Yesterday we mentioned the possibility of synchronous recessions/crashes in China and the US. It’s worth mentioning again. It’s the biggest objection to buying into the resource bull at these prices.
On that score, US Fed Chairman Ben Bernanke fronted the US Congress yesterday and told them that the subprime problem would get worse. But traders are learning to quickly discount what the Fed chief says. “Bernanke’s comment that the subprime mess could be in the US$150 billion ballpark exacerbated the sell-off. Why should we believe him? He didn’t see any of it coming,” said Elliot Spar of Stifel, Nicolaus & Co.
The Fed is spinning the story anyway. What’s going on in the credit markets is no longer just a subprime story. It’s a corporate debt story too. It’s a bank asset quality story. And it’s a story about the health and viability of the balance sheets of some of America’s largest financial firms.
Markets generally muddle through even the worst of situations. But as the Austrian theory of the credit cycle suggests, massive misallocations of capital have to be liquidated before the next bullish phase can begin. Right now, investors seem to be in full denial that liquidation is necessary and healthy. Acceptance will come eventually, after anger and grief.
There’s no doubt Australia has exposure to a slow-down in China. But at least the Aussie boom is correlated to a production boom. Real wealth comes from production, not consumption based on debt. You see evidence of both in Australia.
The resource boom is a production boom producing higher wages for Aussie workers, higher profits for Aussie firms, and higher share prices for Aussie investors. Let’s hope that’s not all squandered away by people choosing to live beyond their means.
But then again, who are we to tell people how to live? You can’t control the financial habits of an era. These things go in cycles too. We live in a time of widespread financial illiteracy. The resource boom has cushioned Australia from the consequences of massive debt. At least for now.
Markets and Money