Australia Heading for ‘Mother of All Hard Landings’: Pros

http://www.cnbc.com/id/47290031/print/1/displaymode/1098/

Australia is headed for the “mother of all hard landings,” according to Société Générale strategist Albert Edwards, who says the country’s “credit bubble” could burst if China’s economy suffers a sharp slowdown.

“(In Australia) We see a credit bubble built on a commodity bull market based on a much bigger Chinese credit bubble,” Edwards said in a report. “Of all the bubbles I have seen over the last 30 years in this industry, this one is even more obvious.”

Edwards reiterated his case for a hard landing for the mainland economy, pointing to the official Purchasing Mangers Index (PMI) of 53.3 last month, which he says is “the worst” April reading in years.

“We are likely to see the PMI trend lower from here and the case for further Australian dollar weakness is clear,” he said.

The health of Australia’s economy, which is largely driven by its resources sector, is closely tied to that of its largest export market China – the world’s biggest consumer of commodities such as iron ore, copper and aluminum.

The Reserve Bank of Australia on Friday separately lowered its growth forecast for 2012 to 3 percent from 3.5 percent. It also lowered its outlook for export growth, warning that a sharp escalation in Europe's crisis could have significant implications on Asian demand, which in turn would weigh on commodities prices.

Australia Has an ‘Obvious’ Credit Bubble

According to Edwards, the lack of volatility in the Australian economic cycle 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,” he wrote in report published Thursday.

Paul Gambles, Managing Partner at independent financial consultancy MBMG, agrees that there is a large credit bubble in Australia’s banking sector, and a hard landing in China is going to be the catalyst that “pricks” the bubble.

Companies in the resources sector, which borrow large amounts to fund their projects, will struggle to repay their debt if commodity prices fall, he said.

“Commodities tend to be capital intensive and based on a long term business model. There has been a huge amount of additional investment in commodities sector since 2008 on the assumption that higher commodity prices would be sustainable,” Gambles said.

“Any reduction in commodity prices is going to devastate these companies…it doesn’t take a big change in commodity price or demand to destroy the viability of new projects,” he added.

He also points to the massive level of household debt in the country, which has been around 150 percent of disposable income since 2006, according to the Reserve Bank of Australia.

“Australia has a very leveraged consumer sector whose wealth is dependent on the performance of the housing sector, which I think is also in a bubble,” he said, adding that the real estate market is highly overvalued, by approximately 45-70 percent.

“Consumer debt, and debt from the resources sector is way beyond anything the Australian government is going to be able to manage if there is a recession or downturn,” Gambles said.

Short the Aussie

Like Edwards, Gambles says that the case for a weaker Australian dollar is clear, warning that the currency will fall below parity against the greenback to 70 cents over the longer-term.

“We think that the Australian dollar along with perhaps the Aussie banks and Aussie property are maybe the greatest shorting opportunity that we're going to see for a long time to come,” Gambles said.

While he doesn’t think the sharp fall in the Aussie is imminent because of the healthy margin it offers carry traders, further deterioration in the outlook for the economy could “terrify” investors and lead them to exit the trade.

“The 70s is not a floor for the Australian dollar. When the Aussie spirals it can be a very volatile currency,” he said. The last time the currency fell below the 70 U.S. cent level was in October 2008 during the global financial crisis.

The media has been predicting Aussie crash for years,,,keep saying but still not happening,,,these experts are creating the news to play the market

Spotlight Australia: Collapse in Service Sector; Unrelenting Discount Wars; Catastrophic Decline in Profits; Stranded Merchandise in Warehouses

Australia in in grim shape. Retailers are going under, home prices are sinking, and there is an enormous collapse in the entire service sector.

Collapse in Service Sector

Market reports Australia Services Sector Slumps in April

KEY FINDINGS

The latest seasonally adjusted Australian Industry Group/Commonwealth Bank Australian Performance of Services Index (Australian PSI®) slumped by 7.4 points to 39.6 in April (readings below 50 indicate a contraction in activity with the distance from 50 indicative of the strength of the decline). This was the lowest monthly reading since March 2009.
The sharp fall in the Australian PSI® was driven by declines in the sales and new orders components of the index, which are now both at their lowest levels in almost three years.
Reports of weak trading conditions were widespread across all services sub-sectors and all states.
Consistent with these reports and with the latest weakening in Australian inflation (with headline inflation just 1.6% p.a. in the March quarter), the input prices and average wages and selling prices indices are now back at or below the levels seen during the Global Financial Crisis.


The sharp fall in the Australian PSI® was driven by especially large declines in the activity indices of the finance & insurance, personal & recreational services and health & community services sub-sectors.

NEW ORDERS

On a seasonally adjusted basis, new orders contracted further in April.
The new orders sub-index fell by 11.9 points to 35.8, which is similar to the levels seen following the Global Financial Crisis in 2009.
On a non-seasonally adjusted basis, new orders declined across all service sub-sectors in April, with particularly sharp declines reported in the health & community services and personal & recreational services sub-sectors.

Price Squeeze

Check out the enormous margin squeeze on Australian service sector businesses.



click on chart for sharper image

Input prices have risen for 110 consecutive months and wages have risen for 33 consecutive months, but sales, new orders, and selling prices have collapsed.

Catastrophic Decline in Profit

The Age reports Retailers hit fast-forward in a race to the bottom

THE unrelenting and deep discounting war being fought in the retail sector has notched up its second victim in a week, with Harvey Norman revealing its pre-tax profit slumped 44 per cent in the March quarter.

Sales for the first nine months of this financial year have fallen nearly 7 per cent.

Only last week, rival electronics and entertainment retailer JB Hi-Fi - which released its own disappointing sales and profit forecast due to the double punch of price deflation and price competition - named Harvey Norman as one of the main culprits of the race to the bottom.
Advertisement: Story continues below

Yesterday, Harvey Norman said the technology category continued to be challenged by declining average selling prices, with global sales falling 6.7 per cent to $4.39 billion for the nine months to March 31.

Comparable-store sales, which take out the contribution of new stores, slipped 6.6 per cent.

Australia, the company's key region, led the decline, and showed a worsening trend through the nine months. First-quarter sales were down 2.9 per cent, but that accelerated to a 10.2 per cent fall in the second quarter, and sales in the third quarter were down 9.2 per cent.

Third-quarter, like-for-like sales were down 7.9 per cent in New Zealand, 5 per cent weaker in Slovenia-Croatia and 1.3 per cent stronger in Ireland.

The knock-on effect to pre-tax profit has been catastrophic.

Stranded Merchandise in Warehouses

Please consider Freight firm fails at cost of 1000 jobs

RETAILERS and building suppliers across the country have been left with large amounts of stock stranded in the warehouses of collapsed transport firm 1st Fleet.
The express freight and warehousing company yesterday sacked its entire workforce, of 600 permanent employees and 400 sub-contractors.

It collapsed with debts worth tens of millions of dollars, triggered by the withdrawal of its lead banker, Coface, from its Australian portfolio.

Near midnight on Tuesday, night-shift workers at company depots were confronted by the firm's administrators and security guards, who locked them out and changed the locks. In Melbourne, most found out they no longer had a job when they turned up for the 7am shift.

Neil Chambers from the Victorian Transport Association said the economic climate for transport and logistics companies was as bad as during the 2008 financial crisis. "1st Fleet is almost like the tip of the iceberg," he said, with wafer-thin margins sending small transport firms to the wall.

RBA downgrades Australian Growth Forecasts, More Rate Cuts Likely

The Australian reports RBA downgrades Australian growth forecasts, more rate cuts likely

THE Reserve Bank of Australia dramatically downgraded its growth forecasts for the Australian economy, sparking the prospect that more interest rate cuts could be ordered in the next few months.

In its quarterly Statement of Monetary Policy, the RBA said that the domestic economy would now grow by just 2.75 per cent by June, down from its forecast of 3.5 per cent delivered just three months ago.

The economy is then predicted to bounce back slightly to 3 per cent by the end of 2012.
The RBA has also softened its inflation forecasts, which economists predict will likely bring on more interest rate cuts.

Not Dramatic Enough

I have no idea what the RBA is smoking but "growth" is not in the picture, nor is a year-end bounce.

Does the RBA even believe what they are saying? If they did, they would not have cut by a half, surprising nearly every economist in the country.

Alternatively, they are monetarist clowns who actually believe they can fine tune the economy with monetary policy even though the enormous property bubble proves otherwise.

Australia in Recession

Australia is now in recession and it will be a long, harsh one, no matter what the RBA does or doesn't do. Retail prices are too high, wages are too high, real estate prices are too high, and belief in policy makers is too high.

Many Australians have been emailing me for years that Australia is recession proof., that housing is in short supply and Chinese exports will keep the economy humming.

Reality is about to set in big, big-time.

oh its great

responses very good! )

I actually think that this is true. The Aussie economy is set up for another "recession that it had to have".

The huge disparity between salaries of the city worker and mining/oil and gas sectors are beginning to be too painful. And the fact that a 3-1 slum up in the mines can fetch the same rent as Peppermint Grove goes to show how rampant scalping is justifiable.

Coupled with the clueless Labor government, putting more taxes all round, exacerbating consumption even further.

The_Hypocrite said:

The media has been predicting Aussie crash for years,,,keep saying but still not happening,,,these experts are creating the news to play the market

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Eventually there will be a crash so someone will be right. If indeed there has not been a recession since 1991, then the chance of one happening soon is rather real. The commodities market has been fueling the growth all these years and nothing last forever. Its the law of averages.

oh its great

I'm new here , nice thread!

http://www.macrobusiness.com.au/2012/05/is-australia-turning-japanese/

Last week the RBA finally lowered its growth forecasts for the year ahead but it did so largely with a grain salt, still forecasting a pretty aggressive range of between 2.5 and 3.5%. Tomorrow night, the Federal government will release its Budget for the year ahead and, as Ross Gittins suggests today, will no doubt also assume a trend rate of growth. The real question both should be asking is why the Australian economy has so underperformed since 2008, with below trend growth the norm since the GFC.

The fear among many is that we are another US in waiting. A massively over-leveraged and de-industrialsed service economy just waiting for the penny to drop. The key vulnerability is asset markets and especially house prices, as well as the potential for a China shock. The thesis goes that once past a “Minsky moment” the bust will accelerate on household deleveraging. Richard Koo calls these balance sheet recessions because they as much about repairing wealth as they are about repairing cash flows.

The Carmen Rhinehardt and Kenneth Rogoff book “This time it’s different” is a powerful reminder that such dynamics are inescapable, enduring and deeply painful.

But, there are different examples of such asset busts unfolding over different time frames, with different mixes of public and private pain, as well as different ways of distributing the pain of correction across the polity.

The US model is one: swift and painful house price falls, rocketing unemployment, as well as big falls in labour costs and a big jump in productivity and a temporary surge in public borrowings.

Parts of Europe are headed down a different path of correction. Or, having it forced upon them. The credit dependent PIIGS are enduring long, grinding recessions, public austerity and wage deflation to improve their competitiveness. The upside, if we can call it that, is that that competitiveness will slowly turn into higher investment and more sustainable growth (politics aside!).

Both approaches effectively let the private sector burn (within reason).

The other model is that of Japan. Take a look at the following chart from Steven Keen last week:

Japan’s asset price falls were paced over a much longer time period than those of the US or Europe. The resulting economic shakeout was different too, with a much longer time frame of subdued economic growth, a more slowly rising unemployment rate and a steady but longer rise in public borrowings to offset the private sector’s slower paced deleveraging. In short, in Japan, collective private losses were socialised over a much longer time frame.

What can these paths of correction tell us about Australia’s future?

Interestingly, Australia is analogous with some of the characteristics of the Japanese experience. Australia is enjoying an enormous mining boom, which has contributed a great deal to the prevention of a swift and merciless correction to our asset inflation model. Although the boom has not produced a current account surplus – that is, as a country, our savings still don’t cover our investment bill – it has significantly improved the country’s external position without having to go through the far more painful approach of reduced imports and rocketing external funding costs that typically accompanies modern asset busts.

This is not unlike Japan, where it’s export model of growth was intact throughout its long correction, whereas much of the US bust corrected imports, which quickly flowed out and smashed everyone else. Or the European PIIGS, whose falling imports are slowly but surely sapping the strength of core country exports and banks.

There are other characteristics that Australia shares with Japan in its steady and manageable melt in asset prices. GDP per capita, for instance, has not tumbled. Rather, it has stalled. Household income has also continued to rise, even as household wealth falls. And some of the hit to wealth has been offset for consumers in stalled and falling dimensions of the costs of living, such as food and apparel, as retail sales volumes hold up but not enough to prevent disinflation and deflation. We even have our own version of the Japanese “salarymen”, a key plank in the slow melt of Japan, in which workers were kept on despite conditions warranting smaller work forces in many sectors. Australia’s informal kurzarbeit system is certainly closer to Japan (and Germany) than it is the United States. The price for this is probably lower productivity. Although Japan managed a decent performance for many years.

The Japanese experience since the end of the eighties is often described as the “Golden Recession”. So, is a golden recession possible for the Australian economy?

First, it is sobering to realise that this is the best case scenario, one in which China continues to boost the nation’s external accounts via historic commodity demand and prices. In that event, a decent current account will prevent global markets from raising the cost of our bank’s borrowing further. It may even be enough to stall the asset price correction for a time and knock Australia onto a shallower path of correction than that endured in Japan. Certainly we are better placed demographically than Japan, with our aging population able to be offset by better birth rates and immigration.

But there are some BIG differences with Japan too. The most crucial is national savings. In Australia, we don’t have…any. Japan had enormous savings when it’s asset bust began. Probably the most important factor in its slowed decline was the slow running down of private savings, much of which was redeployed as government spending, which is why the Japanese government now has a debt stock at 210% of GDP, the largest in the world. It is mostly owed to Japanese citizens and as long they’re happy to lend, the cost of borrowing the money will not rise and no austerity will be required. And so long as the spending goes on, the economy keeps ticking over.

On top of that, as one of the world’s largest economies, and a source of one the world’s most used funding currencies, Japan is able to print money and also fund government expenditure using quantitative easing.

Both of these are impossible for Australia, not least because the government balance sheet guarantees our immense external private borrowings, so any deterioration in its quality will not be received as generously by foreign creditors as it has by the monolithic Japanese public. And any attempt to ease monetary policy too dramatically will be met with capital flight, raising real borrowing rates anyway.

So, in the end, can Australia’s track Japan’s golden recession or find a shallower path of correction for its asset prices? The first observation I’d make is that I understand the framing of this question is a bitter pill for Australia. After all, I’m leaving no scope for any outcome other than a decline in living standards, only the pace is in question.

Second, the shallower paths of correction are clearly dependent upon the assumption that Chinese demand for our resources continues to grow.

Finally, Australia shares one last thing with Japan that make me think none of this will be planned for or addressed sensibly. Rather, we’ll sail on as if nothing has changed and deploy all of our resources in fighting the outcome rather than seeking to make best advantage of it. The rise and rise of vested interests on both sides of politics will prevent us extracting the most value from of the mining boom and keep policy focussed on restoring our fading asset-inflation model.

Re: oh its great

Cnenaristo said:

I'm new here , nice thread!

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I'm new here too ! Nice troll's contribution !

Who gives a fuck what u think

axe168 said:

I'm new here too ! Nice troll's contribution !

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Just when the thread started interesting, the resident attention whore shows up.

Envy. Greed. Pride. Wrath.



What House Price Crashes Really Look Like
From their peaks in mid-1991 and mid-2006, the Japanese and US housing markets have tumbled. From Australia's peak in mid-2010 we could be on a similar track.

Is Prof Steve Keen correct this time? debtdeflation.com
Australia may not escape this one. Be prepared for more bad news.

Re: Envy. Greed. Pride. Wrath.

neddy said:

What House Price Crashes Really Look Like
From their peaks in mid-1991 and mid-2006, the Japanese and US housing markets have tumbled. From Australia's peak in mid-2010 we could be on a similar track.

Is Prof Steve Keen correct this time? debtdeflation.com
Australia may not escape this one. Be prepared for more bad news.

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From the way Wayne Swan talks about returning to surplus, he must be fucking mad.

Re: Envy. Greed. Pride. Wrath.

Won't be surprised that lots of already struggling home owners would be tipped over to negative equity when house prices fall another 10%.

migrant said:

No way. Aussie is the bestest richest prettiest loveliest country in the world. Ts mst be a troll. Whoever speaks bad about Aussie according to loser Neddy ash007 n axe168 can only be trolls.

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Please change your avatar. It's really disgusting

The Australian economy is heavily dependent on her natural resources. Aussies are too anti-intellectual, too thick to produce anything of value. Not too dissimilar to Singaporeans, actually

Re: Envy. Greed. Pride. Wrath.

QXD said:

From the way Wayne Swan talks about returning to surplus, he must be fucking mad.

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The way I read this is that :-
This guy has no choice. He knows that Europe and USA are deteriorating and affecting Australia. Even China is moderating more than it should.

He was there when Rudd started giving away money to simulate the economy.
The economic stimulus money is now almost spent and the economy has not improved.

Will a surplus save ALP?

Also, the Abbott Liberal team are untested in economic management too.

Re: Envy. Greed. Pride. Wrath.

Don't fall for Steve Keen again. He recently went head to head with Krugman and it was not pretty. In 2008 Keen predicted house prices were to correct 40%. We expected 10-15% and that was what happened. Now he is back saying property prices are down 5% Year over year with a 10% further fall in the next 12 months.

Question is do you believe there is bubble in Australian Property? What about the "shortage" of property in the market? Will the RBA's recent cuts help housing?

The bears are out saying crash, the bulls are still looking at China, and the shortage of housing etc while others are looking at a deflationary environment. The smart money is on a long term deflationary trend. How long will it last?

All we know for certain is the RBA can still take action with its balance sheet and 3.75% cash rate. Low debt and room to lower bodes well for you guys.

Just hope China does not spoil the show for all of us. We are suffering wealth destroying inflation here in Sing.

Re: Envy. Greed. Pride. Wrath.

neddy said:

The way I read this is that :-
This guy has no choice. He knows that Europe and USA are deteriorating and affecting Australia. Even China is moderating more than it should.

He was there when Rudd started giving away money to simulate the economy.
The economic stimulus money is now almost spent and the economy has not improved.

Will a surplus save ALP?

Also, the Abbott Liberal team are untested in economic management too.

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It seems like Labor is setting themselves up for a showdown with banks. But constricting the supply of money via taxation, the banks have to become more competitive in their rates or it will backfire on Labor via an election massacre with massive number of homes driven to foreclosure or negative equity.

I already know of one person getting jittery and willing to let go of their property at a 25% discount from 2006, these are the ones who chose to buy >800K with 10% down. Using it as a investment not feasible because rental yield is like shit with very little depreciation to help -ve gear. Now they are going to lose their home, still have to service the residue of their home loan after selling, and downgrade massively to a 3+1 rental.



Clearly the rate cut can't save those who overstretched themselves

Re: Who gives a fuck what u think

QXD said:

Just when the thread started interesting, the resident attention whore shows up.

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Dude, keep dreaming the market is going to crash ! Australia property asset has an annual growth of 10% (when interest rate @ approx 8%)... After 4-5 yrs of zero or no growth, do you honestly think it will crash ?

I'm not surprise for a 'V' recovery.. In view of 2004, Melbourne stagnation...or 2007 Sydney's 5 yrs zero growth.. Dream on dude...

Re: Envy. Greed. Pride. Wrath.

Cut the bullshit.. I know this person is me :-) So what do you have to offer ? Pls spice up this forum !

QXD said:

I already know of one person getting jittery and willing to let go of their property at a 25% discount from 2006, these are the ones who chose to buy >800K with 10% down. Using it as a investment not feasible because rental yield is like shit with very little depreciation to help -ve gear. Now they are going to lose their home, still have to service the residue of their home loan after selling, and downgrade massively to a 3+1 rental.



Clearly the rate cut can't save those who overstretched themselves

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