Self inflicted.

From the NYT

Killing the Recovery

The world has barely dug out of recession and the global economy is again slowing dangerously. Most leaders seem eager to make things even worse.

Instead of looking for ways to reignite growth, Europe’s leaders — and Republicans on Capitol Hill — are determined to slash public spending. Europe’s fixation on austerity is also compounding its debt crisis, bringing the Continent even closer to the brink. Meanwhile, China’s government, which is struggling to contain inflation without letting its currency rise, has been trying to slow domestic demand, allowing its trade surplus to balloon.

Each of these policies is wrong. In combination, they are likely to tip the world into a deep recession.

The International Monetary Fund has cut its forecast for global growth this year to 4 percent, from the 4.3 percent it had forecast in April. It expects rich countries to grow by only 1.6 percent. That may be too optimistic.

The I.M.F. forecasts that the United States will grow by 1.5 percent this year and 1.9 percent in 2012. But that assumes Congress will continue payroll tax cuts and extended unemployment insurance, as President Obama has called for. Mark Zandi of Moody’s Economy.com warns that if Congress fails to do so, the country will probably slip into recession.

Europe is in even worse shape. Rich nations that could afford to spend more to increase growth, like Germany and Britain, are instead slashing spending. Germany and its rich neighbors are also insisting that Greece, Portugal and other debtor countries accept even stiffer doses of austerity to regain the confidence of investors. Sending these economies into near collapse means that they will never be able to dig out or pay off their creditors.

While the German Parliament is expected to approve a new $600 billion bailout fund on Thursday, many European leaders already admit it is too small to deal with turmoil that now also threatens Spain and Italy.

It is true that many countries do not have the money to pay for policies to promote employment and growth. The United States, Britain, Germany and China could boost global demand by spending more at home and buying more from weaker countries that cannot stimulate their own economies.

The United States government must cut its budget deficit, but the economy must recover first. According to Mr. Zandi, President Obama’s $450 billion jobs plan could add 1.9 million jobs in 2012 and cut the unemployment rate by a percentage point. With interest rates so low, the government could easily pay for a bigger program.

The British government has similar room to maneuver. And its stubborn insistence on fiscal austerity is already causing havoc. But the countries that could do most to assist global growth are China and Germany.

China today makes 14 percent of the world’s economic product but consumes only 6 percent of it. Allowing its currency to rise would help combat inflation by lowering the domestic price of imports, while increasing the spending power of the Chinese people.

Germany’s export model is also failing, producing little growth while sucking demand from its neighbors. Germany could easily raise money at low cost to stimulate its own consumption. Yet not only has it refused stimulus spending, it is imposing austerity on the rest of Europe — forcing weak countries to contract their economies in exchange for its aid.

Economic policy makers have made similar mistakes before. That is what caused the Great Depression. There is not a lot of time left to get this right.

Reading between the lines...

..it would seem that the RBA thinks the market has got it wrong

"From time to time over the past year, the Bank has considered whether further restraint was required, but on balance concluded that existing policy settings remained appropriate, particularly given the restraint also being applied by the high exchange rate. At its most recent monetary policy meeting, the Board judged that the recent financial volatility could weaken the outlook for demand, and hence may, in due course, act to dampen pressure on inflation. On this basis, the Board judged that it was prudent to maintain the current stance of monetary policy. In the meantime, financial markets seem to have concluded that the risks are weighted towards the Australian economy weakening sharply and, taken literally, seem to be pricing in a reduction in official interest rates towards the unusually low levels reached after the global financial crisis. There are technical reasons why current market pricing may not be giving an accurate picture of interest rate expectations. Nonetheless, markets do seem to have reached a pessimistic assessment and this appears to be based mainly on the assumption that weakness in the US and Europe will flow through to Australia."

Then follows the conclusion

It is too early at this stage to judge with any degree of certainty whether Australia will catch cold from the US. However, given that over the past 10 to 15 years the Australian economy has been less vulnerable to severe US symptoms, there are reasonable grounds for optimism.

Until a clearer picture emerges, the Bank's approach will be to keep an open mind, and base its assessments about appropriate policy on a careful analysis of the data that become available.

Which seems to imply that the RBA, along with the rest of us, have no idea how things will pan out.

ASX dumped

According to Tim Boreham investors are quitting the market in droves

Mr Lechte said: "Most people are getting sick of the volatility, which is causing them sleepless nights. There are definitely people aged 70 to 80 who are seeing a 10 per cent fall and are saying, 'I'm out' (of the sharemarket)."

"We are clearly going through a very turbulent time," said Alex Dunnin, head of research at funds monitoring house Rainmaker. "It seems we are locked into this massive uncertainty and you can see why consumers are scared."

Mr Dunnin said many workers approaching retirement were "gobsmacked" on learning how much of their nest egg was exposed to equities, when they thought they had a balanced portfolio, and wanted to get out of them.

"All of this money is pouring into cash and deposits" and "explained why bank deposits at $1.5 trillion are now bigger than all super at $1.4 trillion".

According to the Westpac/Melbourne Institute index of consumer confidence, 38 per cent of Australians believe that bank deposits are the wisest place for savings, the highest level since the Whitlam-era turmoil of 1975.

Oh yeah?

According to an expert opinion of Cochlear

Valuation
Using an adjusted average Price/Earnings (PE) ratio of 23, and forecast NROE of approx. 48-55% (declining as equity per share increases) Empire values COH at $83 per share until the next earnings report (scheduled for early August). COH has a history of being “bid-up” by the market, with price/value convergences rare.

At a standard 10% discount for “Wonderful” companies, our maximum buy price would be $76 (i.e we would accumulate at any price below this level).

However, the foreign exchange risk implies purchasing COH shares at a slightly higher margin of safety, so we believe COH is excellent value at any price below $73. Cochlear recently closed below this level, and is currently trading at $72.12

Last Friday COH traded between $50.00 and $52.30

Who exactly is the author of this Wonder?

Chris Becker writes as The Prince. He is a full time equities trader as well as a partner in Empire Investing, a private value investing company. Chris is a former financial advisor and portfolio manager for a boutique financial services company with extensive experience in equities and derivatives trading.