There is blood in the streets. Iron ore prices are in free-fall, the market is pricing in the RBA to cut the cash to close to 1.5 per cent and the news is dominated by the concerns about the economy, the budget, house price bubbles and any other negative economic snippets they can find.
But this ignores some other facts. Facts that are suggesting we are close to reaching the low point in the economic cycle. There are good signs for the economy that are being glossed over or ignored by the tin-hat brigade who are, finally, able to say “we were right” about their pessimism even though the continues rise in house prices is something of a humiliation as they keep waiting for prices to collapse.
In other words, it might be time to set in motion a strategy that takes advantage of pessimists getting pessimistic and after markets have already been hit and in some instances look to be in a classic overshoot.
It might also be time, as I touched on 6 or so weeks ago, to look for a positive tone in markets to the point where the Australian dollar is close to a floor and the RBA is closer to the end of the rate cutting cycle that the market is anticipating.
Let’s have a look at some facts.
Housing construction is booming which is great news for GDP, including retail sales, as the bricks, windows, plumbing and electrical work is done and as new appliances and fittings are bought when these dwellings are completed and the alterations and additions are finished. Dwelling investment looks like accounting for 0.5 per cent of GDP by itself in 2015. The current low interest rate settings are helping with this positive tone.
Speaking of consumers, their pessimism over the economic policy leadership from the government is understandable, but with share and house prices marching higher, consumers are swimming in wealth and money and with that, they have a pent up ability to spend. It’s not clear when that pent up demand will spill over to actual activity, but it will happen, perhaps soon.
Then there is the mini-boom going on in tourism and education where activity is strong, fueled in part by the lower dollar but also better economic conditions globally.
Add to that some lift in demand for labour from the job vacancy and job ads series and it just might be possible to see the unemployment rate edging lower in the latter half of 2015, even if it does hit 6.5 per cent in the mean time. This too might see a welcome lift in wages growth which will of course help to underpin consumer spending.
Speaking of the world economy, there is very encouraging news out of the Eurozone and the ongoing momentum in the US is being complemented by solid activity in China and India, even though China has some property problems to deal with.
No one knows exactly how this will all pan out, but as Baron Rothschild noted, it is said, “The time to buy is when there’s blood in the streets”.
In the iron ore market, currency and interest rate markets, there is a fair bit of blood in the streets. To be sure, there could be more in the near term, but getting pessimistic at the low point of the cycle is the wrong strategy. I am going to take a deep breath and get set for better news in the second half of 2015 and with that, a sea-change in market conditions.