A Manufacturing Industry Revolution
Yesterday's data dump was a non-event. Retail sales rose 0.1%, the current account deficit widened a little, and the RBA didn't change interest rates. The ASX200 followed suit with its own dramatic move, rising 0.16%.
Even when there are big moves in Australian data these days, it only seems to be a head-fake. New dwelling approvals jumped 10.8% in July, but fell 10.6% in the previous two months.
Heady stuff.
But what's this from overseas? A proper manufacturing industry recovery in the works?
Good news is flooding out of the developed economies and China. The other emerging markets haven't been so lucky, with the likes of India and South-East Asia put through the wringer.
But here's the question we're asking today: Have we got a 'fair dinkum' recovery in Europe and the US, as Aussie politicians might say? Or is this one of those 'stop the boats' solutions - all tip and no iceberg?
Let's get to the cold hard facts first - the data.
America's July ISM manufacturing index came in at 55.7 overnight, indicating decent growth. The figure was far better than the expected 54, and an improvement on last month's 55.4. It's also the highest since April 2011.
Even the long lost continent of Europe pulled off a manufacturing expansion. Survey company Markit's Manufacturing Purchasing Managers Index (PMI) rose to 51.4 for July, also a two year high. The French were the only major Eurozone economy with contracting manufacturing. In China, the PMI is back above 50 too. That means expansion is happening at a faster pace than average.
It's a dead-set manufacturing revolution. Commsec Chief Economist Craig James, noting that Australia's trade numbers do not bode well for growth, reckons 'for the first time in a long time, we could see the US economy growing at a faster rate than Australia, which is just quite remarkable.'
Of course, all this manufacturing data is a whole lot less factual than it seems. PMIs, ISMs and other survey based indices are notoriously dodgy. In a document released by Wikileaks, the current Chinese premier admitted the official figures are only for reference (i.e. propaganda) and Argentina's current president mocked Harvard students for believing their own country's statistics after they pointed out her country's economic data is falsified.
So, what's really going on? Is the world finally going to see a decent manufacturing recovery with good old economic growth? Could Australia's 22-year track record of no recessions be extended even further as a new global economic boom begins?
Doubtful.
Much of America and Europe's economic growth over the past few decades was simply an increase in debt. China is in the same boat more recently. Unless borrowed money is invested in assets that improve productivity or generate income, it becomes a burden eventually.
Productive assets like machines and factories have been escaping the US and Europe, not being created. In Italy, a man recently relocated his entire factory to Eastern Europe over the weekend to avoid a union blockade.
Instead of investing in productive assets, welfare and warfare dominates every government budget. Credit card bills and mortgages fund consumption in many households. And compliance and health and safety weighs down every corporate financial statement. Debt is being used in all the wrong ways by nearly everybody and nearly everywhere.
So why the recent optimism? Well, you can always engineer some additional economic growth if you're willing to borrow and spend on unproductive assets. A little more debt gets you a little more economic activity. But at some point, people realise this isn't sustainable and bug out - they stop borrowing. That's when the system comes crashing down a la Lehman Brothers, or Kreditanstalt during the Great Depression.
Unproductively invested debt needs to be purged. Otherwise it remains unproductive and a dead weight on the economy. But purging sucks, so governments and central banks try to prevent it as long as they can. Their solution is of course more of the very illness in the first place - unproductive debt.
Gowdie Family Wealth editor Vern Gowdie reckons the inevitable crash is coming. He sold his financial advisory business in 2008, so his calls on timing aren't to be ignored. You can find out about his latest prediction here.
In the meantime, hints of a manufacturing boom in America, Europe and China are good enough to keep stocks going up.
Or are they?
The problem with all this survey based optimism is that it makes the Federal Reserve's taper of QE more likely. If the Federal Reserve reduces its money printing efforts, but the economy is supposedly improving, where does that leave stocks?
Everyone claims to know, but nobody really has a clue. Does an improving economy outweigh reductions in money printing, or is the stock market only going up because of Federal Reserve Chairman Bernanke's efforts?
This was the topic of a hot debate on CNBC between Peter Schiff and everyone else on the guest panel. Peter has a habit of setting everyone else against himself. His point was that stocks live by QE and so they'll die by QE. Everyone else thought the Fed's tapering signals QE isn't required any more. And stocks will go up once they figure out QE isn't needed - the way a four-year old realises he doesn't need the training wheels on his bike, right before he crashes headfirst into the pavement.
Unfortunately, figuring out what the end of QE means is not as clean cut as TV makes it out to be. Whether there's QE or not is only half the story. All it takes is the potential for more QE and stocks could go up even without an improving economy.
In other words, right now, everyone is speculating on the end of QE. But if QE doesn't end, everyone will speculate on its continuation. It's all speculation, either way.
And with that, we're back to the old good news is bad news phenomenon and its various versions. Right now, nobody knows whether the good news coming out of manufacturing surveys is good or bad for the stock market. If the Fed tapers, people will have to worry about whether bad news is good or bad.
As you can see, government manipulation messes with incentives. It's a case of 'Clowns to the left of me, jokers to the right, and [Australians are] stuck in the middle with...'BHP and CBA.
Vern's solution to your pickle is a very straight forward one. Sell. That way you don't have to find out what will happen the hard way.
Regards,
Nick Hubble+
for The Daily Reckoning Australia