Will this unleash Australia’s ‘economic winter’?
Monday, 18 June 2018
By Bernd Struben
- Oil bulls’ risky bet
- ‘Diminishing our sense of shared prosperity’
‘Europe is getting ready to blow. China is going to blow too; and if China blows, there would be nothing that Europe, the US and the central banks could do to offset it.’
Harry S Dent
We thought we’d start your week off with an uplifting quote.
You’re probably familiar with Harry Dent. His forecasting track record would make Nostradamus envious.
Most of his famous calls involve pending busts. Busts that, for one reason or another, the majority of investors walked blindly in to. These included the lead-up to the dotcom bust in 2000, and the global financial meltdown in 2008.
In the past, Harry has focused predominantly on US markets. But now he’s turned his attention to Australia. And the picture he’s painting looks pretty bleak…unless you’re prepared for what’s coming.
Part of Australia’s vulnerability lies in our over dependence on China. Australia’s largest trading partner, as you likely know, has a bit of a debt problem. That’s nothing new. But the trade ructions going on with the US are raising fresh concerns over the stability of the world’s second largest economy.
It also goes a long way to explaining China’s great pains to accommodate US President Donald Trump’s demands on ‘fair trade’.
Granted, China has said it will slap additional 25% tariffs on selected US imports in a direct response to US tariffs, worth US$50 billion. But Chinese trade officials know they have a weak hand. Hence the constant reminders that China is open to negotiation…and open to trade with the rest of the world.
As RAW reported, Chinese tabloid, the Global Times expressed hope that a trade war could be averted. ‘[China] welcomes dialogue and is not afraid of trade war threats.’
They may not be afraid of trade war threats. But an actual, drawn out trade war could be the pin to pop China’s debt addicted economic growth model.
From the Australian Financial Review:
‘The threat of a US trade war and a batch of weak economic data have revived fears that cracks are appearing in President Xi Jinping’s mission to keep the world’s second-largest economy on a stable footing, as state-owned enterprises and local governments battle to wean themselves off cheap debt…
‘China’s central bank on Thursday failed to match the US Federal Reserve’s interest rate hike, a break from tradition that economists said reflected concern about slowing retail sales and industrial production in May…
‘Guo Shuqing, head of China’s Banking and Insurance Regulatory Commission, said debt defaults by state-owned enterprises were expected to increase due to the central government’s crackdown on excessive leverage…
‘Bonds worth about 20 trillion yuan are set to expire by next year. Mr Guo warned some companies had not taken the debt reduction campaign seriously enough and too many companies did not generate enough profit to cover their interest payments.’
20 trillion yuan, by the way, is AU$4.2 trillion. That’s the equivalent of almost two and half times Australia’s entire GDP.
Certainly not all of those bondholders will default. But even a fairly small percentage going belly up could send shockwaves through China’s debt markets.
And as Harry Dent cautions, ‘if China blows, there would be nothing that Europe, the US and the central banks could do to offset it.’
This is just one of the factors at play that will bring what he calls ‘Economic Winter’ to Australia.
Much of what he foresees unfolding over the next two years isn’t pretty. Which is all the more reason to prepare yourself today.
Zero Hour is intended to help guide you through the revolutionary changes he sees coming.
You can find out how to get your hands on a digital copy, and take a peek at what’s inside, right here.
Now to the markets, where most major indices across the globe all lost ground…
Over the weekend the Dow Jones Industrial Average closed down 84.83 points, or 0.34%.
The S&P 500 lost 2.83 points, or 0.10%.
In Europe the Euro Stoxx 50 index finished down 22.09 points, or 0.63%. Meanwhile, the FTSE 100 lost 1.70%, and Germany’s DAX dropped 96.55 points, or 0.74%.
In Asian markets, Japan’s Nikkei 225 is down 184.84 points, or 0.81%. China’s CSI 300 is down 0.53%.
In Australia, the S&P/ASX 200 is up 14.47 points, or 0.24%.
On the commodities markets, West Texas Intermediate crude oil is US$64.26 per barrel. Brent crude is US$73.01 per barrel.
(More on oil below…)
Turning to gold, the yellow metal is trading for US$1,282.08 (AU$1,724.15) per troy ounce. Silver is US$16.59 (AU$22.31) per troy ounce.
One bitcoin is worth US$6,422.39.
The Aussie dollar is worth 74.36 US cents.
Oil bulls’ risky bet
With OPEC ministers meeting this Friday, 22 June, all eyes will be on Vienna to see how much more supply is likely to come online.
For the past several months I’ve been telling you that WTI should fall back into the mid US$50 range this northern summer. That’s partly based on OPEC upping production. And partly on record US production not looking to stall anytime soon.
Of course, not everyone agrees.
As Bloomberg reported on Saturday, ‘After two months of cutting bets on rising prices, hedge funds are feeling optimistic again as OPEC prepares to meet.’
As you can see in the chart below (if you’ve got really good eyes) net-long position on Brent rose 4.1%.
Click to enlarge
By the time you read next Monday’s Port Phillip Insider, we’ll know if the hedge funds were right to be optimistic on rising oil prices. But I wouldn’t invest alongside them.
For one thing, Russia’s economy can use every ruble it can generate. And with the reduced output from Iran and Venezuela, it’s an opportune time for the Russians to pump more…a lot more…without crashing the price.
‘“The Russians are now pushing for a bigger increase than what we expected earlier, and OPEC is divided now,” said John Kilduff, a partner at Again Capital LLC. “The Saudis are trying to moderate what’s going on, but it will be a volatile week going into the meeting with tons of headline risk.”
‘The Russians are suggesting the 24-nation coalition that began cutting output about 18 months ago lift daily production by 1.5 million barrels, the same amount the International Energy Agency expects to disappear as economic and political crises seize Venezuela and Iran.’
Perhaps Vladimir Putin has been reading Trump’s tweets slamming OPEC for artificially boosting the price of oil.
Perhaps the two leaders have even been colluding…
‘Diminishing our sense of shared prosperity’
Since we started today’s edition on a note of caution, we’ll finish with the same.
It won’t come as news to you that Australian households are holding record levels of debt. Nor that real wages — adjusted for inflation — have remained almost flat for the past decade.
If interest rates go up — and at some point the RBA will need to follow the US Fed in raising rates — that could spell serious trouble. If house prices continue to slip — and Harry Dent predicts a 50% plummet — loan defaults could knock the stuffing out of Australia’s banks.
And the warning signs are beginning to mount up.
The following headline comes from The Age, ‘Dangerous territory as households feel sting’. The article continues:
‘Reserve Bank governor Philip Lowe laid out this subdued economic backdrop to the coming federal election in a speech last week to the Australian Industry Group. He immediately zoned in on the No. 1 thing ailing the Australian economy: namely, the “unusually slow growth in wages.”…
‘Meanwhile, household debt remains “very high”, with Sydney and Melbourne property markets going through what the governor delicately termed a “period of adjustment”.
‘This is leaving many households with a mortgage in those cities high and dry, according to Lowe: “Many people who borrowed expected their incomes to grow at something like the old rate rather than the current rate. With their expectations not being realised, the real value of the debt stays higher than they expected and this is likely to affect their spending decisions.”
‘Lowe says slow growth in wages, combined with this debt hangover, is “diminishing our sense of shared prosperity”.’
I really like that last line. You or I may have said, ‘making us all feel poorer’. But not the RBA’s top bureaucrat.
Whether our sense of shared prosperity is diminishing…or we’re feeling poorer…here’s a sobering fact. Australia’s is a consumer driven economy. Meaning, roughly 66% of our GDP is derived from consumer spending.
As our friends and neighbours sense diminishing prosperity, they’re likely to rein in that spending. This in turn would hit the economy and future wage growth…further slowing consumer spending.
You can see where that could lead.
For Harry Dent’s full analysis and survival tips…go here.
And finally, the latest on the ever-lengthening reach of your government from The Australian Tribune:
‘Government’s Foreign Spy Crackdown a “Serious Threat”’
‘No one wants to see China, Russia…or Lithuania for that matter…interfering in Australia’s domestic politics.
‘But sometimes the cure can be worse than the disease. And the government’s efforts to address foreign interference appears to be on that track.
‘Australia’s two major political parties have been blasted…’
If you’re fed up with sanitised, politically correct dogma cut and pasted from one mainstream source to another then The Australian Tribune is for you.
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