WHO WILL LEAD THE UPTURN?

I recently gave a short presentation in Brisbane where I told the audience of very senior business people that I thought the Australian media reporting of European political economy was “shrill” and “often ill-informed”. There are some exceptions to that including the article in todays’ Weekend Australian by Robert Gottliebsen, and a recent publication from my good friend Michael Knox of RBS Morgans. Michael reports that of the “5000 banks in the Euro area, there are 27 which were undercapitalised under the supervision of the European Banking Authority”. He concludes: “All that remains of the European banking crisis is that market participants learn that it is over”. That is exactly my conclusion.

Gottliebsen is not taking a bet and acknowledges that there are tough times in Europe. Not, however, as tough as the post-war years: it is these years that define European political economy today and for the foreseeable future. My bet is that Europe will get its act together.

In the meantime, the China story is over as we knew it. Australian resources producers in minerals and gas are getting towards the top of the costs curve in a world of declining real prices and huge energy developments in the United States and elsewhere.

Mark my words, the US will lead the world out of its present woes, and German led Europe will recover in much better financial shape as its primary partner. That defines our corporate strategy. The German experience with its postwar Wirtschaftswunder (miracle economy) will prevail and enable its European colleagues to become competitive in the world. Gain follows pain.

Where does that leave Australia? In short, a hollowed out economy which will need significant new multi-industry investment as resources investment declines and stops. There will be rising unemployment, more company failures, more house mortgages and small business loans underwater. Roger Montgomery (www.rogermontgomery.com) is worth reading: “Now that the tide is going out, we are about to find out who has been swimming naked”.

Add a bloated government sector which will need to wound back by the next Federal Government. There is pain ahead. So don’t provide your house as security to the bank for your business loan.