Australia Heading for ‘Mother of All Hard Landings’: Pros

As both an Australian and mortgage owner, I completely agree with this assessment. The part about our reliance on China is something I been saying for quite some time. And I don't care which political party of the two main fed parties is in government, it won't make a bees penis of any difference. I don't really need to say any more as it is all well said here.

CNBC

Australia is headed for the “mother of all hard landings,” according to Société Générale strategist Albert Edwards, who says the country’s “credit bubble” could burst if China’s economy suffers a sharp slowdown.

“(In Australia) We see a credit bubble built on a commodity bull market based on a much bigger Chinese credit bubble,” Edwards said in a report. “Of all the bubbles I have seen over the last 30 years in this industry, this one is even more obvious.”

Edwards reiterated his case for a hard landing for the mainland economy, pointing to the official Purchasing Mangers Index (PMI) of 53.3 last month, which he says is “the worst” April reading in years.

“We are likely to see the PMI trend lower from here and the case for further Australian dollar weakness is clear,” he said.

The health of Australia’s economy, which is largely driven by its resources sector, is closely tied to that of its largest export market China – the world’s biggest consumer of commodities such as iron ore, copper and aluminum.

The Reserve Bank of Australia on Friday separately lowered its growth forecast for 2012 to 3 percent from 3.5 percent. It also lowered its outlook for export growth, warning that a sharp escalation in Europe's crisis could have significant implications on Asian demand, which in turn would weigh on commodities prices.

Australia Has an ‘Obvious’ Credit Bubble

According to Edwards, the lack of volatility in the Australian economic cycle and the absence of any recession since 1991 has led Australians to have an “excessive” appetite for debt in the belief the “future will reflect the past”.

“But for us, suppressed volatility is merely storing up an even bigger crash further down the road,” he wrote in report published Thursday.

Paul Gambles, Managing Partner at independent financial consultancy MBMG, agrees that there is a large credit bubble in Australia’s banking sector, and a hard landing in China is going to be the catalyst that “pricks” the bubble.

Companies in the resources sector, which borrow large amounts to fund their projects, will struggle to repay their debt if commodity prices fall, he said.

“Commodities tend to be capital intensive and based on a long term business model. There has been a huge amount of additional investment in commodities sector since 2008 on the assumption that higher commodity prices would be sustainable,” Gambles said.

“Any reduction in commodity prices is going to devastate these companies…it doesn’t take a big change in commodity price or demand to destroy the viability of new projects,” he added.

He also points to the massive level of household debt in the country, which has been around 150 percent of disposable income since 2006, according to the Reserve Bank of Australia.

“Australia has a very leveraged consumer sector whose wealth is dependent on the performance of the housing sector, which I think is also in a bubble,” he said, adding that the real estate market is highly overvalued, by approximately 45-70 percent.

“Consumer debt, and debt from the resources sector is way beyond anything the Australian government is going to be able to manage if there is a recession or downturn,” Gambles said.

Buckle up fellow Aussies because it's not a matter of 'if', but 'when', this massive bubble bursts with spectacular fashion.

I would take everything Edwards says with a grain of salt. His track record has been exactly spectacular. Granted retails is very "soft" and Hervey Norman is bleating about not making a few more billion in profits this quarter but I wouldn't be too concerned. The Reserve Bank isn't and will be lowering interest rates further towards the end of the year. All very ho hum actually so our two speed economy will continue to power along. Don't worry relax...

Scary, cause its going to be really tough for a lot of people. I look at the US and how they are handling it and it scares the crap out of me ever being faced with unemployment.

Lets not kid ourselves, we are heavily reliant on the US, Europe and China.
Both the US and Europe are struggling and China really is keeping us at turbo speed, but if rumors about ghost cities in China, industrial slowdown etc is anything to think about.. its kinda worrying.

I decided to avoid a mortgage, it didn't seem reasonable to spend $450,000 - $600,000 for a house that 6-7yrs ago was around $220,000.

a few of my friends jumped in asap, purchased a 4x2 for $400-$500,000 and even now they regret it because the value has dropped, they have been made redundant (but luckily found jobs).. but its getting difficult..

I am really considering getting my Taxi license. There are lots of redundancies and cutbacks occurring in many Australian companies at the moment , some of it outsourcing to India/Asia but some of them purely because money coming in is quickly drying up.

Companies like QBE, IBM, Austals, NAB, they were always solid and now they are looking a little unsure..

I want to get rid of my credit card, $4k left. Once that's gone im back to 0. I can lose my job and live off the land or head home to NZ and live off our family tribal land in whangarei.. or just join the army!

im not to good with economics, could some one please explain what this means and what will happen when it bursts?

- should i withdraw all my monies
- people who owe debt to the banks
- and people who dont

i understand this will ultimately effect everyone one way or another.

much thanks !!!!

reply to post by surrealist


It is silly to blame China, the entire money system is to blame.

Every nation on earth is in huge amounts of debt they cannot pay back, and to what; a small group of elitist bankers who do absolutely nothing for society.

Riding the Chinese wave just made the inevitable a bit further away.

reply to post by surrealist
ok i must admit i did not read it all just look out for the up coming budget 23 million people sitting on all the mineral reserves agriculture etc : we are screwed they are to coin a phrase selling the farm Australia will not wake up as long as the general population is lost in the sports results sad as i say we are in the pot and the water is coming to the boil !!!

reply to post by surrealist
ok i must admit i did not read it all just look out for the up coming budget 23 million people sitting on all the mineral reserves agriculture etc : we are screwed they are to coin a phrase selling the farm Australia will not wake up as long as the general population is lost in the sports results sad as i say we are in the pot and the water is coming to the boil !!! its like this if the economy is in the black or the read what difference is that to us the people everything still goes up i would coin the old phrase viv la revolution . but that will not work in OZ unless collingwood goes down thats a football team SAD!!

Have a look at this article as well, with citations below....

Business Insider

"I think we are single-digit years away from the most profound market clearing moment," he said, "A 1932 or a 1982, where you don't need smart guys or girls, you just need to be there."

To create the market clearing process that I fear is within reach I would tantalize or fear [sic] you with the nation that that we could see a hard landing in Asia, coinciding and indeed being encouraged by the problems in Europe. And if you get those two events colliding, and given the lack of protection in such a scenario in Asia, then you would have another profound dislocation, and that's the point where you reach the bottom, and you don't need wise guys, you just need courage.

reply to post by surrealist


Well then it's time to party - come over to my place. We've got Mardi Grass this weekend and the buds will be bodacious !

Seriously though, my guess will be that we will simply follow the same path of all developed nations when the s..t really hits the fan here, and that is, more stimulus and more spending - postpone the inevitable just that little bit longer. Australia's not horribly broke yet like the US, UK, Japan and much of Europe. These guys are so screwed right now. Predicting full market melt-down in 10..9..8..7..

Peace Out - Don't take life too seriously - it's just a ride

PS - Theme of this years Mardi Grass - "It's all coming to a head"

Australia is screwed, just like every other economy, their all coming down and its gonna be a tuff time for all of us...
Like the OP said, "its not a matter of "if" but a matter of when!

The Australian Dollar finished last week with the worst five-day performance in seven months against its leading counterparts as the central bank unexpectedly slashed interest rates by a hefty 50 basis points while risk appetite unraveled across financial markets, sapping overall demand for high-yielding currencies. Looking ahead, another difficult week appears likely as homegrown economic data threatens to bolster the case for further easing while the sentiment landscape remains vulnerable.
www.forexnews.com.../category/currencies/aud/

reply to post by surrealist


There is alot of truth to this article; the property market in Australia (I predict) will burst between end of this year to midway in 2013. Those with mortgages will never escape, and as for our retail sector - I'm watching the Westfield shopping centers closely - many retailers in deep sh*t already (AUD$700+p/sqf)....ouch. It's all starting to happen as those interest rates decrease and our unemployment rises in the hundreds every week now.

Australian will do better than most but it needs to kick the USA troops out and stay friends with China

Did anyone get to vote on letting the USA occupy Australian soil so by placing life's at risk by becoming a buffer for Uncle Sam.............................. didn't think so.