Jobs bad news for economists

IT was the eminent John Kenneth Galbraith who said: “Economics is extremely useful as a form of employment for economists”. Practitioners of the dismal science are hard to please. The news that more than 75,000 full-time jobs were created in May was greeted with much hand wringing. Economists worry workers will be asking for sharply higher wages soon, and pushing up inflation. HSBC senior economist Grant Fitzner is concerned that those newly employed will actually want to spend some of their wages – negating the effects of the two recent increases in official interest rates. Apparently the fear is that unemployment will soon fall below 6 per cent for the first time since 1989. Some of us can remember when any government that presided over such a jobless figure would have been swiftly bundled out of office. These days it is regarded by some as dangerously low.

Economic forecasters are unanimous that RBA governor Ian Macfarlane intends to keep hoisting interest rates up to 6 per cent or higher to lance the inflation boil. But will he need to go that far? The most recent rate cut occurred shortly after September 11. Is the world a less dangerous place today?

Why has the US dollar been tumbling and the gold price rising? Where is the strong global recovery? Alan Greenspan has gone missing from the business pages, and may well have been kidnapped. No chance of tighter money there soon.

Our interest rates are already three percentage points above their US counterparts. That is one factor propelling the Australian dollar higher, promising to hose down imported inflation and hurt export earnings. Could the soothsayers be wrong again?

Analysts agree that dearer borrowing costs are the equivalent of napalm to the stock market in general, and bank shares in particular. So it is rather rum that Commonwealth Bank shares bolted through $34.70 to an all-time high last week, with the other major lending institutions doing hand springs. We suggested some weeks ago that perhaps it was time Australian investors divorced themselves from the worst of Wall Street woes. There are signs that is happening.

Share prices in the US are on the skids for two specific reasons – the discovery that a significant number of their corporations are run by crooks and audited by knaves, and a replay of the Nasdaq horror show.

As to the first, we have not yet reached that level of iniquity here, and we have no technology sector to lose our shirts on.

The All Ordinaries index has retreated just 4 per cent since its peak in March. A good deal of that is due to the weakness of two heavyweights.

News Corp is in danger of being knocked off its perch as the biggest company in Australia by NAB. Chronic invalid Telstra is now coughing blood at $4.50 and has slipped to eighth in the top 150 list.

Banks have been holding the market up because of their earnings certainty, and the fact that the last rate increases were widely anticipated. Any bank manager who has advanced loans without considering a customer’s ability to service the higher repayments might be obliged to seek alternative employment – possibly as a financial planner.

When a market darling falls out of favour

WESFAMERS CEO Michael Chaney confessed he was bemused to read his company described as a “former market darling” in the Australian Financial Review recently. He said he could not explain the logic of the demotion from darling status – which happened after the group announced profits up 60 per cent for the nine months to March, and indicated the $379 million forecast for the full year would be exceeded.

The high-flying Wesfarmers share price has run back from a peak of $33 to $27.70 in line with the market aversion to high prices to earnings stocks.

In a speech to the Australian Graduate School of Management in Sydney, Mr Chaney debunked eight common management myths. Among them were that a company has to specify growth aspirations, it needs a grand vision, and that good management is a complex matter.

He said Wesfarmers studiously avoided business growth ambitions, because “the future is unpredictable”. Rather, the focus is on “logical incrementalism”, while management was a matter of improving business performance, being opportunity driven, and managing the portfolio.

But it is always tough. Mr Chaney told his audience: “Every dollar we earn is under pressure. Someone out there is trying to take it away. Competitors, suppliers, customers and governments”.

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