What a long, strange, boring, indecisive, inconclusive year it's been for investors. There are big problems which don't seem to have any solution. Yet collapse is not desirable and appears to be preventable, if you give a central bank enough room to cut rates and buy bonds through quantitative easing. Are we stuck in an endless rut? Or will things get worse, then better...or better, then worse?
This week will be a pretty good test of your investing character. If you're prone to worry and addicted to data, you'll love it. First off, the Reserve Bank of Australia (RBA) meets tomorrow. The RBA has cut rates by 1.5% in the last 12 months. At 3.25%, the cash rate is still above where it was at the high point of the panicked days of 2009.
But look at the chart below. Lower rates in Australia haven't been the tonic for higher Aussie stock prices. True, higher Aussie interest rates have been the tonic for a strong Aussie dollar. And that's brought billions in foreign capital in to the country. But the poor old stock market can't seem to make up its mind whether to follow America's lead or China's lag.
Aussie Stocks 'Stuck in the Middle With You'
Click here to enlarge
You can pack too much information into a chart. But this one tells us three things. First, the Federal Reserve is pretty good at manipulating stock prices higher. Maybe it's inflation, because it doesn't seem to correlate to rising corporate profits. But stock traders can trade QE, if you're playing in the right market.
Second, the Chinese have given up on speculating in the stock market to beat inflation. We've conceded that the US market is clearly manipulated by the Fed, at least to the extent that the Fed is the largest currency manipulator in the world and is actively screwing with bond yields to force people to take risk. But China's dismal share market performance tells you that the market there isn't really a market either.
To their credit, at least Chinese authorities have encouraged their citizens to own more gold and silver. They've gradually deflated bubbles in housing and stocks without inflating a bubble in social anger. That's no mean feat.
But stuck in the middle of the successful fraud of QE and the slow-motion asset deflation in China is Australia. The share-market can't seem to follow a lead, or it refuses to, and has stuck stubbornly to a third, middle, Australian way. Is this a reflection of the Australian desire to be pragmatic, non-ideological, and independent?
Well, it could be. Or it could be genuine confusion about what the data means for the Australian economy. For instance, later this week the national accounts figures will be released. They will show the terms of trade data, or Australia's net national income (the difference between exports and imports). If the past is prologue, the terms of trade are falling.
They're falling because commodity prices are falling. The main benefits of the investment boom in resources have been realised, too, although the Treasurer and the RBA both say economic growth will benefit from billions of dollars in projects in 2013. But if the data show a falling terms of trade and rising costs, will all those investment projects go through? Hmm.
But really, no one ever got rich by worrying to death. At some point, you have to put aside the things you can't control and decide what to do with your money. As our mate Kris Sayce points out in his latest silver screen production, building wealth is about taking risks.
Dan Denning for The Daily Reckoning Australia