Dominating the headlines over the past week has been the US shutdown – where federal workers have been told to stay at home – effectively on unpaid leave. The reason for this – since the end of the US financial year (30th Sept) a new budget for 2013/14 has yet to be approved and hence the current scenario.
More broadly, and really beyond this article, is why the impasse on a new budget and its approval. The Republican party, who are opposed to President Obama’s Affordable Care Act, are using the current budget deadlock as an opportunity to force the President back to the negotiating table. And this is democracy in action!
Having recently gone through an election here at home, we at one point looked to be falling victim to the same scenario, where the Senate and lower house were on a potentially different page.
However, that now seems to have passed and as far as Australia is concerned, we are not simply open for business but things are picking up. Business confidence, as measured by the NAB, showed a 3½ year high this week, a great sign. However, there will be a lag between this confidence measure and actual business investment and activity. It will flow through and could provide a great boost to the start of the New Year. Other sectors, from property to manufacturing have shown equally solid signs.
Certainly, things feel different. This is good and, if the feeling does trickle down further, into actual activity, then we are in for great times ahead. Interest rates are at very low levels, continuing to act as an incentive for money to be spent – by business and the public alike. While the cutting of rates is likely to pause for a good few months – we are reckoning at least 6, as the impact is truly witnessed, one variable, which remains a concern, is inflation.
Inflation is the measure for increases in price, providing an important benchmark for the cost of living, wage and contract negotiations, rental increases and the like. Some inflation is good, as it provides a momentum within the economy, while too much is a disaster zone, and maintaining the right balance, is critical. Central Bankers do a generally solid job here and currently, according to the statistics, inflation, as measured by the Consumer Price Index (CPI) is sitting at 2.5%.
Away from the statistics and looking anecdotally, my father arrived from the UK last week, and as a frequent World traveller, and regular here to Australia, his immediate reaction gave the gig up. Inflation, in reality is way more than 2.5% – I will spare you the vernacular from Sunday, but suffice to say it wasn’t a gasp of how cheap everything is! 20% more expensive for his daily newspaper, was just one thing he noted.
What was particularly interesting, was his reflection on seeing a similar pattern in the UK, during the 1970s. Bigger wage demands and bigger inflation – albeit union driven in the case of the UK – is not a disimilar backdrop. Ok – so UK inflation peaked at 25% and averaged 13% for the decade (thanks to a Socialist government) and we aren’t close to that – by a long way, however, it is a slippery slope when wage pressures are trundling along.
Confidence and Growth
A fresh government, strong direction and a new level of confidence may well avert what could have happened. Confidence and growth are the key – something we spoke of several months ago in our article, breakfast with Tony Abbott.
Meanwhile, it is business as usual on the trading desk – covered calls across a range of stocks, a bit of sector rotation and most importantly, action takers profiting.