It’s obviously been a tumultuous last month in global markets. The spectre of GFC Mark II looms large. There’s been a lot of commentary on what is in store next and I wanted to share some of the best pieces I’ve read recently.
I’ve been following Nouriel Robini pretty closely since GFC Mark I. Unfortunately much of his commentary is restricted to clients only, but his recent book “Crisis Economics” is a must read, as is this interview in Foreign Policy, “How Bad is Bad?”
- sovereign risk is becoming banking risk: “because of the exposure of the banks to government debt”
- governments are running out of options: “we are running out of policy bullets. The policymakers don’t have monetary bullets; they don’t have fiscal bullets; they cannot even backstop their own financial system. That’s why it’s more scary than a year ago, two years ago, or three years ago — when we had all these policy bullets. Now we are running out of them.”
- this crisis has a long way to go: “debt and leverage issues have to be reduced gradually for many years so the current range of problems besetting the US and Europe in particular are not going to resolve anytime soon. So every other month, or every other week, or every other quarter, we’re going to have another sector or another country or another government being in trouble. And that’s going to have a negative effect on markets.”
- the fundamental problem is that we have a political crisis: “in most advanced economies; they have weak governments. In the U.S., we have divided government. Two parties: one doing taxing; the other doing spending cuts. In the peripheral eurozone, minority governments from Portugal to Spain lead to eventual loss of market access. In Italy, there’s a buffoon like Berlusconi. In the U.K. we have fragile cohesion that might also fall apart. In Japan, we might have soon enough six prime ministers in the last five years — it’s worse in Italy in terms of political instability in the 1960s and ’70s! Even in Germany, which is growing robustly, Angela Merkel is not particularly popular within her own party, let alone with the opposition.”
“I think the fundamental problem is that tough choices need to be made — gradual fiscal austerity, structural reform — [which] imply [the necessity of] governments that can look beyond electoral cycle. And we don’t have a situation in which this is possible, when growth is anemic, unemployment is high, and deleveraging is painful. Governments don’t have the leadership to do the right thing, not nationally, and not in terms of international cooperation. So, smart individuals might be here and there, but fundamentally, there is a political economy problem in most advanced economies that remains unresolved.”
Roubini is also bearish on China. Which given Australia has hitched its resource fed star to the Dragon wagon is disturbing…
“China has responded to its slowing net exports not by boosting consumption — which is now up to 33 percent of GDP — but rather by pushing fixed investments from 40 to 50 percent of GDP. By 2013, China is going to have a hard landing — because no country is going to be so productive that you invest every year half of your GDP into new capital stock. You’re not going to have at the end of the day a massive NPL [non-performing loan] problem, a massive public debt problem (the Chinese public debt is now 80 percent of GDP), and a massive amount of overcapacity that’s going to lead this investment boom into investment bust.”
So what does this mean for Australia? And more specifically what does this mean for Aussie property?
Generally I’ve got to say you can’t go past the guys at Business Spectator for insightful and balanced economic commentary. Now I know that Christopher Joye is on the bullish side of the ledger when it comes to property, but his piece, “Hiding in Australia’s property hedge”, that was recently published by Business Spectator is worth a read if you’ve been asking yourself about how these global shocks are going to impact Aussie property.
The main point Joye makes is the property serves as a safe haven during times of economic turmoil. He notes:
- Compared to shares, this was certainly the case during the 1987, 2002-03, and 2007-08 equity corrections, when local share prices plummeted by 44 per cent, 15 per cent and 50 per cent, respectively, and cruelled the retirement plans of so many Australians who were ‘overweight’ this risky asset-class.
- It was also true in the 2001 ‘tech-wreck’ when global shares, which have historically attracted about 30 per cent of all Australian super fund money, fell by about 40-50 per cent.
- During the recent GFC, the peak-to-trough fall in Australian home values was just 3-4 per cent notwithstanding that an inflation-focussed RBA kept mortgage rates at 9.6 per cent as late as August 2008. That’s less than what the Aussie sharemarket lost in a single day on the 4th August.
- A final test case is the 1991 recession, when despite a spike in the unemployment rate to 11 per cent, and double-digit mortgage rates, overall Australian house prices moved sideways.
Joye seems pretty bullish on the outlook for Australia. Well at least for Australian housing. Even if China has a “hard landing” as Roubini foresees. Joye writes that:
“Ordinarily, consumption accounts for 55-60 per cent of all economic growth. Yet there is another $140 billion or so of new private investment that will be commenced in the next two years alone, which amounts to about 11 percentage points of GDP growth. Even if you take an axe to that number and halve it, it remains chunky.
Yet if the China and India urbanisation stories blow-up, and demand for Australian resources disappears, what will the RBA do?
They will slash interest rates (as the financial markets believe they will), and invite the consumer and household sectors to step into the breach left by evaporating resources investments.
And what is the most interest rate sensitive sector of the economy? Housing.”
The chart below illustrates his point…