PING, PONG, AND PANG

No, not the Puccini Turandot version of the Three Ministers in 19^th century Beijing. This is a little more serious. The three this time are the US, German-led Europe, and China.

Have a look at the Chicago Federal Reserve National Activity Index. It measures what is happening in the real United States economy. The news is more of the same – slow growth, not recessionary, although US Federal fiscal contraction could produce that. But, no indications of that wonderful energy which historically has driven the US and led the rest of the world.

German-led Europe – more of the same. The end result will probably be what the Europeans want – more political and economic integration for long run political stability. But no huge demand drivers yet.

China: read any newspaper! “The country’s growth model has changed”; “greying population”; “Does not need to continue creating low-skilled construction jobs to ensures stability”; “That’s why more steel mills are sure to cut production or close”. (AFR 1-2 September 2012). “Iron ore rout could end up in a hard landing”; “economists are speculating about the risk next year of the R-word”. (Australian September 1-2 2012). China is changing: its economy is maturing, its population expected to peak in 2015, and ageing. In short, China is going to feel more like “Old Europe” to quote a former US politician.

These three will dance around, just like Ping, Pong, and Pang. Expect competitive devaluations or other forms of domestic advantage.

Where does Australia fit? Recession probably if the Gillard-Swan governments still try to achieve a surplus. Where do Australians fit? Use the A Dollar whilst it is at these levels. At some point, it will not be when international investors and sovereign investors realise that it is priced on an evaporating commodities boom. Today, invest offshore in USD or Euro denominated assets. Sell Australian domestic equities and property. The likelihood is deflation. You will be able to buy them cheaper later with much stronger foreign currencies v/v the AUD.