Terry McCrann: Economy and share market on the cusp

I DON’T think I’ve seen a period before where there are two so fundamentally opposite views of where the share market and the economy — both here and ­globally — are headed, writes Terry McCrann.

Reserve Bank governor Philip Lowe has left the rate unchanged at every meeting he has presided over since becoming the “man with his hand on the rate lever” last ­September.

I DON’T think I’ve seen a period before where there are two so fundamentally opposite views of where the share market and the economy — both here and ­globally — are headed.

They are best captured in two things.

For the share market, on the one hand this week we saw Sydney-based fund man­ager Altair’s Philip Parker announce he was selling all Altair’s shares and heading for the hills.

Well, he didn’t actually say the latter, he only metaphorically implied it.

Yet on the other, the Nobel-Prize winning economist Robert Shiller said Wall St could — and I stress that word — actually go 50 per cent higher, from what is already an extraordinarily high all-time level.

Now I wouldn’t normally quote an economist — even, especially a Nobel Prize-­winning one — on the share market, but Shiller is a ­special case because he has shown a rare ability to merge economic theory and investing reality.

The second is the way some commentators are predicting the Reserve Bank will slash its official interest rate, with the economy either going deep into recession or skating on the edge; against those predicting when the first rate hike will come and how many will follow.

Let me immediately note at this point that the RBA is not going to do either at next Tuesday’s meeting.

The RBA will leave it unchanged. It will also not signal any inclination to change it, either way, anytime soon.

Interestingly, current RBA governor Philip Lowe has left the rate unchanged at every meeting he has presided over since becoming the “man with his hand on the rate lever” last ­September.

More pointedly, he has been able to do that.

Even more pointedly, it has been exactly the right thing to do over various ­assorted, inane, imprecations that he should either cut or hike.

The last rate move was delivered at former RBA governor’s Glenn Stevens’s second-last meeting in August.

The last rate move was delivered at his predecessor Glenn Stevens’s second-last meeting in August (on the back of June quarter CPI numbers).

This provided a fascinating contrast with Steven’s first rate move all of 10 years earlier (also, on the back of quarterly CPI numbers).

Last August, Stevens cut to 1.5 per cent. Back in Nov­ember 2006, Stevens was raising to 6.25 per cent.

There is, of course, an awful — word used advisedly — lot of history between those two dates and those two numbers. However, they are also fundamental to explaining where we are now and not just where we might be headed but the diametrically opposite opinions on that.

This is broadly, briefly, the way historically low ­official interest rates right around the world have sent property and share values roaring higher and higher. But also, despite that, we have economies seemingly stuck in a low-inflation low-growth state.

So the central question becomes: will the extraordinary liquidity that has been pumped into global economies and asset markets actually, finally, succeed in pushing the major economies — the US, Europe and Japan — into stronger economic growth; and at least validate the high share (and property) values?

The major economic forecasters have signed on to this view — from the OECD and the IMF at the global level, to both the RBA and Treasury at the local level.

You can believe the relatively optimistic RBA forecasts, on two levels. The first is that it has no cause to do other than tell it like it really believes; it has no agenda other than doing its job.

Secondly, it knows its limitations. Institutionally, it knows it can’t foretell the future in some sort of all-knowing way; so it projects those forecasts with very broad margins for error.

It’s more complicated with Treasury, but broadly you can also believe its strikingly similar short-term forecasts as a true indication of what it has analysed. The “out years” and the translation to the Budget numbers are very different matters.

Then there’s the altogether additional and separate matter of China, where we face a similar absolute divergence of opinion: that on the one hand, its credit bubble is going to explode; on the other, that it’s managing its transition to a new more dom­estically focused growth dynamic.

At this stage, all we can really say is that the jury is still out on both the global and local economic outlook, and for the global share market.

Our local share market is perhaps a little easier to assess. I wrote some weeks ago, 6000 on the index looked like a ceiling, even with Wall St tracking higher — more because of the market composition around the big banks and a dozen other stocks that look fully-priced.

But if Wall St goes higher or even just stays broadly where it is, there’s no chance of collapsing GFC-style.

Treasury secretary John Fraser. Picture: Kym Smith

TWO PUBLIC SERVANTS SERVING

BOTH Treasury head John Fraser and APRA boss Wayne Byres provided valuable insights in their appearances before Senate estimates.

These to-and-fros have developed over the years into almost exclusively exercises in political grandstanding — and not only by the pollies on one side of the table.

It was therefore both surprising and refreshing — and in both the broad public and your interest — to see two key managers of public business honestly and informatively answering questions and explaining their actions.

Most important was the nuance.

Fraser explained why Treasury was relatively optimistic about the economy.

But he also detailed his qualifications and uncertainties. The subtext: he was ultimately not claiming forecasting omnipotence.

He also candidly confirmed why we got the bank levy: simply, cleanly, because that’s where the money was.

Byres was at pains to explain how APRA would use its new powers to ensure “good” and “secure” banking. He also put the bank levy in its appropriate contexts, while refraining from (political) demands the banks cop it on their profits.

Originally published as Terry McCrann: Economy and share market on the cusp