Over the weekend, Great Britain missed out on what some thought was a certain gold medal for champion cyclist, Mark Cavendish.
After Bradley Wiggins won the Tour de France, victory for Britain seemed certain.
It wasn’t to be. Cavendish came in a lowly 29th.
So how did it all go so terribly wrong for Cavendish before his home crowd?
Simple. Cavendish didn’t have a Plan B.
It’s a problem faced not just by British cyclists. In fact, the failure to have a Plan B is staring the Australian economy square in the chops today.
And it’s a failure that could have a startling impact on the economy and financial markets. Here’s why…
We’ll get back to Plan B shortly. But first, in a speech last week to the Anika Foundation Lunch, Reserve Bank of Australia governor, Glenn Stevens signalled he sees no limit to what it can do to prop-up the Australian economy:
‘We might find that, in an extreme case, the Reserve Bank — along with other central banks — would need to step in with domestic currency liquidity, in lieu of market funding. The vulnerability to this possibility is less than it was four years ago; our capacity to respond is undiminished and, if not actually unlimited, is not subject to any limit that seems likely to bind.’
That, we dare say, includes ramping up the printing presses. And when central banks do that, there are two assets you want to own to help you profit from money printing: gold and…shares.
The following chart shows you the performance of five key assets since the market bottomed in March 2009:
The green line is the gold price. The yellow line is the U.S. S&P 500 index. The blue line is the U.K. FTSE 100 index. And the red line is the Aussie S&P/ASX 200 index.
Oh, and the purple line. The line that shows a 30% gain since 2009 is the Aussie gold price.
So for all the talk by the mainstream gold bears about gold being a terrible investment that doesn’t do anything, well, the breaking news is that it’s beating the Aussie stock market by three-and-a-half to one.
And for those same gold bears there’s no getting around it, the Aussie stock index is the worst performing out of the five assets.
But this chart means more than just the percentage gains shown. It shows you that a country that controls its own currency, in effect, can boost asset prices more effectively than those without this control.
Printing Stock Gains
Whether you’re in favour of money printing or not (we most certainly aren’t, for the reasons we’ve given many times, including the terrible inflationary impact for those who don’t know how to protect themselves), the impact on asset prices is certain.
To show you what we mean, look at the following chart:
It’s a bit jumbled, but we’ll try to explain it. As we see it, stocks are in three groups.
In the top group you’ve got the U.S., U.K., and German markets. The U.S. and U.K. central banks have printed money like it’s going out of fashion.
The German economy has benefited from this as it has exported its manufactured goods and services to these economies.
Plus Germany has for a long time been the strongest economy in Europe.
The middle group contains Australia (gold line). Australia hasn’t yet needed the RBA to print oodles of new money. Mainly because exports to China have kept money flowing into the economy.
But it still hasn’t been perfect for the Australian economy. While the resources sector has boomed, the rest of the economy has struggled. This morning’s news that Ford Australia will likely close its local car-making business comes barely a few months after the Aussie government fed it a multimillion dollar taxpayer funded bailout.
And it’s hot on the heels of a number of high profile business collapses.
Then you’ve got the bottom group. This includes economies in the euro such as France and Spain that could do with more money printing (again, we’re not saying we believe in money printing, we’re just saying that in the short-term at least, it does have a positive impact on stock prices).
And as we reported last week, the bottom-dwelling euro nations may get what they wish for. European Central Bank president, Mario Draghi has vowed to do whatever it takes to make sure the euro doesn’t fail.
That can only mean more central bank stimulus.
It helps explain Friday’s 3.9% rise for the Spanish IBEX index, and the 2.3% gain for the French CAC40 index.
But what about Australia? Right now, the idea of the RBA printing money seems unlikely. But it’s not completely off the table as the quote from Glenn Stevens above shows…
No Plan B for the Australian Economy
You can hardly pick up an Aussie paper without reading about how great things are here. Why the Australian economy is different to the Northern Hemisphere economies. And why we’ll muddle through even if things go a bit wrong.
But where’s the Australian economy’s Plan B? Plan A is to sell lots of stuff to China…lots of resources.
What if that plan doesn’t last as long as the mainstream hopes? Already Ken Henry’s claim that the resources boom would last until 2050 is looking a bit shaky.
So what happens next?
In the Olympic road race competition, Mark Cavendish’s problem was that his British team only had a Plan A. That was to hope none of their competitors would break away from the main group. So that when they approached the finish line after 260 km of racing, Cavendish could use his burst of speed to beat the rest.
It turns out everyone else figured that was Britain’s plan. So it wasn’t surprising that nearly 40 riders broke away from the group by the half-way point.
In bike racing it’s common for the main group to catch up with the breakaway group. But not in this case. The British team couldn’t rein them in because no-one else in the main group would help.
(Nearly every country was represented in the breakaway group, so if the riders in the main group helped to catch them, they knew that Cavendish would win, potentially robbing one of their own countryman of a win.)
In other words, Britain didn’t have a Plan B.
If Plan A didn’t work, there was nothing to fall back on. That’s the position Australian economy finds itself in now. There’s no Plan B for after the resources boom ends. That’s bad news for the Aussie economy in the long term.
But in the short term, if North America and Europe is anything to go by, it’s almost certain the RBA will follow the carefully laid out plan used by other central banks. That is, printing money.
As bad as the long-term economic and stock market consequences may be (look at Japan’s economy), in the short term we’ve seen that it can and does boost stock markets.
That’s why we don’t suggest you completely abandon the stock market.
The Aussie market has gotten a boost this morning from Europe’s potential money printing plan (up over 1% as we write). But when the inevitable happens and the RBA has to print in order to protect the Australian economy as the resources boom ends, you can be almost certain Aussie stocks will soar higher.
And when that happens, you don’t want to be left with a portfolio of no stocks.
Cheers,
Kris.
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