Before taking a break after the end of a remarkable year, the team at MacroBusiness sat down recently to share their views on the events of 2011 and the risk and opportunities that lie ahead.
The discussion was framed around 5 questions with the first 3 answered in Part 1 posted yesterday, with the final 2 questions discussed below.
Question 4. Where do you see the risks and opportunities that lie ahead for 2012 and beyond?
Delusional Economics (DE): Well the biggest risk for me currently is obviously Europe. The issues are mutli-dimensional, however the underlying issue of competitiveness imbalance still exists and very little is being done about it. We could see a resolution in 2012, but the latest “fiscal compact” and economic data suggests that the problem is going to get even worse before it gets better.
In regards to opportunities it really is a wait and see game, if we get some form of resolution in Europe then EZ FIRE (financials, insurance, real estate) sector would be an interesting place to look for the risk takers.
On the short side there are opportunities all over the place specifically in Europe but also China and the emerging markets that are export reliant as the world’s economy slows.
The Unconventional Economist (UE): Risks are definitely a China hard landing, a soft landing is coming but anymore than that…. As with DE, I think a big risk coming out of Europe is a global credit freeze, this would likely entail sharper housing correction in Australia.
The Prince (TP): The greatest risk and opportunity is the reliance of our economy and hence an investor’s portfolio, on the China story. I subscribe to the “this is China’s century” view, but like the 19th century for America, and in other eras where new empires dominated, there will be recessions and roadblocks along the way. This is not unusual nor “bearish”, its just history repeating.
The danger is being leveraged so much that nations on the periphery are caught up in these inevitable and frequent setbacks. The opportunity lies in capturing that volatility in the short term, and recognising the risks over the long term.
Asia is our future, but Europe and US could drag us into the past.
Deus Forex Machina (DFM): It’s a trader or speculators market so the risks and opportunities go hand in hand with volatility. Volatility of sentiment, of price action, of politics, of economies and of markets.
Houses and Holes (HH): Catch the medium term rallies on the way up – that’s the opportunity. The risk is missing the peaks on the way down…
DFM: It’s a play with what you can lose kind of game and if you’re not up for that then retreat to the safety of TD’s for a couple or few years until the wounds in the global economy can at least start to heal. Where is there a better risk adjusted return on the planet than an Australian ADI TD for the next few years???
DE: DFM is right – for the rest of us, it is fixed income in strong sovereigns and cash until we see some resolution and/or strong direction to the macro issues.
Rumplestatskin (RS): The main risk is the European countries fail to gather enough support to change the rules of the game to allow a broad economic recovery. I think that a resolution, one that would allow the economic growth to be established once again, will come when things are looking most grim, but the timeframe is anyone’s guess.
For Australia in particular, it seems the terms of trade has peaked for now, and our key export commodities are seeing prices fall. Under these conditions the AUD will trend lower, while we may see some of the major mining investments delayed again.
The general impact of disleveraging, will see growth maintain a slow pace far below the pre-2008 trend and very slow in per capita terms.
Q Continuum (QC): The US political situation is concerning, with some zany antics on the Republican side. The Syrian situation could also lead to further instability in the Mid East, pushing oil prices higher.
I still think some high-quality stocks will be worth picking up when the market gets into one of its funks, especially at current yields. Fixed-interest securities/bonds will increase in popularity and hence price, so the race for yield will probably quicken
Question 5. What have you learnt and/or appreciated the most since blogging at MacroBusiness?
DFM: I learnt that when like minded individuals who have an obsessive inquisitive nature it can make for really good insightful analysis that is often on the money. I’ve been reminded that an open mind is much better than a PhD.
I hope that our readers have learnt that you don’t need an economics or finance degree nor have the title of Chief Economist or Strategist to be good at this stuff.
DE: Most so-called economists have absolutely no idea what they are talking about. They simply string a long line of “finance” words together and hope that no one notices that they aren’t actually making any sense or that their previous calls were wildly off the mark!
HH: The biggest lesson? There are many smart Australians that know far more about the global economy and our place in it than our idiot media that purports to be an expert.
DFM: Absolutely HH, there is a broad and growing cabal of people in Australia and beyond who we can learn from and who are questioning conventional media and wisdom.
RS: Yes, the mainstream media is doing a terrible job in this country. The journalism profession needs to seriously rethink its place in society, especially with the wave of new and social media.
The main lesson for me is there is no right or wrong way to ‘manage’ nation’s economy. There are simply choices about the future the people desire. Some prefer to trade-off the high risk of commodity dependency for short term gains, while others prefer long term stability at the cost of short term gains.
TP: I’ve had my empirical model of how stock markets behave, derived from Minsky, tested in the real world whilst broadening my understanding of macro – mainly through the eyes of the team here at MB.
Most of all I’ve enjoyed the response from our broad and growing group of readers and commenters.
UE: Me too – I really appreciate the intelligence of my fellow MB bloggers and our readers, all of us have benefited.
QC: My learning curve outside of fundamental analysis through the macro view has been dramatic and very appreciated.
I have also gained an appreciation for how flawed much of the mainstream analysis is, even though it is presented as fact or fait accompli to what used to be a naive reader. The coverage of the WAN-7 merger was a classic case….
DE: The most important lesson for all of us at MB is that there is a huge population of Australians who feel the same way about the Australian media’s inability to provide an intelligence and balanced assessment of the political economy. A lot of them appear to be young Australian professionals from all walks of life, which gives me a lot of hope for the future of Australia.
We may only be houses and holes now, but that doesn’t mean we have to keep it that way.
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