‘U.S. stocks advanced, sending the Standard & Poor’s 500 Index to the highest level in five years, amid better-than-estimated data on Chinese exports.’ – Bloomberg News
It’s not just the US stock market on the rise.
As we noted yesterday, the Japanese stock market is at the highest point since early 2011, and the Australian stock market is pretty good odds to head higher as the Reserve Bank of Australia (RBA) follows its overseas cousins and cuts interest rates.
Of course, the Aussie market’s future relies on China. And as you know from our old pal, Greg Canavan, the Chinese economy is set to bust.
But not so fast. A fight is brewing. And we’re not talking about trade wars or currency wars involving the US, China, Japan and Europe. We’re talking about a no-holds-barred scrap between two of our heavy-hitting editors…
In a weekly update to his readers last night, our other old pal Dr Alex Cowie wrote:
‘After seeing most mining stocks, big and small, fall for the last 18 months, this signal is a great way to start 2013. It suggests that the worst is behind us and that there should be some good opportunities this year.‘And why shouldn’t there be? The resource story hangs off China, and China’s data is improving. I am the only China bull in the office (it gets a bit lonely at times)! But I look forward to writing to you in the next newsletter to spell out why I think China is about to drive the next leg up in the resource market.’
We’ve always seen the Doc as a contra-contrarian. That is taking the contrarian view to contrarians…but which isn’t necessarily the mainstream view. Confused? Don’t worry, we get confused ourselves sometimes.
But according to the Doc in his weekly update:
‘Even the mainstream media is beating up China these days. Who would have anticipated that being a China bull in 2013 would be a contrarian view?’
As we say, we don’t think a China rally is a contrarian view. We’d bet that most contrarians still have China hitting the skids and collapsing in an almighty heap. But we get the Doc’s point. Even the mainstream media is nowhere near as bullish on China as it used to be.
We Don’t Care Why the Stock Market Rallies
For what it’s worth, our take is that the Chinese economy will collapse. It’s only a case of when, not if. And when it does happen, it will take the Australian economy and stock market with it.
Trouble is, we’re not sure when that will happen. And because we understand the risks, we’re happy to keep playing the Australian stock market rally for as long as it lasts. If that sounds like we’re sitting on the fence with the macro-economic picture, we’ll cop that.
But the argument for the stock market rally to continue remains strong. Whether it’s due to China’s resource buying, US economic recovery, Japan’s money printing or Eurozone bailouts, we don’t know. And if we’re frank, we don’t care.
Yesterday we showed you the one year chart of the major indices. Here’s a chart covering the past five years:
Source: Google Finance
As the chart shows, the US and UK markets are back to the 2008 high, and close to the all-time high reached in 2007. On the other hand, the Aussie and Japanese stock markets are still down 21% and 25% respectively.
So much for the benefit of being close to the booming Chinese economy. It doesn’t seem to have helped the Aussie stock market much in the past four years.
That’s why there’s a reasonable argument to say that the Australian stock market has more to do with the performance of the Japanese market and yen, rather than China. As Japan prints money, the big investment institutions tend to take that money and look for higher yields.
Here’s Why Stocks Could Rise in 2013
Despite the record low interest rates in Australia, you can still get a good yield on Aussie government bonds. And as investors have searched for yields as interest rates have dropped, this has forced investors into buying stocks…pushing stock prices up…especially since last November.
It’s hard to see that trend disappearing anytime fast. The US Fed isn’t about to raise interest rates, and neither is the Eurozone. And given the recent actions of the Bank of Japan, neither is Japan.
Closer to home, the NAB today says the RBA will cut interest rates to 2.25% by the end of this year. Remember that ANZ has the cash rate at 2% by the end of 2013.
To our mind, as we look at the chart (and we’re not a technical analyst remember) we’re putting the balance of probabilities on the Australian stock market making a decent gain this year.
Earlier this week, Alex asked us for your year-end forecast for the Aussie index. We said 5,002 points – about 6% above the current level. We’re now starting to wonder if we’ve underplayed potential advance.
We haven’t changed our long-term view on China. It’s a Ponzi economy built on expanding credit. But look at how the markets rallied from 2003 to 2007. Wasn’t that on the back of a Ponzi economy rallying on expanding credit, too?
Cheers,
Kris
From the Port Phillip Publishing Library
Special Report: The Big Money Secret of Ironstone Mountain
Daily Reckoning: A North Korean Investment Opportunity
Money Morning: How Central Banks Are Letting Inflation Get Out of Control
Pursuit of Happiness: Are You Brave Enough to Break From Technology?
