Is our economy about to turn ‘Coyote Ugly’?

When I was younger I used to watch the Roadrunner cartoons (beep, beep!).I remember how the Wile E. Coyote used to run after the Roadrunner and charge off a cliff with his legs still spinning. As soon as he looks down and notices there is no longer solid ground beneath his feet, he falls to earth ending in a puff of dust.

I am starting to get a little worried that the Australian Economy is that Coyote. In recent days we have seen the RBA cut interest rates to 3.25%, with some forecasters expecting further more savage cuts to come as the economy slows down. Many currency hit businesses are running like the Coyote with nothing beneath their feet. New Home sales out today hit a 15 year low down 5.3%, whilst our trade deficit recorded its widest deficit since March 2008 as coal exports dropped. This all bodes badly for our economy.

China which has been the engine room of the amazing run of economic growth is undoubtedly slowing down as we approach a change in leadership with the Purchasing Managers Index (PMI) falling from 56.3 to 53.7 spurring the Asian Development Bank to lower its 2012 for the region from 4.4% to 4.2%.None of this is helpful to the Aussie miracle economy. The collapse in Iron Ore has been well documented in the media but looking further out to the long term assumptions for this bulk commodity, could get very nasty indeed with long term assumptions as low as $70. Of course these are the same forecasters that predicted that the price would not go below $110, I think $86 was its recent lows. All this means, is a loss in revenue for our erstwhile Government, delicately trying to balance those cook(ed) books and cutting back on spending just when the economy cannot afford the pullbacks.

With the AGM season fast looming it will be instructive to hear how the Chairmen of the Board see the outlook .But one thing seems certain, there will be cautious statements  throughout. So how is that going to affect the equity market is the big question?

As we sit nicely above 4400, at the top end of the range, it’s hard to find anyone bearish despite the plethora of issues facing Europe and the US. The Dow continues to go from strength to strength hitting multi year highs and even the moribund economy of the UK seems to be ignored by the FTSE pushing up towards 6000.Smugness has set in and we are now so conditioned to the bad news stories out there that we have become comfortably numb. The US fear index or the VIX is below 16 which is 10% below its long term average. Complacency is rife. Equity markets both here and overseas are very fat and satisfied about the risks that are posed by a Euro Banking crisis or the slowdown in China. We are all hoping that it will be alright on the night. That Central Banks around the World will come to the rescue, as they have in the past. Are we right to hope?

I have been bullish on our market for some time. Skeptical and nervous but bullish none the less.They say that Bull markets climb a wall of worry. Well, I am starting to worry. No one really knows to this day what set the 1987 crash in motion. Smarter people than me have done studies on the factors behind the massive falls we saw in October 1987 and I am not suggesting we will see the same thing again. All I am saying is after such a great run in the markets, maybe it’s time to take some profits and head back to safe high yield paying stocks which have good cash flow and insulated from the World’s woes.

Or you can act like Wile E. Coyote and not look down.

Clarence

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