Bloomberg says RBA could lead the way

Bloomberg says RBA could lead the way

Dear Australia, don’t we have a problem?

No one is ready to admit it yet.

But it’s time to start facing the facts.

No amount of political campaigning or central bank headline hogging can change it.

There’s something afoot with our economy…and what happens next is completely beyond our control.

Spending money we don’t have

There’s a simple rule when it comes to managing your money: Don’t spend money you don’t have.

Of course, that means not going into debt to buy things you don’t need.

But it can also be applied to your cash flow.

That is, don’t make financial decisions about what money is ‘due’ to come your way. Money decisions should only ever apply to the cash you are sitting on now.

That is the basis of household budgeting.

The problem is, the Australian economy isn’t run that way. And we’re about to get a rude shock.

We’ve built houses based on the idea of wages staying the same.

Politicians have started a bunch of projects and made promises, assuming all things will remain constant.

Then, of course, we have hundreds of giant holes in our outback, based on the premise that our best customer will always be there…

But that’s the thing with customers. They get to choose where they shop.

And Australia’s biggest trading partner isn’t as flush as we once thought.

Only a week ago, I explained to Strategic Intelligence subscribers just how much the global economy hinges on China’s good fortunes.

When China’s gross domestic product (GDP) data was 0.1% better than expected, major Western markets rallied.

‘Whew’, sighed investors. Things are still okay.

Of course, Chinese economic data should never be taken at full value.

Because it falls apart once you start digging through it…

The Chinese fairy tale

In April, China’s Purchasing Managers Index (PMI) for manufacturing dropped 0.4% to 50.1. This suggests China isn’t making as many goods as it claims.[1]

That same month, word got out that China’s banks were back lending again. And you know what happened? Yes, that’s right. The same markets rallied once more.

More debt in China equalled more spending to come.

But where exactly is that going to come from?

Research firm Balding’s World says that energy consumption in energy-intensive industries has dropped on average 3% in the past six months.

Then there is the anecdotal evidence coming through…not yet reflected in recent statistics. 

Athletic apparel company Brookes is moving the majority of its Chinese manufacturing processes to Vietnam, leaving only 10% of its business in China.

Taiwanese-owned Foxconn is also moving production out of China and into Vietnam.

Oh, and some of Apple’s key suppliers are shifting their production base there as well.

Why the move? Simply put, all these companies are looking for ways to avoid any US-imposed tariffs.[2]

But it’s not all about potential tariffs.

Computer chip maker Super Chip is shifting chip manufacturing over to Vietnam as well.

All because of ‘security concerns’…none of which have been proven. Chances are the chip maker doesn’t want to risk its contracts with computer companies HP and Dell.

We are watching the labour capital of the world — China — being brought to the brink.

You still have time to prepare

Just this morning, Bloomberg asked how much China would ‘feature’ in the Reserve Bank of Australia’s interest rate meeting tomorrow.

The news site kicked the day off with this attention-grabbing headline: ‘Global Easing Could Start in Australia as Odds of Rate Cut Grow’.[3]

It noted that a rate cut from the RBA would be the first in the developed world this cycle.

And here is where the problems lie for Aussies.

All the way down the bottom of the world, we have built an entire economy based on what we can sell to China. And our best customer is pumping out statistics that mask what is really going on.

There’s a lot at stake.

All this iron ore and no one to sell it to.

Ordinary people who took on debts after being told everything is okay.

Governments that reinforced the idea that it’s business as usual.

The problem is, things change. Economies change.

The rhetoric for the past two years has been nothing but reassurance.

Our governments continue to tell us our economy is perfectly fine.

This has been backed up by our own central bank.

Less than six months ago, RBA Governor Philip Lowe told Australians that the next interest rate move would be ‘most likely up’.

Yet here we are, 24 hours away from the first rate cut in two and a half years. And as Bloomberg said, potentially the first major economy to cut rates in this cycle.

Things haven’t been okay for a very long time.