THE DISTILLERY: Number crunchers

Jotters weigh up macroeconomic concerns including the blunders of austerity theorists, worry over China's growth and the gold slump.

This morning's edition of The Distillery is all about economics and markets. In the wake of the global financial crisis, all economic analysis for developed economies has been conducted against the backdrop of stimulus versus austerity. Is it better to stimulate or cut your way back to prosperity? One columnist runs his readers through the damning news that the work of two researchers that has been widely cited by austerity supporters the world over was a bit shoddy.

Fairfax’s Gareth Hutchens explains how implications of revelations that professors Kenneth Rogoff and Carmen Reinhart made relatively basic errors in their formulations about the need to seriously limit government spending once debt-to-GDP reaches about 90 per cent have policy implications around the globe.

“The errors were discovered by Thomas Herndon, a student at the University of Massachusetts Amherst's doctoral program in economics. He published a paper this week explaining what he found, with help from two of his teachers, Michael Ash and Robert Pollin. The paper shows Reinhart and Rogoff had omitted data, made a mistake in their Excel spreadsheet, and used a bizarre statistical methodology, all of which skewed results. It set the academic world ablaze... Reinhart and Rogoff have acknowledged they made a spreadsheet error, but they also say it didn't affect their result much.”

Given the implications that their research was used to impact the lives of hundreds of millions of people, their confidence has a lot riding on it.

Fairfax’s Malcolm Maiden believes that the takeaway from last week's stream of economic data strengthens the case that the worries about America's economic situations are overstated, just like the confidence about China's economic strength is overstated. Given the former is increasingly an accepted notion, we'll focus in the latter here, specifically China's latest GDP numbers.

"It was still growth that would be astounding elsewhere in the world, but China's economy lost momentum as the quarter progressed. Exports, a tell-tale for global economic demand given the ubiquity of Chinese products, grew at an annual rate of only 10 per cent in March, less than half the 23.6 per cent growth rate achieved in January and February. Similarly, while power consumption growth in China is forecast to rise from 5.5 per cent last year to about 7.5 per cent this year, consumption rose at an annual rate of only 2 per cent in March, and at 4.25 per cent in the March quarter. Demand was affected by a 'whole society slowdown' according to the Electricity Council of China."

Maiden also passes on the concerns of Goldman Sachs Asset Management boss for Australian equities, Dion Hershan. He has just returned from a fact-finding mission (one of the worst harasses ever invented) and he says that China's car industry could tell the bear story.

Speaking of the US, America's emerging economic strength is largely derived from three factors: cheap energy, low labour costs and more business friendly governments. The Australian Financial Review's Chanticleer columnist Tony Boyd explains how Incitec Pivot's decision to take advantage of this triad with an $US850 million ammonia plant investment is quite an endorsement of the American formula.

"In stark contrast to the tortuous process for major project development in Australia, the Louisiana plant was approved within six months of the application being lodged. At one stage, the Louisiana administration, under governor Bobby Jindal, offered to get staff to work overtime to speed up the approval process. Incitec Pivot accepted the offer and had the work done faster, at its expense. It was the sort of offer never seen in Australia."

Meanwhile, The Australian's Robin Bromby says commodity investors should pull their worried heads out of the goods market and thrust it into something much more fundamental.

"Rather, fret about base metals – that situation is far more serious. This column has always avoided reporting the gold manipulation theorists, but some very credible commentators have now joined their legions, convinced the recent price rout was nothing more than some naked manipulation. So, if that turns out correct, gold will right itself after a period. But you can't be as sanguine about the base metals. As one commentator put it when the London Metal Exchange closed on Friday night, 'I think we can all say TGIF'. The financial roller-coaster had ended at the bottom of the track, with copper now below $US7000 a tonne, closing down 1.4 per cent to $US6990 a tonne (and slumping to $US6875 during the session). That's down 11 per cent in six trading days. And the London Metal Exchange warehouse situation is a shocker – 614,350 tonnes of unsold copper, another new 52-week high, and up 91 per cent since January 1."

There's more where that came from. It's important to understand that the focus on the gold price is not unfounded because it's a well-established safe haven and, by design, a confused barometer for confidence and fear. It's just that while everyone was fretting about whether the gold price had lost its safe haven status, base metals that trade closer to fundamentals, which investors love, were being punished.

Meanwhile, Fairfax’s Eric Johnston says anyone pointing to one factor that brought about the gold price plunge isn't doing the story justice. "Rather, there has been a confluence of pressures".

In other mining-related news, The Australian's Barry Fitzgerald points out that the changes incoming BHP Billiton boss Andrew Mackenzie is ushering in all point to a keen awareness that the heady days of the mining boom are over.

Fairfax's economics correspondent Peter Martin debunks the metrics of claims often made by governments and companies about the jobs created by various ventures.

Elsewhere, The Australian Financial Review's Andrew Cornell appears to be looking forward to the moment when an Abbott government – assuming the Coalition wins in September – frames the inquiry into the financial system. "How likely treasurer Joe Hockey frames such an inquiry will be an important test of how much substance a new government will have," he says.

And finally, The Australian's John Durie says the investment banking and trade practices mafia will be concerned about the effect last week's Bradken court case result will have on the way auctions are managed in Australia.

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