You call that a credit bubble? This is a credit bubble!
Posted by Izabella Kaminskaon May 03 12:34.
The famous (implied) last words of Crocodile Edwards — a.k.a SocGen uber bear, Albert Edwards — this Thursday.
Following in the foot steps of colleague Dylan Grice’s episode of Australia bashing the other week, Edwards calls the situation plain:
All we have in Australia, at its simplest, is a credit bubble built upon a commodity boom dependent for its sustenance on an even greater credit bubble in China. Of all the bubbles I have seen over the last 30 years in this industry, this one is even more obvious than the rather prominent nose on my increasingly haggard face.
To make his point he cites the 2012 Demographia International Housing Affordability Survey, which illustrates that every Australian centre is “severely unaffordable”.
Yes, it’s an old story. Australia is exposed to China, and China is exposed to the commodity bull-run. And nobody knows how genuine that really is. But don’t let that put you off listening to Mr. Edward’s view of things (our emphasis):
Our own more Minskyan interpretation of events is that the lack of volatility in the Australian economic cycle (see above) and the absence of any recession since 1991 has led Australians to have an excessive appetite for debt in the belief the future will reflect the past.
But for us, suppressed volatility is merely storing up an even bigger crash further down the road. The Australian “miracle” is dependent on the wheels not coming off China.
In that context our FX strategist, Kit Jukes, points out that the April official “Chinese PMI reading, at 53.3, makes for a fifth monthly advance but not great reading. April is typically the best month of the year for this series (see chart below) and, apart from 2009, when the PMI was in the early stages of its post-2008 bounce, this is the worst April in years. We are likely to see the PMI trend lower from here and the case for further AUD weakness is clear.”
The Australian dollar has long been seen as a play on Chinese growth. Despite its recent weakness it is thought to be one of the best ways to hedge a China hard landing, either by shorting it directly or alternatively by going long its current unusually low level of volatility (see chart below).
Administrator says:
Looks like Australia is fucked.
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6th May 2012 at 9:50 am
Administrator says:
Hubris and other signs of trouble ‘down under’
Posted by Masa Serdarevic on Apr 25 18:22.
Australia is rich in iron ore, coal and copper … and its stock of hubris seems to be growing.
After a recent trip to the “quarry in China’s backyard” SocGen’s Dylan Grice is even more worried about its economy than he was beforehand. It seems a book describing Australia’s economic success as “a miracle” was the catalyst (more on that below). In a note to clients Grice is recommending shorting the aussie dollar. And, if you’re lucky enough to be Australian, stockpiling gold.
But let’s rewind. His point is that the commodity boom has masked the full extent of the credit expansion and has fooled some into thinking the country’s economy is stronger than it really is. Or as he puts it:
When you scratch the surface of the Australian miracle you don’t just find an unmiraculous commodity super-cycle: you also find an equally unmiraculous credit super-cycle as well. A credit bubble built on a commodity market built on an even bigger Chinese credit bubble, Australia looks like leveraged leverage, a CDO squared.
Ouch. As he notes, debt to disposable income has risen from 40 per cent in the 1990s to around 150 per cent today, or in chart form:
Partly as a result, Australia now has five of the world’s top 15 most expensive cities. But a potential housing crash looks unlikely as there was no residential housing construction boom. The boom in construction engineering projects, however, is a problem.
Australia has been investing in mines as if Chinese demand is just going to keep growing.
And Grice doesn’t think putting all your chips on China is a good idea (emphasis ours):
How healthy is Chinas iron ore demand? If its steel prospects were so attractive why does Wuhan Iron & Steel for one think pigs are the future? Why has the company recently announced plans to invest nearly $5bn over the next five years in industries in which it has no expertise, such as pig, fish and organic vegetable farming? Probably because steelmakers are now loss making and there is excess capacity. And if they have no confidence in the Chinese steel industry, why should Australia?
Coal, Australia’s other major commodity export, has an export capacity chart that looks a lot like the one above. And it’s also facing headwinds as China’s growth slows, while shale gas is a growing threat. “Though its predominantly a US story today, its going to go global,” says Grice.
There are worrying mutterings elsewhere. Andrew Liveris, Dow Chemical’s Darwin-born chief excutive, said last month that Australia’s economy had become too reliant on China for growth and blamed the strong Aussie dollar for its growing uncompetitiveness. ”We are seeing troubling signs for our economy at large – maybe even signs of a coming downturn,” he added.
Grice argues there may be trouble in Australia even China’s resource demand somehow holds up, because of the strength of its currency (emphasis ours):
The improvement in Australia’s terms of trade (the ratio of its export prices to its import prices) has been spectacular thanks to the bull run in commodities. It should be running large current account surpluses, like Norway. But it isn’t. It’s running a deficit of 3 per cent. So the AUD is overvalued and vulnerable. For Australians, buying bonds makes some sense to me … while buying gold makes a lot of sense (because gold is very cheap in AUD terms). For foreigners, the AUD’s own day of reckoning provides a very good hedge against any great leap backwards in China.
As an aside, we’re hearing anecdotally that Australians are increasingly buying electronics and books on Amazon US. Even after the shipping costs and various taxes and duties, apparently it is often significantly cheaper than buying domestically. It may one of the reasons why the share price of Harvey Norman, “Australia’s leading retailer”, is down 28 per cent in the past year.
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6th May 2012 at 9:56 am
dd says:
does the ever-inceasing foreign earned profits by American companies not scew this historical relationship.
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6th May 2012 at 12:28 pm
David Smith says:
Great article. The unbridled greed of the few has resulted in great damage to global economies and society.
They say no good deed goes unpunished, and the reverse seems to have happened here. Their bad deeds have been rewarded with bailouts, blame shifting and bonuses.
It makes me sick.
I wonder about the psychology of Australian bulls and property investors in this environment. Do they really think this is a new paradigm where housing bubbles never burst. Reading the spruikers comments below, you’d have to say so…..
http://australianpropertyforum.com/forum/3210735/
If these people are still living in such a world of delusion, what hope is there for society. Can the ‘Occupy’ protests ever change the minds of people who are that sure the bubble is a myth?
Let’s hope we can change their outlook. For if we can’t, Australia is doomed.
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6th May 2012 at 11:35 pm
Ron says:
I keep hearing how great things are under Obama,people argue the markets and gov. figures.Of course they dont think about the money the fed is pumping in or the folks fleeing foreign markets that for the moment are doing worse than the usa.
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6th May 2012 at 12:59 am