Another $32 Billion Lost — Is This How it Begins?

Same story different week.

Fears about China’s economy slowing caused the Dow to shed 470 points last night.

Weak manufacturing data out of China spooked the Aussie market yesterday. Last week’s recovery has all but been vaporised. The ASX lost 2.1%, or $32 billion, in one day.

Adding to the market’s woes was our worse than expected current account deficit (our net borrowings from the rest of the world) — a blowout of $19 billion.

The RBA has kept rates on hold. But I suspect that, as the global economic situation continues to deteriorate, further rate cuts will be on the table.

The IMF issued an update warning…global growth will be weaker than they forecast two months ago. Honestly, why do we pay these people? They are perpetual over-estimators.

Hark back to January. The year started out with such promise.

Share markets continued where they left off in 2014…moving onto new highs.

Global growth forecasts were optimistic.

But things haven’t quite worked out to the rose-coloured plan the policymakers would have liked.

The scoreboard so far is:

  • Commodities index down 10%
  • Growing fears about the extent of the slowdown in China’s economy
  • Eurozone GDP growth fell in second quarter 2015
  • Less likely the Fed will raise interest rates this month
  • Australia Bureau of Statistics announced in June that Australia’s long term unemployed hit a 16-year high.
  • The RBA has reduced cash from 2.5% to 2%
  • And Australia’s mining sector continues to struggle.

Alpha’s collapse shows more coal mines must close for others to survive

Australian Financial Review, 31 July 2015

While this is not the outcome the central bankers and politicians would have foreseen in January 2015, none of this should come as a surprise to you.

My outlook for 2015 was included in the 27 January 2015 edition of Markets and Money, and has been reiterated many times in Money Morning and Markets and Money since.

Understanding the big picture is crucial to investment success. In the investing game, avoiding risks is, on balance, more important than capitalising on opportunities.

Significant losses can set you back years and even decades.

Appreciating what lies ahead is critical to long term wealth creation AND retention.

The End of Australia, my recently published book, is my big picture view on how all these forces at play in the global economy lead to an economic collapse. And on what you can do to protect your family’s wealth, and profit from the recovery on the other side of this crisis. You can still order your free copy online; click here to find out how.

The greatest debt powder keg in history

The Great Depression was preceded by a debt crisis.

The long bust in Japan was preceded by a debt crisis.

The world is sitting atop the greatest level of accumulated debt in its history — in both dollar terms and percentage of GDP. This cannot end well. Yet, as a society we are not having any meaningful discussion about the single greatest threat to our living standards.

There is plenty of talk on marriage equality, becoming a republic or whether a retired judge intends to speak at a function.

While these topics may be near and dear to individuals, none of it really matters if the world is turned upside down financially.

When the GFC hit, all talk about climate change (the great moral, economic and social challenge) was completely sidelined. Why? Because when it comes to what really matters to households, money and employment are top of the list.

The fact the global debt issue is not front and centre in the national forum is a reflection on the level of community complacency and political deception we have in society.

This, to me, is a further contrarian indicator that an economic disaster on a par with The Great Depression awaits us.

For a bit of perspective on the recent market chaos, which no one in the mainstream seems to have seen coming, below is an extract from my January article on the outlook for 2015.

Commodities in 2015

Firstly let me say that one of the risks in forecasting is the old ‘extrapolate the past into the future’ trick.

Commodities is a very broad basket of goodies — agricultural, mineral, timber, energy, livestock and precious metals.

Predicting the direction of each one of these is beyond my capabilities. However on the key commodities — iron ore, copper, natural gas and oil — my expectation is the past price action is likely to continue this year.

We have world of increased supply meeting one of decreased demand. Eventually price equilibrium will be restored but only after supply decreases or demand increases or a combination of both. The more probable scenario is for supply to decrease as marginal players close up shop.

In the fight for survival producers are inclined to lower prices to generate cash flow. My expectation is for lower commodity prices this year. This outcome only adds to the deflationary scenario we are facing.

China’s outlook

The slowing growth rate in China is a function of globalisation and domestic imbalances — a result of massive debt funded infrastructure spending.

Like the rest of the world, China believed at some point during the past six years the western consumer would revert to type and the growth engine would once again purr into action. China backed this belief with a full throttle approach to infrastructure investment.

In 2000, China’s credit market debt was US$1 trillion. Today it is US$25 trillion.

China has built it, but no-one (at least not to the numbers they need to service the debt) has come.

To achieve this objective China needs to create its own internal demand.

Eventually this’ll happen, but not in 2015.

In the interim the continued retreat of the western consumer and the challenge of stabilising an economy that has leveraged up 25x in 15 years will further slow China’s economic progress. In due course China is set to register growth numbers beginning with a 3.


Thoughts on Australia

A slumping China means more pain for our mining sector.

More marginal miners will close operations in 2015. Banks are already increasing their bad debt provisions to the mining sector.

Higher unemployment beckons from the resources slowdown together with the softening in global growth.

A hostile and financially irresponsible Senate means the Federal Government runs larger budget deficits than originally projected.

The Official cash rate is destined to fall below 2%, perhaps into the low 1% range.

Judging by the public backlash to governments that have had the temerity to tackle debt issues, it appears our political masters have been put on notice by an electorate that has  very little appetite for unfunded promises to be scaled back.

Australia dodged the worst of the GFC for two reasons. China’s full throttle response to infrastructure spending was a huge boon to our resource sector. And Federal Government debt was non-existent.

Australia will not be so fortunate when the next crisis lands on our shores.

China’s decision to ease up on infrastructure spending and transition to a more consumption based economy means the resource sector will not play the role of the ‘white knight’.

In the space of seven years the Federal Government has gone from being $20 billion in the black to $390 billion in debt.

As a percentage of GDP this is relatively modest by international standards, but it is of a sufficient level the Government has to be more considered in its stimulus responses…unless of course it goes down the path of the US, Europe, UK and Japan.


At some point over indebtedness will lead to massive debt write-offs (defaults). Resulting in serious financial pain for investors holding the debts — bond holders and bank shareholders.

Governments will renege on their social contract regarding entitlements for life. The social upheaval from those ill-equipped (as distinct from those who are too sick, old or disabled) to generate income independently will create a troubling and unsettled social mood. A depressed social mood will be reflected in the prices investors are prepared to pay for assets — shares and property.

Finally, overcapacity will be resolved initially by producers filing for bankruptcy or simply closing the doors on their loss making enterprises. In due course the remaining producers will benefit from the gradual consumption uptake from China and in due course, India.

In summary over indebtedness, over promise and over capacity has put us all over a barrel. This is a bad situation that has to be worked through. It cannot be avoided or solved with printed paper and suppressed interest rates.

Many in the mainstream press would have you believe that the chaos on markets for the last few weeks was something that no one saw coming. These are the same figures that will sell you other market myths, like ‘stocks always go up in the long run’. That may even be true, but it won’t do you much good if it takes longer than your lifetime for them to recover from the crash.

Financial advisors and hedge fund managers with a vested interest in having your money in the market may claim not to have seen this crisis coming. But the causes are there for anyone who cares to look. To read more about why the market is ripe for a fall, and what you can do to protect your wealth, order your free copy of The End of Australia here.


Vern Gowdie,

Editor, Markets and Money

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Vern Gowdie has been involved in financial planning since 1986. In 1999, Personal Investor magazine ranked Vern as one of Australia’s Top 50 financial planners. His previous firm, Gowdie Financial Planning was recognized in 2004, 2005, 2006 & 2007, by Independent Financial Adviser (IFA) magazine as one of the top five financial planning firms in Australia. He has been writing his 'Big Picture' column for regional newspapers since 2005 and has been a commentator on financial matters for Prime Radio talkback. His contrarian views often place him at odds with the financial planning profession. Vern is is Founder and Chairman of the Gowdie Family Wealth advisory service, a monthly newsletter with a clear aim: to help you build and protect wealth for future generations of your family. He is also editor of The Gowdie Letter, which aims to help you protect and grow your wealth during the great credit contraction. To have Vern’s enlightening market critique and commentary delivered straight to your inbox, take out a free subscription to Markets and Money here. Official websites and financial eletters Vern writes for:

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