The Private Practice eZine Winter 2013 Page 13

The Private Practice

Autumn 2013

ECONOMICS &

MARKETS

GROWING PAINS

In a June press conference after a
FederalOpenMarketCommittee
meeting, Fed Chair Ben Bernanke
indicated that the Fed is likely to begin
to `taper' QE that is, to buy fewer
long-term securities than the current
$85 billion per month before the
endof2013,withaneventualaimof
ceasing such purchases altogether
by mid 2014.

Note that this wasn't a statement

of what the Fed will do so much as
a statement of what it plans to do,
provided that the economy still shows
consistent signs of growth.

Note also that `tapered' purchase

would still result in further expansion
of the Fed's balance sheet, so if the
above chart has any meaning that
should still be consistent with a rising
share market.

The share market fell significantly

that afternoon, and again on the
following day. Meanwhile, long-term
interest rates have risen sharply, with
the10-yearbondratenowat2.44%,
from1.64%asrecentlyas1May.This,
in turn, causes mortgage rates to
rise and thus calls into question the
ongoing housing recovery.

I continue to think market analysts

are jumping at shadows, and that a
world in which the Fed is comfortable
ending its programme is a world
that should be conducive to further
share-market gains. It is, however,
just as well that these issues are being
discussed long before we get to the
end of the process; the more market
volatility this causes now, the less
there may be later.

In addition to the US effect, the

Australian market has been held
back by concern about the state of
the Australian economy, along with
continued soft Chinese data.

The national accounts for the

first quarter, released in early June,
depicted an economy growing at just
2.5%inthepastyear,downfrom4.4%
as recently as a year ago. They also
suggested that the mining investment
boom has already peaked, which
removes from the economy a major
source of growth in recent years.
We knew the end of this boom was
coming; it just arrived a little earlier
than anticipated.

This slowdown led to calls of

recession, and to assessments that the
Australian economy would already be
in recession, were it not for exports.
The latter statement is meaningless:
as a general rule, if one excludes all
the stuff that is growing strongly, the
average growth rate always falls.

DOUBTING THE
DOUBTERS

A couple of well-regarded private-
sector economists have gained some
publicity with their estimates that
thereisa20-25%chanceofarecession
within a year. Think about that. What
they are saying is that it may happen
but it probably won't. Who can
disagree with that?

The issue is that it's not clear

that the rest of the economy will pick
up the pace quickly enough to offset
the loss of growth from mining
capital spending.

I am frequently asked just where

the replacement growth is going to
come from, and the answer does
not always convince doubters. The
response must be that it won't
come from any one sector, but from
everywhere that is helped by lower
interest rates and a lower exchange
rate (along with an improvement in
business sentiment that seems likely
to occur after 14 September).

& DIVING