On the breakdown in growth in the Chinese – Australian nexus
China and Australia
As you may know two of my ten surprises for 2012 revolved around the Chinese Australian nexus. Here’s what I wrote in January in my first Credit Writedowns Pro post:
- China will have a hard landing: I have a tough time on this one. But in keeping with the 50% odds when everyone else gives it one in three, I think China is the big story here. People who aren’t in the thrall of the China bull story know that the malinvestment there has reached breathtaking proportions. And with a second synchronised global growth slowdown in the last five years forming, China will get hit just as its over-investment bubble is popping. There are only so many losses it can socialise while its export and banking sectors are hit at the same time. The stimulus won’t be enough to prevent quarterly growth from stalling to say 5% annualised by the end of this year. That is China bearish given that stocks are already in a bear market. The additional real economy slowdown will hurt profits and sentiment, taking P/Es down with profits for a double whammy.
- Australia’s housing bubble will pop: I was just thinking about this in the context of Ireland. Ireland has seen prices in Dublin fall 65% peak to trough. That’s enormous, Japanese-style asset price deflation. No wonder Ireland is in a depression. In 2005, when the housing bubble was at peak, Irish house prices were up 192% in the previous 8 year period, second only to South Africa in developed economies surveyed by the Economist. By comparison, Australian house prices were up 114% putting them behind only South Africa, Ireland, Britain and Spain. I can’t speak to South Africa but those other bubbles have popped while house prices in Australia have climbed higher on the back of Chinese over-investment. if you think China will slow, as I do, that makes Australia extremely vulnerable – and makes its house prices and Australian shares vulnerable too.
I have kept a watch on those two events and I don’t think China or Australia is falling out of bed yet but the situation is clearly deteriorating in both countries. A lot of pundits have begun to question the official statistics out of China, especially given the weak electricity numbers in the country, which point to rapid economic deceleration. In Australia, the housing bubble has clearly popped but the question is how quickly will the fallout develop and how widespread will it be. With stories about reckless lending now coming forward it does seem that Australia’s banks are knee deep in this.
And that has to be a concern given their overvaluation. remember yesterday’s link from Pragmatic Capitalism on Australia’s banks being worth more than Europe’s. That’s nuts. I say short Australian banks and go long European ones just on the relative value play alone.
"Given the fact that the Euro crisis is never ending (thanks to a lack of political compromise) it’s unlikely that the timing on this one will be anything remotely similar, but this statistic just jumped out at me as a sign of incredible skew in a large market. It’s food for thought and as always, certainly not an investment recommendation, but a very nice 30,000 foot view of the collapse in European equities during the last few years. The European financial sector is now smaller than Australia’s! Now that has to make you go “hmmmm”"
Australian banks are vulnerable and we will soon find out how well-capitalised they are.
"Claims that Australia’s banking sector is conservative, safe and secure have taken a bath in recent days as evidence has emerged of Australia’s own sub-prime lending scandal."
"China catches a cold – Australia gets the flu
Australia’s economy is dependent on China. Last year, exports to the country were equal to 27.3% of Australia’s GDP. Overall, minerals and fuel account for just under half of total exports."
"Banks, companies and investors are preparing themselves for a collapse of the euro. Cross-border bank lending is falling, asset managers are shunning Europe and money is flowing into German real estate and bonds. The euro remains stable against the dollar because America has debt problems too. But unlike the euro, the dollar’s structure isn’t in doubt."
Worthy post by Karl Whelan on why a breakup would be disorderly.
Economist Hanno Beck recommends a Greek default and writedown. He contends that it would be better for an "orderly default" than a "disorderly breakup" of the euro zone.
Portugal not only had the worst GDP numbers earlier today, it also rang up to 15% unemployment for the quarter, topping the record 14.9% unemployment set the quarter before. The unemployment rate for 15 to 24 year olds is 35.5%.
"La caída del precio de la vivienda se aceleró en julio con un descenso del 11,2% respecto al mismo mes de 2011, el mayor desde marzo pasado"
The euro zone as a whole contracted 0.2% but the change in GDP varied greatly. Germany(+0.3%) Netherlands (+0.2%), Lithuania (+1%), Austria (+0.2%) Slovakia (+0.7%). and Finland (+0.8%) were the best. France was at no growth or decline while we also saw Portugal (-1.2%) Spain (-0.4%) Cyprus (-0.8%) Italy (-0.7%)
As of July, Spanish banks have 375.5 billion euros of loans from the ECB. That is a record, up from the record 337.2 billion in June. In April 2011, credit with the ECB was at a record low of 42.2 billion
The United States
"Last week we wrote about how US lending standards for mortgages have continued to tighten — in severe contrast to standards for other kinds of loans. This was reinforced by the Fed’s senior loan officer survey for July, but we didn’t take a very close look at other parts that also shed some light on what’s happening with banks and the housing market. CreditSights, however, just summarised those bits in an excellent short note from this morning. You can find the whole thing in the usual place, but we’re posting the highlights below"
"Among those affected is Karen Harrelson, an Arkansas cattle farmer who has been in the business for nearly 40 years. She’s already had to sell 100 cows this summer. As a single woman working the lands on her own, Ms Harrelson says it can be a tough life. Now she worries that if it doesn’t rain in the coming months she could lose more of her cattle – and take an even greater hit to her livelihood."
A lot of this discussion is about cyclical forces and not secular ones. I am more concerned with how resilient house prices are in a recession because that’s when the damage to household balance sheets is most destabilising for the economy. The real foreclosure shock happens during a downturn.
"Iceland’s commitment to its program, a decision to push losses on to bondholders instead of taxpayers and the safeguarding of a welfare system that shielded the unemployed from penury helped propel the nation from collapse toward recovery, according to the Washington-based fund."
Is this a sign of risk seeking return? I say it is. "Borrowing costs on dollar debt due 2021 dropped 20 basis points, or 0.20 percentage points, to 5.1 percent"
"Canadian stocks are poised for their worst year since 1998 relative to global equities as a slowing economy weighs on commodities and analysts predict the first drop in corporate profits in three years."
A $340 civil penalty, high enough to get people to think some justice was done. This is largely as I predicted. In the US, there is almost never prosecution in financial services. it is ALWAYS a settlement. That’s how it works.
"Samsung on Monday mounted its defense in the ongoing Apple v. Samsung patent trial, with the pair of "fact witnesses" giving testimony regarding alleged prior art to Apple’s "rubber-banding" and "pinch-to-zoom" patents."
"Samsung sold 90.43 million mobile handsets in the second quarter, giving the South Korean consumer electronics powerhouse a 21.6% market share, up from 20.7% in the first quarter this year and up from 16.3% the same quarter a year ago, Gartner’s figures showed."
"There is no denying Android’s dominance anymore. There is no way even the most rabid Apple fanboy can deny that iOS is in second place now. Android is winning."