Australia is NOT China

Tuesday, 29 March, 2016
Albert Park, Australia
By Kris Sayce

  • Squandered the lot, and more
  • Why this isn’t a ‘China moment’ for Australia

Look at what happens.

We take the weekend off, and when we come back, the market rewards us with a 73 point, or 1.5%, drop.

What the heck is going on?

Details in a moment. First…

Markets

Overnight, the Dow Jones Industrial Average index gained 19.6 points, or 0.1%.

The S&P 500 index gained 1.1 point, or 0.05%.

Most European exchanges were closed for the long weekend, in observance of Good Friday and Easter Monday.

On the commodities markets, West Texas Intermediate crude oil is trading at US$39.14 per barrel. Gold is trading for US$1,217 per ounce.

On the currency markets, the Aussie dollar is trading for 75.56 US cents.

Squandered the lot, and more

If there’s one thing that should have most folks scratching their heads about the Aussie economy, it’s how, after arguably the biggest boom Australia has ever experienced, the federal government can be in debt to the tune of $417.4 billion.



Source: Australian Office of Financial Management
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Folks often say that Australia squandered the riches from the mining boom.

That’s only partly correct. It’s true that Australia did blow the whole darn lot. But if that’s all it blew, things wouldn’t be so bad.

The biggest problem is that Australia not only blew it all, but that it blew it all and a whole lot more.

That’s why the government is in debt by $417 billion. At the current rate, the government will likely be half a trillion dollars in debt long before the end of the 2017 financial year.

And if it was just the government drowning in debt, we could make an argument that you shouldn’t worry too much — after all, a government can just instruct its central bank to print its way out of debt, right?

But as the chart below shows, it isn’t just government debt posing a problem. It’s household debt too.

This chart shows Australia Household Finances: Housing Debt to Income, in percentage terms:



Source: Bloomberg, Reserve Bank of Australia
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For every $100 of income, Australia has $133 in debt.

You may think that’s not so bad. But when you consider that around one-third of the population owns their home outright, and one-third rents, the real picture is much darker.

For the point of comparison, it’s worth checking out the following chart. It’s of US Household Debt to Disposable Income:



Source: Bloomberg
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The numbers aren’t exactly the same. The Australian data is gross income, whereas the US data is disposable income.

So we can split hairs if we wish. The point is, the US index peaked at 132 in the December quarter of 2007. The Aussie index currently stands at a record high of 133.8.

I know. Folks (me and others) drew similar comparisons between the US housing market and the Aussie housing market in 2008 and 2009.

The US housing market crashed. As a whole, the Aussie housing market didn’t crash.

There are all sorts of reasons, explanations, and excuses for why that was.

But in truth, you don’t need a PhD in economics to know that when something doesn’t look right, the outcome is usually trouble.

And right now, things don’t look right for the Aussie economy. It’s why I took the unusual step of not making a stock recommendation in the March issue of Tactical Wealth.

Instead, I laid out the seven data points for why I believe the Aussie, US, and world markets are heading for big trouble.

After looking at these charts, I’d say I need to edit that report. There are now eight data points for why I believe the Aussie, US, and world markets are heading for big trouble.

Why this isn’t a ‘China moment’ for Australia

Not everyone agrees with our view.

One Tactical Wealth subscriber wrote to say this:

Regarding your recent issue of Tactical Wealth, 7 signs of market crash. I realise your analysis is focused on the US, not Australia, however whilst the US is at all time highs, the Aussie market has gone nowhere for over 10 years.

The value of the Aussie market based on the EWA ETF (which takes account of the AUD/USD rate) is;

– down 54% from the 2008 high as at January 2016

– down 42% from the April 2011 high as at Jan 2016

On August 4 when you predicted the crash, EWA was already down;

– 40% from the 2008 high

– 25% from the 2011 high

If someone is calling for a crash after a 54% decline, a flag goes up in my mind to take a closer look. The aussie market has underperformed for over a decade, [total market cap]:GDP is low, the currency is relatively cheap and there is yield on offer. There may be some setbacks in the short term, but there could be an excellent buying opportunity approaching as well.

Happy investing!

Alliance member, Daniel

Daniel could very well be right. I made the similar argument in 2014, when most analysts were predicting a crash for the Chinese market.

I barked loudly that the Chinese market had already crashed. It was down 67% from the 2007 high. That advice was prescient. Within a year of telling investors that China was a great buying opportunity, the Shanghai Composite index had soared 157%.



Source: Bloomberg
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So, is Australia about to ‘do a China’? Should I make the same call on Australia’s stock market today as I did on China’s stock market in 2014?

After seeing the chart below, I’m not so sure.



Source: Bloomberg
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This chart shows Chinese household debt in US dollar terms, going back to 2004.

Household debt has increased (admittedly from a low base) at an average of 25% per year, for a total increase of 1,113%.

It means that in US dollar terms, Chinese household debt stands at over US$5.7 trillion.

The big increase in housing debt from 2012 to 2015 no doubt helped spur the Chinese market’s rapid rise in 2014. From 2012 onwards, China’s household debt has more than doubled.

If we assume that the increase in debt, including margin lending debt, boosted stock prices, bullish investors would have to hope for similar sized growth in the Aussie lending market.

So, we ask, does it seem likely that Australian household debt will double over the next 24 months?

You’d also think that would require a near doubling in household income. Does that seem likely?

Let’s see what the market says. In an economy where debt and income could double in the near future, that should be good news for the banking system.

Well, tell that to the Aussie banks.

As Bloomberg reported a couple of weeks ago:

Australia & New Zealand Banking Group Ltd., Asia’s 10th-biggest lender by market capitalization, may face pressure on revenue and asset quality. Overseas income may slow further on weaker emerging economies, while domestic revenue may cool as the housing market peaks.

We hope that Daniel is right. We hope this is the Australian market’s ‘China moment’.

But somehow, something tells us it isn’t. We’ll maintain our view that a major global market crash is on the horizon.

Cheers,
Kris

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End of day market data

If you have any ideas about what you would like us to include in our end of day market data drop us a line at letters@portphillipinsider.com.au, and type ‘Market data’ in the subject line.

52-week highs: 26 stocks, including Fisher & Paykel Healthcare Co Ltd [ASX:FPH], BlueScope Steel Ltd [ASX:BSL], NextDC Ltd [ASX:NXT], K&S Corp Ltd [ASX:KSC], and Premier Investments Ltd [ASX:PMV].

52-week lows: 23 stocks, including EQT Holdings Ltd [ASX:EQT], Karoon Gas Australia Ltd [ASX:KAR], Regional Express Holdings Ltd [ASX:REX], and Vectus Biosystems Ltd [ASX:VBS].

Note: The stocks listed above are stocks that hit an intra-day 52-week high or low during today’s trading. The stocks didn’t necessarily close at the 52-week high or low.