Is Australia The Next Greece?

Submitted by Tyler Durden on 07/19/2015 21:45 -0400

Australian consumers are more worried about the medium term outlook than at the peak of the financial crisis, and rightfully so.

Source: @ANZ_WarrenHogan

As The Telegraph reports, by the end of the first quarter this year, Australia’s net foreign debt had climbed to a record $955bn, equal to an already unsustainable 60pc of gross domestic product, and is set to rise as RBA’s bet that depreciation in the value of the country’s currency would help to offset the decline in its overbearing mining industry hasn’t happened to the extent they would have wished.

 Furthermore, as UBS explains, China’s real GDP growth cycles have become an increasingly important driver of Australia’s nominal GDP growth this last decade. With iron ore and coal prices plumbing new record lows, a Chinese (real) economy firing on perhaps 1 cyclinder, and equity investors reeling from China’s collapse; perhaps the situation facing Australia is more like Greece than many want to admit, as Gina Rinehart, Australia’s richest woman and matriarch of Perth’s Hancock mining dynasty stunned her workers this week: accept a 10% pay cut or face redundancies.

The government in Canberra and the Reserve Bank of Australia, The Telegraph explains,  had bet that depreciation in the value of the country’s currency would help to offset the decline in its overbearing mining industry. However, that hasn’t happened to the extent they would have wished.

Last month Gina Rinehart, Australia’s richest woman and matriarch of Perth’s Hancock mining dynasty delivered an unwelcome shock to her workers in Western Australia:accept a possible 10pc pay cut or face the risk of future redundancies.

Ms Rinehart, whose family have accumulated vast wealth from iron ore mining, has seen her fortune dwindle since commodity prices began their inexorable slide last year. The Australian mining mogul has seen her estimated wealth collapse to around $11bn (£7bn) from a fortune that was thought to be worth around $30bn just three years ago.

 

This colossal collapse in wealth is symptomatic of the wider economic problem now facing Australia, which for years has been known as the lucky country due to its preponderance in natural resources such as iron ore, coal and gold. During the boom years of the so-called commodities “super cycle” when China couldn’t buy enough of everything that Australia dug out of the ground, the country’s economy resembled oil-rich Saudi Arabia.

However, a collapse in iron ore and coal prices coupled with the impact of large international mining companies slashing investment has exposed Australia’s true vulnerability. Just like Saudi Arabia, which is now burning its foreign reserves to compensate for falling oil prices, Australia faces a collapse in export revenue.

Recently revised figures for April show that the country’s trade deficit with the rest of the world ballooned to a record A$4.14bn (£2bn). That gap between the value of exports and imports is expected to increase as the value of Australia’s most important resources reaches new multi-year lows. Iron ore is now trading at around $50 per tonne, compared with a peak of around $180 per tonne achieved in 2011. Thermal coal has also suffered heavy losses, now trading at around $60 per tonne compared with around $150 per tonne four years ago.

For an economy which in 2012 depended on resources for 65pc of its total trade in goods and services these dramatic falls in prices are almost impossible to absorb without inflicting wider damage. The drop in foreign currency earnings has seen Australia forced to borrow more in order to maintain government spending.

The respected Australian economist Stephen Koukoulas recently wrote of the dangers that escalating levels of foreign debt could present for future generations. Could a prolonged period of depressed commodity prices even turn Australia into Asia’s version of Greece, with China being its banker of last resort instead of the European Union.

As UBS further explains, China’s real GDP growth cycles have become an increasingly important driver of Australia’s nominal GDP growth this last decade.

The property-driven slowdown in China’s GDP growth is continuing to having a disproportionately large negative impact on Australia’s economy. This is because China clearly remains Australia’s largest export destination, having peaked at a record high ~? share of total exports last year (equivalent to ~7% of GDP), but more recently retracing sharply to the current 28% share. This reflects the >20%y/y drop in Australia’s nominal exports to China in FY15 – which is on track to subtract ~1¼%pts y/y from nominal GDP.

In contrast, FY14 export values surged 26%y/y, adding 1¼%pts y/y to nominal GDP. Notably, this turnaround entirely reflects collapsing prices, which more than offset surging volumes. (Indeed, this overall fall in export values is despite a boom in Chinese tourism arrivals which are currently growing ~20%y/y.)

Weak Chinese demand remains a key downside risk for not only Australia’s economy but also the RBA & AUD outlook. The weakness in Chinese growth is having the most obvious negative impact on Australia because our basket of exports is (almost) uniquely concentrated in commodities (back down to ~? share), where China is generally the marginal price-setter. Indeed, after iron ore alone reached a 30% share of total Australian exports in 2013, the recent renewed collapse in iron ore prices saw its export share drop back closer to 20%. The price effect has been a key driver behind Australia’s terms of trade collapsing by ? since its peak in 2011.

This negative income shock is weighing heavily on Australia’s fiscal position, which has seen its deficit consistently worse than expected over that period; as well as leading to a ‘capex cliff’, which has seen the RBA cut rates and drag the AUD/USD down to a 6-year low. Indeed, an ABS survey of the outlook for mining investment in FY15/16 implies a ~37% collapse which could directly subtract a massive 2%pts y/y from nominal GDP. As such, weak Chinese demand remains a key downside risk for not only Australia’s economy but also the RBA & AUD outlook (with the latter still expected to depreciate further to 0.70USD ahead).

*  *  *

As The Telegraph concludes, rather ominously,

The problem is that Australia, after decades of effort to diversify, is looking ever more like a petrodollar economy of the Middle East, but without the vast horde of foreign currency reserves to fall back on when commodity prices fall.

Instead, Australians must borrow to maintain the standards of living that the country has become accustomed to, which even some Greeks will admit is unsustainable.

Irish Finance Minister Dumps Stocks – Buys Gold

Submitted by GoldCore on 03/16/2015

- Ireland’s Minister of Finance shifted personal wealth out of stocks and into gold
- Minister invested in SPDR Gold Shares ETF, Portuguese government bonds and other ETFs

- Maintained holdings in bank and agricultural commodities ETFs
- Gold ETF not a safe haven asset – much unappreciated counterparty risk

The Minister for Finance in Ireland, Michael Noonan, sold his shares in funds that track European and US stocks and diversified his portfolio including allocating some of his personal wealth into a gold exchange traded fund (ETF) in 2014.



Noonan sold out of his positions in the Lyxor Eurostoxx 50 ETF and SPDR DJIA ETF in 2014 and opted to invest in the SPDR gold shares ETF and Portuguese government bonds. He maintained his holdings in SPDR KBW Banks ETF, Ishares FTSE 100 ETF, Market Vectors Agri Business ETF, ETFS Agricultural Commodities ETF.

The information was published last week in the Register of Members Interests, in which members of Oireachtas – the Irish Parliament – must declare financial interests valued at over €13,000.  

The changes to the Minister’s portfolio were highlighted by Ireland’s Sunday Independent yesterday, who described Noonan as “bearish” and interpreted the move as a “hedge against euro deflation”.

The piece acknowledged that gold is a safe haven – the “traditional hedge against tough times” and that “gold is an asset that has outperformed in times of both inflation and deflation.”

Noonan is believed to be quite a shrewed investor. The Sunday Independent reported that

Noonan’s personal investments give an insight into his thinking and his views on the risk and opportunities facing the global and European economies and markets. He has a track record stretching back decades of canny private investments.”

The news is of interest given Noonan’s status within the Eurogroup of Finance Ministers, the Council of the European Union and the Ecofin. The Economic and Financial Affairs Council (Ecofin), is composed of the Economics and Finance Ministers of the Member States, generally meets once a month under the chair of the rotating EU Presidency.

Noonan is an EU economic insider and would have access to good information with regards to financial and economic developments in Europe.

Noonan represents Ireland at these meetings and chaired the Council during the first half of 2013. He is committed to the European political project. The political opposition and an angry public have accused him of  putting the interests of EU banks and political elites over those of Irish society.

Given Noonan is close to EU elites, it is interesting that he chose to sell his European stocks and his allocation to Eurostoxx. Was the decision made prior to the ECB mooting the possibility of QE? If so it would suggest that Noonan may have been concerned about deflation. And yet the ECB never considered factoring the potential for deflation into its stress tests for banks.

Or was the decision made with knowledge of the ECB’s intention? If this were so it would indicate a lack of faith by a European finance minister in the ability of the ECB to achieve its stated objectives, given that QE should raise European stock markets.     

Unfortunately, the Register of Members Interests does not detail the timeline of investments or their relative value so it is difficult to speculate whether the minister dumped his stock market investments prior to buying the gold ETF.

Noonan also bought Portugal 4.35% October 2017 government bonds. This either suggests that he has more confidence in the economic outlook for Portugal than for Ireland or more likely it is a form of diversification.



Gold Investment Pyramid – GoldCore

He continues to hold SPDR KBW US Banks ETF – which tracks US banks,  iShares FTSE 100 ETF, Market Vectors Agribusiness ETF and ETFS Agricultural Commodities ETF.

Whatever the motivation of a European finance minister to buy into a gold ETF – which, incidentally, is not the same as owning physical gold as it carries significant counterparty risk – it represents a significant shift in attitude toward gold.

It also demonstrates that the recovery narrative is not one that the Minister appears to have much faith in. Noonan is prudently hedging his bets in this regard.

We advise readers and clients to do as the Minister has done and prudently hedge the many risks of today by diversifying into gold – not paper gold but physical gold. The gold ETF is not a safe haven asset rather it is a derivative that tracks the price of gold and in which one does not have legal title to or own the underlying asset.