian dollar spiked and the All Ords sunk.

Neither the RBA nor economic talking heads more generally can understand why this happened. On the Australian dollar, people suggest it’s because traders were disappointed that the RBA didn’t cut by 50bps. The fact the Australian dollar isn’t really any weaker following 175bps of cuts shows how wrong this argument is. But it highlights how little people understand. Indeed, economists don’t even seem to understand why confidence in this country is actually worse following the RBA’s easing cycle. Instead they try to pretend it isn’t or try to ignore it – sweep it under the carpet. This is very foolish.

We need leaders who can adapt to, rather than blame macroeconomic policy settings – who can stand tall and plan for the future instead of cowering with fear. Who can lead Australia to its full potential. I highlighted in a Eureka Report piece on Monday why prospects for this country are the best in decades. This nation should be overjoyed, brimming with pride at our economic success and the prospects for our future. We’re not. Instead we live in constant fear –bombarded daily with the shells of hysteria and the relentless lie. All due to the self-serving interests of a small minority. For mine, the only ingredient missing in this country is effective leadership. The year 2013 will hopefully be the year we see that change.

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