More cracks in global financial markets

Thursday, 5 July 2018
Melbourne, Australia
By Bernd Struben

  • Why oil’s set for a major fall
  • Mark Sunday, 8 July on your calendar

There are plenty of warning signs flashing on the state of global markets.

But for Australia, one of the most concerning ones comes from China.

As you likely know, China is Australia’s largest trading partner. The data in May showed that Australia has exported $102 billion worth of goods to China over the previous 12 months.

China’s rapid growth has driven a voracious appetite for Australian resources. This is largely what kept Australia from dropping into recession following the global financial meltdown in 2008. Though that didn’t stop the ASX from plunging 50% in value.

Like much of the world, China’s growth miracle owes much of its magic to debt. Lots and lots of debt.

Analysts have been warning about China’s ballooning debt for years. To date, the forecasts of a financial implosion have proven premature. But all the while Chinese corporations have been piling on more and more debt, largely in the form of corporate bonds.

It’s these corporate bonds that may well be the canary in the coal mine for what’s ahead.

From Bloomberg:

China is zooming to a record year of corporate-bond defaults, with the 2018 total already more than three-quarters of the previous high even before an expected economic slowdown bites.

Chinese companies have reneged on about 16.5 billion yuan ($2.5 billion) of public bond payments so far this year, compared with the high of 20.7 billion yuan seen in all of 2016, according to data compiled by Bloomberg. Strains are set to get worse if the trends of credit-rating companies are anything to go by — agencies including Dagong Global Rating Co. have been downgrading firms by an unprecedented margin…

In the meantime, rising yields are set to make the refinancing of maturing debt all the tougher for private companies that lack the access to the state-dominated banking system that national behemoths enjoy. With the People’s Bank of China making only limited steps to support credit to private companies, borrowing costs show no sign of dropping.’

You can see the perilous position of the local Chinese bond market in the chart below:

chart image

Source: Bloomberg / Dagong Global Credit Rating
Click to enlarge

China’s AA-corporate bond yield is now at 6.99%. That’s up from about 4.6% in mid-2016.

That’s a tidy return for lenders…assuming the corporation whose bonds you bought isn’t one of the growing number to default. But it’s obviously not making servicing their cumbersome debt levels any easier for Chinese companies.

We looked at the impact of the rising cost of loans in our debt-addled world in Port Phillip Insider earlier this week. We won’t rehash that today. Only to remind you that, when interest rates go up in the US or other major markets, there is a ripple effect across the globe.

Speaking of ripple effects, trade tensions stoked by Donald Trump show little sign of easing. The Chinese have promised not to fire the first shot in any escalation towards a full-scale trade war. But Trump has made no such commitment.

And the ripples for Chinese companies if things heat up could look more like tsunamis.

As Bloomberg notes:

An escalation of trade tensions could add to defaults in China’s financial system, which is already in the midst of a deleveraging campaign, according to JPMorgan Chase & Co.

If U.S. President Donald Trump imposes sweeping tariffs on Chinese imports later this week, there will be spinoff effects on the country’s financial sector, according to Jing Ulrich, JPMorgan’s vice chairman for Asia Pacific. Consumer demand and the wider economy are likely to weaken and that “may translate into worse credit quality down the road,” Ulrich said in a Friday interview in Hong Kong.’

The last thing China needs, as it struggles to transition its economy from production driven to consumer driven, is weaker domestic consumer demand. Especially if its largest trading partner — the US — is slapping tariffs on its exports.

You can see how it won’t take much for things to turn seriously pear shaped.

Yet renowned economic futurist Harry Dent will still tell you that, ‘Things are worse than they seem at first glance.

He’s not trying to scare you here. Well maybe a little. But only to prepare you for the epic crash he sees in Australia’s near future.

This is from the same forecaster who predicted Japan’s 1989 economic collapse, and the dotcom and subprime busts. Not to mention the populist wave that saw Brexit pass and Donald Trump enter the White House.

Harry pins much of the blame on the coming global crash on the US. And while the US will suffer from the fallout, he believes Australia is set for some of the worst pain.

Here’s an excerpt of what he has to say,

America has been stalling the coming economic crisis for years. Instead of dealing with the global financial crisis of 2008, the American Federal Reserve just printed a bunch of money and tried to blow their way out of it.

Central banks around the world followed suit. And made the bubble worse.

After the GFC, we didn’t have a Great Depression. Even though the models called for it.

So with this next crisis, I believe we’re just going to get hit harder.

I’m convinced that the combination of cheap money, inflated debt, declining demographics and politics, could ultimately lead to a collapse worse than any we’ve ever seen.

As mentioned, I recently completed a tour of Australia in February and March. And I’m convinced of something else…

That this collapse is going to hit Australia harder than many other nations.

In his brand-new book, Zero Hour, Harry Dent explains exactly why he sees Australia heading into what he calls ‘economic winter’.

Understanding what he sees coming…and when…will enable you to formulate your own investing plan around this sequence of events.

More than that, he gives tips on which ‘chaos currency’ to own during the meltdown. As well as explaining which under the radar emerging market could soar even as developed nations crash. And much more…

If you’re only planning on reading one more book this year, I’d put this one at the top of your list.

It’s compelling reading. And if the upcoming crash Harry forecasts is even half as severe as he expects, having read Zero Hour will put you well ahead of the herd.

You can get your digital copy — and discover a lot more about what’s inside — here.

Now to the markets.


Overnight the US markets were closed for the Independence Day holiday. Happy 4th of July!

In Europe, the Euro Stoxx 50 index finished up 5.69 points, or 0.17%. Meanwhile, the FTSE 100 fell 0.27%, and Germany’s DAX lost 31.53 points, or 0.26%.

In Asian markets, Japan’s Nikkei 225 is down 195.47 points, or 0.90%. China’s CSI 300 is down 0.54%.

In Australia, the S&P/ASX 200 is up 25.61 points, or 0.41%.

On the commodities markets, West Texas Intermediate crude oil is US$73.80 per barrel. Brent crude is US$77.89 per barrel.

(More on oil below.)

Turning to gold, the yellow metal is trading for US$1,256.78 (AU$1,704.80) per troy ounce. Silver is US$16.09 (AU$21.83) per troy ounce.

One bitcoin is worth US$6,556.43.

The Aussie dollar is worth 73.72 US cents.

Why oil’s set for a major fall

The price of crude is down just a tick since I wrote to you yesterday. But it’s still close to three-year highs. And still 20% higher than where I expected oil to be as we head into September.

Donald Trump, for one, isn’t happy with the high prices US voters are paying to fill up their cars. Not only does he want to appear to be doing something to help them. He wants to ensure petrol prices come down before the US mid-term elections in November.

If Republicans can maintain their majority in the Senate and Congress, Trump will wield even greater power in his second two years in office. Not to mention that his risk of impeachment pretty much goes out the window.

It’s not surprising, then, that Trump is upping the pressure on OPEC. You can see his latest reaction on Twitter below:

chart image

Source: Twitter
Click to enlarge

You can’t even label this a thinly veiled threat.

Saudi Arabia appears to already have gotten the message. Though it’s unclear if the kingdom will end up pumping up to an extra two million barrels of oil per day, as Trump is demanding.

In his latest tweet, Trump is directly warning other OPEC members — Kuwait, Iraq, and the United Arab Emirates come to mind — that they could lose vital US military aid if they don’t follow the Saudi’s lead.

There’s been no official reply from OPEC yet. But without US military backing, many of these nation’s governments will find themselves on very thin ice.

Then there’s Russia, the world’s third largest oil producing nation after the US and Saudi Arabia. Trump’s upcoming summit with Putin will almost certainly involve oil talks. And with Putin eager to cosy up to the US president, I expect more Russian oil to hit the markets.

Now an important reminder…

Mark Sunday, 8 July on your calendar

That’s this Sunday.

And after you mark the date on your calendar, jot down ‘1pm AEST’.

That’s when gold experts Jim Rickards and Shae Russell kick off their special four–part investment series, put on by our friends over at Agora Financial Australia.

It’s called ‘Project Prophecy’. And the goal is to show you how to exploit a very rare, and historically very rewarding, gold window.

The last time this window opened was from 2005–2007. Investors who used the trading strategy Jim and Shae detail in ‘Project Prophecy’ had the opportunity to see gains of 2,000% or more.

Now this strategy is far riskier than simply buying gold (and silver) and chucking it in a secure vault. But the potential payoffs are also far higher.

Agora Financial Australia is streaming the ‘Project Prophecy’ investment series on a restricted VIP website. But as I mentioned yesterday, they’ve kindly agreed to allow our readers access for free.

But you must register your interest so they can hold a spot for you. You can do that…and learn more about the investment series…here.

Finally, here’s the latest on online security from The Australian Tribune:

‘Gmail Delivers Another Blow to Online Privacy’

Have you ever sent an email message you’d rather keep private between yourself and the recipient? A message you wouldn’t want to share with a stranger poring through your sent box?

If so, and you use Gmail, you may wish to review the permissions you’ve granted when downloading new apps.

That’s because…’

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.

And it’s absolutely free.

Sign up here to get The Australian Tribune delivered free to your inbox five days per week.

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