A 60% Fall, and Still Delusional on the Australian Economy

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First of all, I owe you an apology. I’ve had a bit of a shocker. On Monday I asked you to let me know what you think about the strength, or otherwise, of the Australian economy based on your experience at the coal face.

After being mildly offended that my request elicited not a single response, I realised that I gave you an email address that doesn’t appear to work.

My sincere apologies for that little blooper. If you wouldn’t mind, could you resend it to letters@dailyreckoning.com.au. And if you missed Monday’s edition, feel free to send in your two cents worth.

The request was made in response to an article in the Weekend Australian by Adam Carr. He argued that the Aussie economy was actually getting stronger, not weaker.

I have my doubts about that. Which is why I asked those of you running small or large businesses to send in a few lines to tell us what you think.

Funnily enough, a few days later I saw another one of Mr Carr’s articles. He was arguing that if the high iron ore price didn’t cause a boom on the way up, then it wouldn’t cause a bust on the way down.

The problem with that line of thinking is that it did cause a boom on the way up. A boom that the RBA had to control with the highest interest rates in the developed world.

Now that we’re well and truly in the iron ore price bust phase, the RBA is cutting faster than Edward Scissorhands to control the fallout.

But the RBA can’t control the fallout from the iron ore bust. All it can do is promote the structural retardation of the Aussie economy. That means encourage more and more capital to funnel into property speculation at the expense of genuine, productivity enhancing investment.

That’s why Aussie mortgage and household debt is now at a new record high as a percentage of the total economy. We’re leveraging further into an iron ore price collapse!

The RBA certainly can’t control the Chinese economy either, which continues to cast a dark shadow over the Aussie economy and, yesterday, the stock market.

During yesterday’s trading session, China’s economic growth numbers, along with a host of other data, came out. The market fell sharply despite GDP being bang on target at 7% growth (fancy that).

But the 7% growth number that was widely reported was for the year to 31 March. The actual March quarter number came in at just 1.3%, or 5.2% annualised. For China, that’s a rapidly slowing rate of growth.

Make no mistake, China is slowing fast. It’s probably why the Australian stock market sank on the news. Even Shanghai didn’t buy the ‘bad news is good news’ line. It fell 1.24%.

Although having said that, the big miners finished the day higher. It was the banks that drove the market lower. Go figure…

But that’s all forgotten now anyway. The market ‘shrugged’ weaker than expected Chinese growth off overnight and local shares are set to head higher today.

The fact that West Texas crude hit its highest price this year helped push the market higher.

That the oil price rally happened on weak Chinese GDP, and weaker than expected industrial production, fixed asset investment and retail sales data just adds to the confusion.

All this weak Chinese data is a part of the country’s necessary structural adjustment. It will likely go on for years. If you’re lucky, China will be able to manage the slowdown without an unemployment blowout and major political instability.

Whatever happens though, there will be no luck for the iron ore miners in the future. They cashed it all in during the boom years.

The Financial Review dug into China’s fixed asset investment numbers, which revealed some ugly truths for the iron ore sector.

The area of land sold in the first quarter – a key indicator of future construction and steel demand – fell by 32.4 per cent from the same quarter last year.

The stock pile of new homes, yet to be sold, increased by 24.6 per cent over the same period.

That left the total area of newly completed residential property at 650 million square meters or around 6.5 million apartments.

The figures neatly demonstration the acute over-supply of property across the country, which has many forecasting iron ore demand to fall by around 5 per cent this year.

Residential property construction accounts for around 20 per cent of Chinese iron ore demand.

As ugly as that looks for iron ore, no one in the industry seems to care. The delusion levels are still at all time highs. The juniors think if they can just hang on until the price recovers, they’ll be fine.

The problem is, there will be no price recovery until the juniors and all their production exits the market.

Last night, a story popped up on the afr.com that clearly illustrates this delusion. Matthew Steven’s had a scoop on the ongoing Atlas saga. He revealed that the seven different contractors who work for Altas are trying to come up with a rescue plan.

These companies clearly rely heavily on Altas’ production for their own revenues and are desperate to keep it afloat.

The sad reality is that the longer the small, marginal producers stay in the market, the longer the iron ore bear will hang around. There is simply too much excess capacity (and more coming) for everyone to survive.

No one in the sector wants to recognise this though. The iron ore producers are about as deluded as a Sydney property speculator, and that’s saying something.

As this debacle continues to work it’s way through the economy, the RBA will have no choice but to cut interest rates again. Whether it’s in May, June or July, it doesn’t really matter. Savers will continue to subsidise the spendthrifts.

If you’re one of those savers who are by now getting a bit miffed by all this, you may want to check out Total Income, our recently launched income focussed investment advisory. It’s devoted to achieving solid income returns from the market, without going crazy and ‘chasing yield’.

Editor Matt Hibbard doesn’t just look at a stock’s headline dividend yield when assessing opportunities. He looks at overall value and won’t overpay for a stock.

So you won’t see the likes of the big four banks on his recommended stock list. Instead, you’ll find lesser known (and in my humble opinion, much less risky) stocks generating good cash flows and healthy dividend yields. You can check out Matt’s work here.

Regards,

Greg Canavan+,
for The Daily Reckoning Australia

Join The Daily Reckoning on Google+

Greg Canavan
Greg Canavan is the Managing Editor of The Daily Reckoning and is the foremost authority for retail investors on value investing in Australia. He is a former head of Australasian Research for an Australian asset-management group and has been a regular guest on CNBC, Sky Business’s The Perrett Report and Lateline Business. Greg is also the editor of Crisis & Opportunity, an investment publication designed to help investors profit from companies and stocks that are undervalued on the market. To follow Greg's financial world view more closely you can subscribe to The Daily Reckoning for free here. If you’re already a Daily Reckoning subscriber, then we recommend you also join him on Google+. It's where he shares investment research, commentary and ideas that he can't always fit into his regular Daily Reckoning emails. For more on Greg go here.
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7 Comments on "A 60% Fall, and Still Delusional on the Australian Economy"

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Chris Curtis
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I read this somewhere a long time ago..perhaps the real economic cycle.
1. You are poor, and know you’re poor.
2. You are getting wealthy, but still behave like you’re poor.
3. You are wealthy, and know you’re wealthy.
4. You are getting poor, but still behave like you’re wealthy.
Seems very true. I think Australia (we are not alone) is at stage 4, with a lot of economic pain to go through before we get back to stage 3.

slewie the pi-rat
Guest
at least Greg doesn’t think there were any spooks involved! L0L!!! the Aussie Dollar has been whacked, too, which, allegedly [according to Megan, i think (?)], makes the deflation medicine go down. but it could be inflationary on the imports. set up a ‘Flation Indicator for Oz? i’d help, but i don’t have any hair left. L0L!!! don’t sweat China. even the little piggies going to Market by floating Over the River and Through the Smog, into town, while dead, have FABULOUS lipstck! if the Rockefellers [JPMorgue/Chase] have gone, full-tilt, now, into Chinese bankstering, as slewienomics has not quite postulated,… Read more »
scottoftheantipodes
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“The iron ore producers are about as deluded as a Sydney property speculator.”

Probably the same group of people.

Eugene dela Croix
Guest
Not all the iron ore producers are deluded. Looking back 8 – 10 years, there was a void in supply, every one jumped at it here and abroad – including those that shouldn’t have. Of the ones who shouldn’t have jumped, I would say these guys are more in denial than deluded. Deluded would be when they are screaming “give me the keys to the haulpak” whist sekurity is dragging them from the building under the gaze of the creditor appointed administrators… Then you had others like Mitsubishi who took the financially prudent approach to cancel Oakagee port and rail… Read more »
Ray
Guest

Regarding misdirected email. Get your webmaster to set up a catch-all mail address for your domain.

Sean
Guest

Good article, however it’s much, much worse even than that. Even when the juniors exit the price will go down as the supply is being back filled by the rest of the world who don’t have to deal with unions and obscene government compliance and on-costs.

Australia’s run as a resource provider is basically, done. Its too far away and to much of a hassle for any player.

A good 5 year recession, the end of the unions and dropping tax will help, without that look forward to 8-12 year recession and global obscurity.

Sean

al karslake
Guest

There is no way housing bubbles in either china or Australia can be described as minor aberrations. There is also no way that the federal governments talking up the economy is going to produce more than hot air. We are already seeing a clamshell economy that was wide open during the gfc and yet closing rapidly with the worst economic probabilities seen in a generation.

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