–You know there’s a whole other world out there. Someone might want to tell this to Australia’s political establishment. It’s narrowly focussed on the idea of taxing carbon dioxide emissions as a means to redistribute income in the Aussie economy. But meanwhile, there are some ominous signs from the rest of the world that could spell trouble here soon enough.
–The first example is Greece. Default on Greek sovereign debt, as we’ve mentioned before, is seemingly inevitable. Everything that happens between now and then is a delaying tactic so that select European creditors can sell their Greek debt or otherwise reduce their exposure to the eventually restructuring/de-facto default.
–Ratings agency Standard and Poor’s lowered Greece’s sovereign credit rating by three levels to Triple C. Greece sits at the bottom of the sovereign ladder, now, at least in terms of credit ratings. S&P said it considers a restructure of Greek debt, where creditors take losses and accept a longer maturity, is effectively a default.
–Greece is a prelude to what will happen at local, state and national levels all over the Western world. It will vary in some places, of course. In Europe, nations like Greece, Portugal, Ireland, Spain, and Italy are unable to deal with huge government debt loads with inflation, the traditional way of easing debt burdens. This forces these countries to cede sovereignty to their European money masters, sell off national assets, and accept austerity.
–Greece is the birthplace of modern democracy. There’s probably something fitting about Greece being the first Western nation to deal with a full reckoning of its debt problem. And of course the debt problem is only the extension of the problems of the Western Welfare State in a globalised world. Globalisation, come to think of it, is proving to be the enemy of the Nation State.
–We’ll save the elaboration of that thought for later this week. For now, even if Australian lenders have no direct exposure to a Greek default, they will have direct exposure to the low-level chaos that ensues in Europe’s banking market, and the general ripples in global capital markets (higher interest rates).
–What about China? That’s a much more understandable and immediate concern to Australia. Reuters reports that China’s money growth has slowed to a 30-month low. Hikes in reserve ration requirements and interest rates are finally starting to bite. That said, the broadest measure of Chinese money supply (M2) was still up 15.1% for the 12 months ending in May. And Chinese banks still loaned $85 billion in new money that month.
–Investment in fixed assets—resource-intensive construction and infrastructure projects—is running at 50% of Chinese GDP. That’s historically high and unsustainable. But we’ve been saying that about China for a while now. So what should you watch for to see that the government has finally popped China’s credit bubble?
–How about the Shanghai Composite, China’s broadest measure of stocks? There’s been a speculative boom in Chinese property, too. But the stock market is the first place you start to see tighter credit growth hit speculators. The Shanghai Composite is down 12% since early April. Check out the 10-year chart below.
–A 10-year perspective captures a lot of history. You can see that Chinese stocks were not big beneficiaries of the big 2003 interest rate cuts in the Western World. But by mid-2005, the resource and consumer demand those rate cuts had triggered (via liquidity) started to get priced into the Chinese market. And with Chinese interest rates low and government stimulus high, the market took off.
–After the GFC crash the Chinese market recovered more quickly than its Western peers. But since touching 3,500 in late 2009, it’s made a series of lower lows. Now, the 50-day moving average is again in danger of crossing below the 200-day moving average. That’s a bearish short-term sign.
–Is it a bearish long-term sign, though? And does it tell you that China’s credit bubble has popped, with economy-wide deleveraging on the way? It’s too soon to say that. Official Chinese consumer inflation numbers come out tomorrow, though. If the CPI is running hot at 5% or better, expect more monetary tightening by the People’s Bank of China. And don’t expect investors to like that.
–Finally, our thoughts and prayers go out to our readers in New Zealand and especially Christchurch. More aftershocks from September’s quake hit the city yesterday. More are expected. We hope our readers are safe and sound and doing the best they can.
Markets and Money Australia