The Premiers and Prime Minister meet today to try to agree on a better management plan for southern Australia’s scarce water. The only certainty is that the hot air will add to global warming, but we wish them well and hope for sensible agreement.

While the hot air rises above the National capital, Henry’s favourite pollster, Gary Morgan, fronts the lions of CEDA in Sydney. His hypothesis is:

We are now watching the “live play” of conflict of interest and cronyism associated with the Qantas takeover bid. … The issue is the three Ts – Truth, Trust and Transparency of Management, The Board, and the role of Government and Other Stakeholders.

Will these issues see Prime Minister Howard and/or the L-NP Government ousted this time?

The answer is “No”. Prime Minister Howard may well go – but not because of these issues. In the absence of a major crisis (yet another one – real or manufactured), the issues that decide the election will be economic, … jobs, IR (and the real unemployment estimate) and interest rates.

Moving on to the global economic scene, The Economist reports that the slowing of the US economy seems so far to have had little impact:

The figures are striking. The annual rate of growth of America’s real domestic demand dropped from 4.4% in 2004 to only 1.9% in the second half of last year. The main culprit was the sickly housing market: although consumer spending has held up better than expected, the construction of homes has collapsed.

So is the rest of the world also wobbling? On the contrary, many other economies have put on a spurt. Japan’s GDP grew by 4.8% at an annual rate in the fourth quarter, mainly thanks to stronger domestic demand … Equally surprising was the euro area’s annualised growth of 3.6%. GDP per person is now growing faster in the euro area than it is in America. Domestic demand is also booming in emerging economies in Asia, the Middle East and Russia.

How does this cheery outlook translate into financial markets? The Economist’s Buttonwood recently summed up the prevailing mood. “It is a scene familiar to all Western lovers. The cavalry is riding through a mountain pass. One officer turns to a comrade. ‘I don’t like it,’ he says nervously. ‘It’s too quiet’. The next second, an arrow hits him in the chest”.

“I’m gradually making my portfolio more defensive,” Henry’s favourite equity manager reported.

It is a time to be cautious, but of course records are made to be broken, and continued strong global economic growth may keep the great equity show on the road for far longer than past experience suggests.

We note in particular the renewed upward pressure on the price of oil (see these graphs). Yesterday we learned US inflation exceeded expectations, and if oil keeps on rising this will add further to US inflation and force the Fed to hike rates again.

Read more at Henry Thornton.