THE BIG PICTURE: Your economic New Year’s resolutions

It is that time of the year when people make their New Year’s resolutions. And while these resolutions tend to focus on travel, health or personal habits, there’s no reason why finance and economics can’t feature.

1. Don’t believe everything you read/hear/see.

This resolution goes without saying, but it’s amazing how many people read, see or hear the latest doom and gloom predictions from a so-called financial luminary and take it as gospel that it will happen. The simple fact is that no one knows. That may come as a shock to some, but no one can see the future with certainty. One person may be successful with one prediction, but that is no guarantee of future success.

2. Be selective with financial information.

Again, it probably goes without saying. Still that’s the whole point of resolutions isn’t it? We know that we should drink and eat less and cut out smoking, but it’s the follow-through that’s the hardest. There is so much financial information that is available in print and electronically. But there are only so many hours in the day to read and analyse it. Find information and analysis that is well written and makes sense. Taking on too much information or complicated information will just leave you confused.

3. Realise that bad news is always more prominent than good news.

Bad news is put on page one of newspapers; leads electronic news services; and tends to be put high up on internet sites. In fact you may have heard the term ‘bad news sells’. You probably heard it, because it’s true. Humans tend to embrace bad news and leave good news for another time. The problem is that this can make you somewhat unbalanced: hardly positive if you are trying to weigh up the pros and cons accurately.

4. Apply the “So what?” rule.

With whatever information you take on, ask: ‘So what does it mean to me?’ This will allow you to get to the ‘hot button’ issue straight away. If it has no relevance, move on.

5. Realise that markets don’t always get it right.

There is not always a simple reason why things happen. Sometimes hedge funds or global investment banks apply power to force a certain result. The profit motive is very powerful. And so-called “fundamentals” don’t always yield the “right” results. In a perfect world they do, but unfortunately the world is far from perfect and some players exert greater influence. Survival of the fittest isn’t just the law of the jungle, it applies in finance. Ireland and Greece were both vulnerable to speculative attack and paid the price for largesse.

The week ahead

The Reserve Bank still takes the view that the economy is in good shape. But the first download of economic data in the new ‘teens’ decade is set to challenge that perception. The Performance of Manufacturing index is released on Tuesday with the equivalent index for the services sector due on Thursday. Building approvals are also due on Thursday, preceded by new home sales figures on Wednesday.

There may only be four economic indicators to be released – and second-tier indicators to boot – but each is likely to give the same impression. That is, that the economy is treading water. The Performance of Manufacturing index has been below 50 for the past three months. Any reading below 50 is said to indicate that the sector is going backwards. And the Performance of Services index has been below 50 in six of the past seven months.

Perhaps the surveys are giving false signals. But then there is the data on new home sales – down in five of the past six months. And dwelling approvals – down in six of the past seven months. So whether it is construction, manufacturing or services, the news is hardly inspiring. And it’s important to note that building approvals is a forward-looking indicator. While approvals were up in October, we expect that growth was short-lived with another 2% fall in approvals expected to have occurred in November.

Turning to the US, the picture is actually somewhat brighter. The ISM manufacturing index is released on Monday and economists expect a solid reading of 56.8 in December, up slightly from November. Data on construction spending for November is out the same day and economists tip a 0.2% lift after the 0.7% increase in October.

On Tuesday, data is expected to show modest gains for both car sales and factory orders. Then on Wednesday economists tip a 100,000 lift in the ADP employment index and further strength in the ISM services index.

But while these indicators should provide encouragement for investors, most eyes will be focused on Friday’s jobs report. It’s this report that usually turns out to be make-or-break – the good news being that economists are hopeful of more jobs growth in the latest month. On average economists tip a 125,000 lift in non-farm payrolls (employment) with private sector jobs to rise by around 140,000.

The other events to watch over the week are the minutes of the December 14 Federal Reserve meeting (Tuesday) and the testimony of Federal Reserve chairman, Ben Bernanke on Friday. Bernanke is to testify on the economic outlook before the Senate Budget Committee with the tone likely to be one of “cautious optimism.”


The good news is that only 18 of 72 global sharemarkets went backwards in 2010. After more than doubling last year, Sri Lanka is leading the gains in 2010, up 96%. Latin American and Asian bourses are among the top performers together with former USSR republics such as Estonia, Ukraine and Lithuania. Greece and Cyprus are at the bottom of the leader-board, down 35%, with Spain and China also in the bottom grouping.

The US Dow Jones was up 11% in 2010 with the UK FTSE up a similar magnitude. Germany has out-performed, with the Dax up 17%, but the Japanese Nikkei was down 2.3% over the year.

Interest rates, currencies & commodities

The Australian dollar has been among the strongest global currencies in 2010 and the Aussie dollar ranks as second strongest against the greenback of 120 currencies monitored. The Aussie has lifted from A$1.11 per US dollar to A99 cents, a gain of just over 11% over the year. The strongest currency has been the Mongolian tugrik, up 14% against the greenback over the year, while the Japanese yen is in third spot, up 10.8%. Asian currencies dominate the top rankings of the currency leader-board with currencies from Malaysia, Thailand, Taiwan and Singapore all posting firm gains.

At the other end of the scale, African and eastern European currencies have fallen most against the greenback over 2010. The Ethiopian birr slid just over 30 per cent against the US dollar in 2010 with the Uganda shilling down 22%. The Euro was the 11th weakest against the greenback in 2010, down 9%.

Across the asset classes, once again commodities posted strong gains in 2010. With a few days left, the CRB futures index had lifted by 17% in 2010 after a 23% lift in 2009. Amongst the strongest commodities was cotton, up 124%, with thermal coal up 50%, wheat up 47% iron ore up 45 per cent and beef up 38%. Interestingly gold rose by ‘just’ 28% with oil up 15%.

Bonds and shares finished 2010 neck and neck. The UBS government bond index lifted 4.6% over 2010 whereas the All Ordinaries accumulation index lifted by 3.8%. The cash rate started the year at 3.75%, ending 2010 at 4.75%. But while the three-year government bond yield lifted from 4.66% to 5.35% over 2010, the 10-year bond rate eased from 5.70 per cent to 5.66 per cent.

Craig James is chief economist at CommSec.


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