Ahead of the curve ?
Overnight Australia's central bank cut interest rates. We mentioned the likelihood of this happening yesterday. Stocks in Australia shot higher by 2%.
While there won't be too many people spending time on considering how and why it fits into the big macro investing and economic theme, we'll discuss it here today. What has happened in Australia says a lot about why the Fed has been so afraid of moving too early and too fast.
Mistakes in this environment can undo a lot that has been done. In the case of the Fed, it could undo the global economic recovery.
First, Australia is interesting for a number of reasons. Australia has made big mistakes, so has Europe. When the world was clearly buckling in 2007-2008, both the ECB and the RBA kept raising rates. Then they finally slashed rates like everyone else.
The RBA cut rates from 7.25% down to 3% at the depths of the global economic crisis, in sympathy of the massive policy responses from the leaders of the major economies of the world. But they were quick to start raising rates again.
Given China gobbled up cheap commodities back in 2009 with freshly printed yuan, helping to pull the global economy out of the doldrums, the Australian economy actually averted recession and began showing signs of a hot expansion in the early days of the global economic recovery.
The Australian economy is closely tied to the health of the Chinese economy. When China demand is healthy, they tend to buy a lot of commodities from Australia. And in the past seven or so years, they've bought a lot of real estate in Australia. With what looked like a sharp recovery underway, from 2009 to 2010, the RBA raised rates from 3% to 4.75%.
Now, within the course of this hiking period, Europe confronted the first wave of the sovereign debt crisis threat. But with the coordination of the policy response from the European Central Bank, the Fed and the Bank of Japan and China, the first round of the sovereign debt crisis was warded off. And China played a large role there too. They came in as buyers of euros, and of European sovereign debt and Greek state-owned assets.
So, like the central bank in Australia, the European Central Bank was also quick on the draw. The ECB started raising rates, assuming a sharp V-shaped recovery was coming for Europe and the global economy.
The ECB and the RBA, underestimated the scale of the crisis. And it's been to the detriment of both economies. Europe has since re-entered recession and has had to fight off more iterations of the sovereign debt crisis, both of which have culminated in the launch of QE in Europe, almost six years after the worst period in the global economic crisis. And with the slowdown in China, the Australian economy has been sucking wind too.
So we have a tale of two central banks (in Australia and Europe) that jumped the gun on rate hikes, and were forced to reverse course, but not after doing damage to their economies.
Still, as we discussed in the past couple of weeks, we think a global economic and market sentiment shift is here, in the early stages. And it's at the early stages (the turning points) where the best investors are placing their bets. That's where the biggest rewards come. By the time it smacks everyone in the face, the opportunity for big returns have passed.
We think that "smack in the face" moment will be when Europe starts showing "green shoots." In the past month we've already seen a positive surprise in first quarter GDP and yields on German debt have been moving higher (looking as if the negative yield scare won't happen on the benchmark 10-year German bund — that's a positive for stocks and the outlook).
With this in mind, remember we looked at both the Australian stock market and two key European stock markets yesterday (Germany and Spain). This policy divergence between the U.S. and the RBA and ECB is squarely positive for the prospects of this gap in the chart below, closing. That's why we think these global stock indicies offer the opportunity for big returns relative to the U.S. stocks.
source: Forbes Billionaire's Pro Perspectives