21/12/2011 - 11:12

Buckle up for tough economic ride in 2012

21/12/2011 - 11:12


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It is not the season to be jolly as credit markets continue to crunch banks and governments in a low-growth world.

It is not the season to be jolly as credit markets continue to crunch banks and governments in a low-growth world.

Contrary to popular opinion as the New Year nears, it is not the season to be jolly. 

Rather than letting our belts out to accommodate excess consumption, it is time to tighten our belts because, if you think 2011 was a tough year, then get ready for an even tougher 2012.

No ‘brownie points’ are earned for issuing dire warnings about a severe economic downturn, but there is some value in being prepared for a year when:

• Credit availability will tighten as banks around the world are forced to husband their cash, call in loans, and fight to meet new international capital adequacy rules.

• Asset values in all classes struggle to rise, and probably fall, including property, shares, and gold.

• Consumers continue to save at a near record rate, squirreling away 10 per cent of their income, while also doing more internet shopping, which will make life even harder for traditional retailers.

• The Australian dollar, a darling of international markets, retreats under the pressure of lower commodity prices, a trend which will be welcomed by manufacturers, education and tourism operators.

By this stage most readers will be horrified that anyone would draft a list like that, let alone publish it, but if you look beyond the isolation of Perth you see a very unhappy and unstable world.

The great unravelling of the experiment to create a country called Europe out of 27 traditional rivals is the centre of this latest phase of the global financial crisis, which started more than three years ago.

Today, the problems of an unbalanced Europe are infecting every other country, including Australia’s major customers for our raw material exports. China has slowed, as has the rest of Asia. The US remains flat.

Linking everyone is a credit crunch caused by a combination of banks being forced to rein in their lending and governments forced to pay higher interest rates on their debts thanks to excess borrowing and downgrades by credit-rating agencies.

Blame for the crisis is being dished out by politicians from the left and the right, which is perhaps the best sign that both sides are equally guilty of spending money they never had on pet projects designed to win votes rather than generate wealth.

An age of austerity is descending on the world and Australia will not be immune from its effects as consumption slows, leading to a decline in demand for raw materials, a slower pace of resources development and small companies forced to rely on shareholders’ equity to fund their projects because the banks have adopted a zero-risk profile.

If in doubt that 2012 will be a year we would all rather forget before we even experience it, then consider the sequence of problems, and where it is leading, starting with:

• The sub-prime crisis in the US which saw rotten bank loans advanced to rotten clients who could not, or would not, make repayments, a process which shattered the US banking system.

• The Europe phase of the crisis, which saw rotten governments (Greece, Ireland, Italy, Spain and Portugal) break allegedly strict budget rules and borrow large amounts of money which they could not, or would not, repay.

• The bureaucrats’ phase of the crisis in which a series of hopeless rescue plans are hatched, austerity measures enforced, with no-one appearing to recognise that without growth the debts incurred cannot be repaid.

• The German phase in which even stricter austerity is demanded (the Germans love being strict), growth shrinks further and Europe starts to break-up with Britain likely to be first out the door.

• The bank regulators’ phase (to come) in which a new set of rules called Basel III are introduced, forcing banks to retain even more capital (which they haven’t got) or raise more equity from investors (who will not subscribe) in order to meet a theoretical level of greater security – which will prove impossible to achieve.

Who’s to blame for this intractable mess? Everyone. Politicians for refusing to cut spending because they feared being voted out. Consumers for living beyond their means and banks for encouraging excess levels of debt.

Next year will be the start of a long hangover from 20 years of gluttony.

It will not be a time for bold business decisions. It will be a time for caution. It will be a time for simple pleasures, saving rather than spending, meals at home rather than eating out, making do with the old car, taking a holiday in Australia rather than overseas and living frugally until the storm passes.

Deflation worry

How long will the downturn last? That, of course, is the critical question and the answer is until excess stock is removed from the system – and by stock that means everything from over-priced property, to non-performing bank loans, to the over-stacked shelves of retailers.

Quite simply, there is too much of everything circulating in the global system, manufactured or acquired by excess credit creation, or by governments printing money they have not got.

Australia had its artificial phase of ‘creative consumption’ when the economy was stimulated after the first phase of the crisis with government cash handouts.

That will not happen again because, even if money is returned to taxpayers, they will simply pop it into the bank, or pay down debt.

The year ahead will see a continuation of a great de-leveraging as governments, banks and households, retire debt in a process which will last for at least 12 to 18 months.

Deflation (falling prices), not inflation (rising prices) will be the bogeyman of governments, and their central bankers, in 2012.

Reward for patience

For investors, this great de-leveraging process will create opportunities, especially as fund managers are forced to sell even their best assets to meet redemption demands from clients.

Some of that selling, especially by European funds, can be seen in the dumping of gold and premium Australian equities such as BHP Billiton and Woodside Petroleum.

In time, bargains will emerge in the stock market (as well as the property market) but the key factor will be time. 

Unlike the mad dash up caused by ready credit, there will be no need to rush in the next phase of the market because recovery, when it comes, will be painfully slow.


“Information is power. Advance information is profit.”

Allegedly once the motto of the Rothschild banking family.


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