THE US WILL LEAD THE WORLD OUT OF RECESSION

The United States has long been the home of post-WW2 technical innovation, entrepreneurship and venture capital. In part, this was generated by the huge military R&D investments of that war and a post-war influx of hundreds of thousands of engineers and scientists from the United Kingdom and Germany. The boom of the 1950’s was led by the application of military R&D to consumer products and, for most people, the advent of readily available credit. This was the period of Harold Macmillans’ “You’ve never had it so good” and the German “Wirtschaftswunder” (economic miracle).

This culture in the United States is there today, if somewhat buried by excessive government spending, intervention, and the advent of the welfare state.

But, the culture will resurface (this is the only way growth to reduce Federal debt can occur), and it will do it on the back of its traditional skills supplemented by:

·         Cheap Energy – yes energy at a fraction of Australian or European energy costs;

·         Competitive devaluation of the US dollar;

·         The world’s best intellectual property regime;

·         New manufacturing technologies;

·         Strategy designed to repatriate the innovation and production of high end products;

·         Cost inflation in China and other BRIC’s.

When?

2014 onwards.

www.millhouse.co

 

CHINA IMPLOSION?

Australia is very trade exposed to China. We all know that. The weekend Australian Financial Review reported “…all of the necessary pre-conditions for a banking crisis of incalculable proportions are in place in China. The primary driver of an explosion in bad loans is an explosion in credit growth…..That is unsustainable and likely to come to a messy end….”

I was in Singapore at the height of the so-called Asian crisis in former years. I was the ONLY occupant of one the large hotels there. Is this what will happen in China and what will be the impacts on the world? We shall see.

In the meantime, my punt is on a US led recovery (more later) followed by recovery in German led Europe.

CONFIRMATION OF FORECASTS

For my readers who may have been sceptical of what I forecast, please look at the articles in Business Spectator (www.businessspectator.com.au) and reprinted in the Australian today (15^th November 2012). These articles are written by two of Australia’s most prescient and respected commentators, Alan Kohler and Robert Gottliebsen.

Kohler writes about the “Small to Medium Business Crisis” and suggests “alarms should be setting off in Canberra (the Australian capital), and through every bank and big company boardroom in the country”. “Non-mining businesses are in serious trouble just as the resources boom ends. There will be nothing to take its place”. How right he is. I founded my last company, MillhouseIAG, in 1991 in a serious Australian recession and today feels just like that outside of the resources sector.

Robert Gottliebsen suggests that energy developments in the United States will be used to “transform manufacturing and later transport”. Agreed. 100%. The US will lead the world out of its present funk based on cheap energy, an innovation and venture capital culture, and the consequent ability to produce quality manufactures. All assisted by competitive currency devaluations so that manufacturing exports can thrive.

Australia: A hollowed out economy and problems ahead in resources. Domestic deflation has to happen. Brisbane office rents and housing costs should not be higher than Downtown Manhattan.

THE MAINSTREAM PRESS

 The Mainstream Press are picking up the themes in my Ping Pong Pang Series. Of note is one of Australia’s most eminent economic commentators, Robert Gottliebsen. Writing in the Australian (26^th October 2012), he assesses the potential impact of competitive devaluations (so-called currency wars) on Australia. His conclusion is not pretty.

It is also consistent with my blogs. Germany will finance Europe. There is no doubt about it, and they will do it using a manufacturing base which is world competitive in terms of product differentiation, but more so given the money printing undertaken by the European Central Bank. The United States similarly in respect of its manufacturing sector. For the United States, this will be given huge impetus given that a new era of cheap energy is going to concurrently drive that economy. Australia is going to be sidelined. In the short run, the Australian dollar is likely to appreciate against these currencies, and in the medium term, significantly depreciate. I don’t know exactly when dear readers, but consider using your powerful Aussie dollars whilst you can. The end of that era is bound to come. The era of volatility will replace it.

 

WITHER NOW THE AUSTRALIAN DOLLAR?

For those of you who have followed my Ping Pong Pang Series, there is a report from Goldman Sachs this week which recommends taking long Euro and short Australian dollar positions. Please remember where you read this strategy first.

If you want long Euro positions, you can invest your dollars in Millhouse, Inc. PLC, listed on the Frankfurt Stock Exchange. If Goldman is anywhere near correct, you could possibly double your money in currency volatility alone.

The Australian media is not replete with people who understand what is happening in Europe, so please read the latest Economic Strategy from Michael Knox at RBS Morgans. Entitled “Reconstructing Europe’s Banks”, he reports the spreads in the Euribor credit market falling to their lowest since mid-2007 and concludes that “the EBA and ECB have brought the European banking crisis to an end”. Long Euro sounds good to me, especially v. the AUD, given falling terms of trade, declining commodity prices and rising Australian Federal and State government debt.

PING PONG PANG #3

Actually, this one is Pang. It is not often that I agree with Professor Ross Garnaut after his foray into climate change (Australian Financial Review 2^nd October 2012), but this article on China is spot on. His prognosis is that Australia will be hit by “three mutually reinforcing negatives underway in China”. These are shifts away from heavy industrial investment, a move to lower emissions, and a cyclical downturn. He compares the challenges faced by Australia today to those of the Great Depression and the 1970-1983 period. He talks a lot about “hardship” and “sacrifice”.

This is a long way from the “miracle economy” speak we get from the Australian government. I was in Sydney this week where even CBD drycleaners are reporting revenue drops of 30% or more. This may be anecdotal, but the For Lease and For Sale signs aren’t.

I became Foundation Chief Executive of UniQuest Limited in 1983 and we were able to build a great business, although the 1987-1993 period was tough. But volatile times do create opportunities. That’s what we have now, but perhaps not in iron and coal.