THE DISTILLERY: Evergreen pastures

Denial is powerful, even as the Canberra's Progressive Barn Dance (Tamworth, Cloncurry and Port Macquarie rules) moves (hopefully) into its last round. The real economy keeps intruding, reminding us that the election campaign was a farce, especially that junk about debts and deficits. In reality the economy is strong – much stronger than anyone in the campaign realised. Consumers kept shopping in July and hiring continued in August, as analysts say we will find out this week. So while many of our best and brightest jotters are still consumed by Canberra's quick stepping, the smarter ones have moved to the greener pastures of economy and business, in fact back to their roots, with the Reserve Bank meeting tomorrow first cab off the columnists' ranks. Can anyone justify a "rate rise looms" call? Nope, but don't tell the markets. Many are still looking the other way, still struggling to accept economic reality. 

The Australian Financial Review says "The Reserve Bank of Australia is expected to keep interest rates on hold for a fourth straight meeting as policy makers assess the global outlook and consider whether faster domestic growth will stoke inflation." That's hardly an insight of stunning proportions. The key to watch for is the wording of the post-meeting statement from Governor Glenn Stevens as The Australian's David Uren points out: "Financial markets believe global recession is imminent and are still toying with Reserve Bank rate cuts. This, despite the effervescent growth revealed in last week's national accounts. The Reserve Bank is likely to use Glenn Stevens' statement, following tomorrow's board meeting, to correct market impressions and underline the risk that rates may have to rise if demand continues to increase". 

After last week's surprisingly strong economic data, The Sydney Morning Herald's economics editor, Ross Gittins says our problem is feast, not famine: "two weeks after the election, the June quarter national accounts have swept away all the nonsense of the campaign. The resources boom is back, the economy is roaring along, the government's filling coffers will soon get the budget back into surplus without the pollies doing any more than resolving not to spend all of it, and the economy's big problem will be growing at full employment without overheating." His counterpart on The Australian, Michael Stutchbury, agreed on Saturday, pointing out that "Australia has entered an unprecedented 20th year of uninterrupted economic expansion which is now gearing up for a once-in-a-century mining boom fuelled by the highest terms of trade since the early 1950s. Since 1987, the Australian economy has expanded 107 per cent, outstripping all comparable developed countries: the US (up 83 per cent), Britain (61 per cent), New Zealand (70 per cent) and Canada (74 per cent), let alone Japan (42 per cent). We are economically hitched to fast-growth developing China and India but constrained by the aspirations and complaints of rich-nation politics." Another News Ltd entrails plucker, Terry McCrann, agrees. "Is this a good time for a rate rise? One answer would be yes, absolutely yes. For on the other, wouldn't it be delicious, if he threw a rate rise into the middle of all the wheeling and dealing. It would be like a clap of thunder, reminding the political class of the reality lurking outside Canberra," he writes.  Tezza says we won't get a rise tomorrow.

And the AFR adds: "Australia's largest investors have warned that the debt crisis in Europe and the United States economy pose the biggest threat to the local $1.3 trillion superannuation industry, and returns on investments could take several years to return to pre-global financial crisis levels." That's based on a survey of 12 big fund managers. So our booming economy and our strong trade link with China will have no impact? What are our lazy fund managers doing? Fee-clipping and sleeping?

Given that thinking, it's no wonder that The Sydney Morning Herald's Adele Ferguson finds that it's hard scrabble for brokers. "In the past two years, more than 20 brokers have either collapsed, near-collapsed or merged. Most have culled staff or instigated staff freezes... Times are certainly tough in stockbroking land, particularly for the smaller full service retail brokers. Some are complaining that the phones hardly ring. This, coupled with more investors going for the cheaper online option to do their trading, or putting their money in the bank, will force many more out of the industry." It's part of a secular trend that showing up in the US. For more and more retail investors, the market is on the nose, indexed and bond funds seem to be the way to go," she writes.
 
As part of that, John Durie says that "Citigroup has declared the equities cult dead, with bonds the new king. But as logical as that argument might look from Britain or the US, it doesn't carry much weight in Australia. British strategist Robert Buckland has noted the Australian superannuation system supports the equities culture, but he could also have added that local equities have outperformed bonds. In contrast, global equities since 2000 have returned just 4 per cent, or 0.3 per cent a year, against 103 per cent, or 6.9 per cent a year, for global bonds. Whether the cult is finished is another question, but certainly the disparity in trends is one more reason Australian investors should spend less time worrying about offshore and more about what happens at home." And the Weekend AFR's Glenn Mumford was also into this interesting idea in his column on Saturday.

And finally, it seems Friday night's jump on Wall Street had more to do with hope rather than the reality of the August employment data. They were still terrible, but not as terrible as markets had set them up to be. So shares rose, but a survey of the huge US non-manufacturing sector of the economy found the worst result this year, which curiously didn't have the same impact as the manufacturing survey earlier in the week. The AFR summed up the impact of the jobs report: " The recovery isn't creating enough new jobs to absorb the near-record 14.9 million who are officially unemployed. Add the 8.9 million "involuntary part-time workers” – an increase of 300,000 in August – and one in seven Americans can't find a full-time job." Denial is a powerful place to be for American investors, it seems. And there still seems to be quite a few locals in the same boat, denying the strength of our recovery. For the next installment, watch for our August employment data on Thursday.