As the Europeans get organised and approve a deal to bail out Greece again, attention will shift to the United States and the end of QE2.
When the Greek can is kicked down the road again, as it soon will be, markets will rally but then quickly focus once more on the American economy’s failure to get lift-off because of persistent unemployment and a housing market that remains in quicksand.
And this week the US Federal Reserve buys its last Treasury securities as part of what became known as QE2 - the second program of quantitative easing. It has been buying $US75 billion worth every month since November, and that cash has been supporting financial markets and weakening the US dollar.
Prima facie, therefore, when the program ends the sharemarket and the Australian dollar will both fall. On the other hand they will both rally when Greece is bailed out because that will remove - for a while at least - the threat of disruption to the European banking system and European Monetary Union itself. Risk off, risk on.
The net effect is anyone’s guess, but all the various conflicting post-GFC forces – gradual economic recovery, liquidity pump-priming, regular debt crises - have kept our sharemarket flat for two years, while foreign investors in the Australian market have enjoyed a 16 per cent annual return from the currency.
That, as they say, has been a beautiful thing - one of the very few in world investing - and reflects Australia’s position as both a stable proxy for China and bellwether of the global economy.
The worsening global outlook has resulted in futures market odds on a rate hike in the next 12 months coming back to 25 per cent, despite Governor Glenn Stevens’ very clear message last week that rates will need to rise because of the mining boom and sub-5 per cent unemployment.
But the Australian economy is in the grip of conflicting forces. Incomes are rising because of low unemployment and the mining boom, but it’s being siphoned off by rising food, petrol and electricity prices plus higher interest rates. There’s a record amount of capital investment in the pipeline, but trade-competing firms are being hammered by the high currency.
During Japan’s lost decade in the '90s, no-one predicted a decade would be lost: it was a long succession of churning optimism and disappointment, followed by pessimism and pleasant surprise. Then everyone realised a decade had passed and no progress had been made. And then it became 20 years, with the latest attempt at recovery snuffed out by the Sendai earthquake.
Europe and America will also experience a lost decade, give or take a year or two. There is no way that either of these economies can get lift-off any time soon because, like Japan, they did not clear the debts. The politicians chose to socialise them, and try to muddle through in order to keep their own jobs.
Australia’s economic wagon is hitched to China, but its markets are hitched to Wall Street; as a result we will see economic growth - albeit multi-speed - combined with flat markets for a while yet.
The global bear market is far from over but China is undergoing the greatest industrialisation the world has ever seen. Australia is going to get very rich indeed but the investment markets will underperform.
And then sometime in the next 12 months, Australians will wake up to the greatest buying opportunity they have ever seen because the world will realise what we have, and so will we. The cash that has been on the sidelines for two years will flood back into assets.