So, is Australia really a bubble?4 May, 2012, 12:11. Posted by Zarathustra
In the past, my understanding of the Australian economy did not go beyond the fact that the Australian boom is pretty much based on the China boom, which generated a lot of demand for Australian commodities. And since I am extremely bearish on China, one could imagine that I don’t see many good reasons to be bullish on Australia, even though you didn’t see me calling it a bubble.
So now it seems fashionable to talk about Australian bubbles. My friends at MacroBusiness have been doing a great job in highlighting that for probably more than a year now, way before Dylan Grice and Albert Edwards have recently mentioned, and Ray Dalio’s Bridgewater Associate.
The most amusing passage from the Albert Edwards’ note was this:
I dont intend to repeat my colleague Dylan Grices analysis of the Australian economic bubble but the part which caught my eye was his quote from a book called “The Australian Moment” by George Megalogenis, a highly regarded journalist in that country.
The books subtitle was How we were made for these times and its introduction contained the following passage: “Australia, uniquely, has avoided the first three super crashes of the digital age – the Asian financial meltdown, the tech wreck, and the big one, the Great Recession, which we branded the ‘global financial crisis’. A single escape might be put down to luck, two to good management. But a third is the stuff of legend.”
What utter, utter drivel. All we have in Australia, at its simplest, is a credit bubble built upon a commodity boom dependent for its sustenance on an even greater credit bubble in China. Of all the bubbles I have seen over the last 30 years in this industry, this one is even more obvious than the rather prominent nose on my increasingly haggard face.
(To add to that, just go and have a look of how many books see in a bookstore nowadays saying that China will rule the world, or what the West can learn from China, etc)
Last month, a team at Ray Dalio’s Bridgewater Associate wrote:
AustraIia’s highly indebted domestic sector was able to continue to accumulate debt in recent years, in large part because of the support of a substantial commodity-exporting external sector. This divergence remains in place as the external sector remains very healthy as both commodity exports and significant mining related investments are major supports to the economy that are likely to remain in place for many years, while domestic conditions are weak. And the combination of high debt levels, weaker income growth rates and falling asset prices increases the risks of a more significant domestic slowdown.
The chart below shows that the household debt to GDP ratio is at a very high level, which my friends in MacroBusiness have been explaining how this has been fuelling the real estate bubble there. .
Source: ABS, FRED
And of course, how tight the correlation the Chinese and the Australian economies are as manifested by the curious but tight correlation between the yoy change of steel and power production in China and yoy change of the AUDUSD exchange rate.
Source: National Bureau of Statistics, FRED