Hot Air Rising For The Australian Economy

It’s good to see all that hot air finally leaving Brisbane. And the temperature is set to fall too, after reaching near-record highs yesterday.

That’s right; the G20 Conference ended yesterday, and you can feel safe and secure in the knowledge that among the outcomes, members of the conference submitted more than 800 proposals to boost economic growth. From

The world’s 20 richest nations have agreed to boost their economies by more than $US2 trillion ($2.3 trillion) over the next five years and to clamp down on tax evasion by forcing multinationals to pay tax to the country in which they earn their profits.

Declaring the Group of 20 had “shifted from responding to events to setting the agenda”, summit host Tony Abbott estimated results from the clamp down on profit shifting and tax evasion could be visible within two years. The growth agenda involved the G20 members submitting more than 800 proposals to grow their economies by 2.1 per cent over five years.

Wow, that’s an average of 40 proposals per nation…your tax dollars in action.

Here’s my tip. Whatever growth we achieve in the next few years will have nothing to do with these proposals, but rather the blood, sweat and tears of everyday people going about their business, as far as possible unhampered by rules and regulations.

By the way, did anyone manage to see Abbott ‘shirtfront’ Putin? As far as I know, it was all pretty cordial. It even descended into a koala cuddling photo opportunity with the other leaders, just to make sure the masses understood that everyone, for the most part, were friends and working together for the weekend.

Putin could obviously handle only so much, and got out as early as he could, citing the need to ‘catch up on sleep’. That’s only a rung up on the old ‘washing my hair’ excuse to get out of engagements.

When you’re a semi-dictator, photo-ops, small talk and PR must seem trivial and unnecessary. When you’re a democratically elected leader, such games are a vital part of your job.

During the conference, US Prez Barrack Obama gave a ‘stirring’ speech in front of impressionable youths at the University of Queensland. Obama’s people are clearly concerned about how adults might respond to his empty rhetoric, given recent walkouts on his speeches in the US. Put him in front of the kids…they’ll lap it up.

Despite all the hot air, there was some genuinely good news for Australia’s economy… hopefully. If all goes according to plan, China’s President Xi Jinping will sign a free trade deal with Australia today in Canberra. The deal will open up some of China’s markets within four years.

According to John Garnaut at the Sydney Morning Herald,

A last-minute breakthrough by Trade Minister Andrew Robb will give Australian dairy farmers tariff-free access within four years to China’s enormously lucrative infant formula market, minus any of the “safeguard” caps that currently restrict competitors from New Zealand, according to sources.

Winemakers, currently selling more than $200 million worth of goods to China each year despite tariffs between 14 and 30 per cent, will also see tariffs eliminated over four years.

Tariffs on horticultural products, seafood and other goods accounting for 93 per cent of Australian exports by value will also be reduced to zero by 2019. Shock tariffs recently imposed on Australian coal will be removed over two years.

That’s exactly what politicians should be doing — facilitating trade between nations, not hampering it. Trade is a major source of wealth creation and a prime way to foster good relations amongst peoples. When you trade with someone and rely on that trade for your income, you don’t care about politics, religion, race or skin colour.

That’s why trade sanctions are such an important economic weapon. Russia knows all about it…as does Iran.

So what does China want in return for opening up its markets to Australian businesses? They want our labour market to open up to competition. From the SMH again:

The Abbott Government has given ground on labour, agreeing to a new case-by-case mechanism for Chinese investors to apply to bring in workers at Australian wage rates in areas of skills shortages.

Hmmm. With the end of the mining boom and rising unemployment, it’s hard to see skills shortages becoming an issue. This sounds like a way for Chinese companies to bring in their own labour at their own labour costs.

It’s hard to be too critical about this. Australia has priced itself out of many international markets because of our high labour costs. It’s making it much harder for us to weather the commodity downturn, as high labour costs embed themselves into a high cost capital structure. This makes it much harder to achieve a decent return on capital, which influences future investment decisions.

According to some anecdotal accounts that I’ve heard over the years, unionised labour hasn’t exactly covered itself in glory in many of the mining boom mega-projects. With oil and LNG prices now under pressure, you’re going to see some of those large LNG projects (requiring tens of billions of capital investment) struggle to earn their ‘cost of capital’, an issue I discussed on Friday.

China, of course, has historically had an abundance of labour and they are bewildered by Australia’s good (to say the least) labour conditions. It will be interesting to see how China takes advantage of this free trade concession in the years ahead.

But it’s not all smelling like roses on the China front. Late on Friday, data came out that showed China’s credit bubble continuing to deflate. Total social financing, the broadest measure of credit growth in the economy, registered growth of 633 billion yuan compared to forecasts of 888 billion. That’s a decent miss.

And at 12.6%, China’s M2 growth (a monetary aggregate) continues to come in below the targeted 13.5% growth rate.

This slowdown in credit growth is deliberate, and so far so good. But with a slowdown in credit growth comes a slowdown in economic growth, and you’ll likely see the 7.5% growth target reduced in the coming weeks.

The main issue here is at what point does the slowdown in nominal economic growth start having an impact on default rates? You saw some defaults emerge at the start of the year, but since then such news has been carefully stage managed and kept out of the headlines.

The authorities won’t be able to keep doing that if growth slows too quickly. As always for China, it’s a case of having to manage the credit slowdown VERY carefully.

There’s no clearer evidence of the reduced appetite for credit and construction than in the iron ore market. Having just returned from a trip to China, UBS mining analyst Glyn Lawcock reckons there’s every chance prices will fall into the $50/tonne range in 2015.

Wow. Fortescue Metals must be praying for a collapse in the Aussie dollar. They won’t survive such a sustained price fall without it!

Meanwhile, other commodity prices got somewhat of a reprieve on Friday as the US dollar sold off. Oil and especially gold bounced higher. By the way, if you haven’t had a chance to read the latest Diggers and Drillers report on oil, check it out.

After surging around US$40/ounce on Friday in the US, gold looks a little better than it did a few weeks ago, but needs to rally back above $1,200 to get out of the danger zone for now. Has it bottomed? I have no idea, but at these levels, it looks much closer to a bottom than a top.

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Greg Canavan is a Contributing Editor at Markets & Money and Head of Research at Port Phillip Publishing. He advocates a counter-intuitive investment philosophy based on the old adage that ‘ignorance is bliss’. Greg says that investing in the ‘Information Age’ means you now have all the information you need. But is it really useful? Much of it is noise, and serves to confuse rather than inform investors. And, through the process of confirmation bias, you tend to sift the information that you agree with. As a result, you reinforce your biases. This gives you the impression that you know what is going on. But really, you don’t know. No one does. The world is far too complex to understand. When you accept this, your newfound ignorance becomes a formidable investment weapon. That’s because you’re not a slave to your emotions and biases. Greg puts this philosophy into action as the Editor of Crisis & Opportunity. He sees opportunities in crises. To find the opportunities, he uses a process called the ‘Fusion Method’, which combines charting analysis with more conventional valuation analysis. Charting is important because it contains no opinions or emotions. Combine that with traditional stock analysis, and you have a robust stock selection strategy. With Greg’s help, you can implement a long-term wealth-building strategy into your financial planning, be better prepared for the financial challenges ahead, and stop making the same mistakes that most private investors do every time they buy a stock. To find out more about Greg’s investing style and his financial worldview, take out a free subscription to Markets & Money here. And to discover more about Greg’s ‘ignorance is bliss’ investment strategy and the Fusion Method of investing, take out a 30-day trial to his value investing service Crisis & Opportunity here. Official websites and financial e-letters Greg writes for:

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