Greg Canavan’s new ‘Fuse is Lit‘ film has certainly lit a fire inside the belly of many Aussies.
It’s had 27,447 views in just two weeks.
‘The Fuse is Lit‘ is a blistering take-down of the supposedly ‘safe hands’ that have been guiding Australia’s economy during the China boom years.
But it all rests on a central thesis: that the China boom has peaked. And that it’s not coming back. Some analysts contest this. Some are even optimistic that Aussie miners will see iron ore prices return to the near-$200 peak in 2011.
Whether or not the China boom really is over is the most important question you can ask about your wealth this decade.
So in the last couple of days before the Christmas break I sat down and put that question to Greg Canavan.
Simon Munton: Greg, your ‘China’s Bust’ report was pretty prophetic. But what about the recent stories on how China’s economy is ‘recovering’ or has ‘bottomed’? Should you change your thesis to ‘China’s Just Had a Temporary Bust’?
Greg Canavan: No.
Simon: Can you elaborate?
Greg: Well sure, there’s no denying the economic data has improved from three months ago. But these sorts of post-bubble declines don’t happen in a straight line. In 2013 China’s growth rate will continue to slow. There may be mini-recoveries and the odd bits of positive data. But this won’t constitute ‘bottoming out’. What you’re really seeing is Beijing trying to manage the decline so it’s not too jarring.
Simon: So managed decline throughout the year?
Greg: Yes. Anyone who thinks the China boom will get anywhere near the heights of the last few years has been partaking in way too much eggnog over the Christmas break. China is now on the other side of its historic credit boom (which expanded most famously from 2009 to 2011). But due to the state-controlled nature of the banking system, credit growth is still running at dangerous levels. According to numbers by Fitch Ratings by 2013 China’s banking sector assets will have expanded by nearly US$14 trillion since 2008.
Greg: Meaning China basically replicated the entire US commercial banking sector in just five years. That kind of balance sheet expansion has consequences. In my view, when new credit exceeds one-third of GDP for four years running, you’re going to see some very nasty economic side-effects.
Simon: What kind of side effects?
Greg: This is where phase two of my China’s Bust thesis kicks in. China can do two things in 2013. It can ratchet up the old investment-led growth model anytime it wants. But this will only lead to greater problems down the track. I think China’s leadership understands this, and will take option two: managed decline. Chinese investors are already betting on the second option. In December 2012 the Shanghai stock exchange made new lows. This just goes to show how uneconomic and profitless much of China’s ‘boomtime’ growth has actually been. But it has showed some signs of life recently.
Simon: OK, so what are the implications here for Aussie investors in 2013?
Greg: Well there are three big ones. China’s rebalancing is a long drawn out affair. And it takes time for the effects to filter into different parts of the Australian economy. But keep in mind this rebalancing has been going on for at least 12 months now. So you’re going to see the effects of this rebalancing manifest in three specific areas of the Aussie economy in 2013. I demonstrate these three areas visually in a new video I recorded before the break. [If you haven’t watched it yet, go here.] But those are the negative consequences of the China slowdown, which I reckon you need to protect yourself from. In the closing weeks of the year a potential POSITIVE for Aussie investors has come to my attention…
Simon: What’s that?
Greg: The Chinese stock market is now down nearly 70% from its peak. That’s a massive fall, and you’d have to think there is some value in China’s stock market at these levels. If China’s market fell through its boom years, there’s no reason why it can’t rise during a more economically responsible ‘rebalancing’ phase. If China’s leaders begin to talk about profit being important, rather than just growth at all costs, it might be time to dip a toe in. There are ways you can do this WITHOUT having to buy Chinese stocks directly. I’ll be looking into those in 2013.
Simon: So what’s the big takeaway for Aussie investors as 2012 draws to a close?
Greg: The upshot for Aussie investors is that the stocks that have done very well in 2012 will be bad investments in 2013. I’m talking about the financial sector, which will feel the brunt from phase two of the China bust. If you want to know where I think the profit pockets will be in the Aussie market in the coming year, you should watch ‘The Fuse is Lit‘. You’ll learn about something I call ‘The Survival Circle‘.
Simon: What if China shocks everyone and goes ‘nuclear’, launching another big stimulus?
Greg: Well, in this game you’ve got to make calls. My call is that won’t happen. But I could be wrong. Even if that happens, the investments outlined in ‘The Survival Circle‘ should be sound ones to own. And if China puts even more air into its credit bubble there will be a great bunch of shorter term investment opportunities. But my baseline scenario is that China’s leaders know that reigniting the credit bubble will effectively seal their fate in a few years’ time. I don’t think they’d sacrifice their (and their Party’s) long term position for a few more years of rapid, investment-led, credit fuelled growth.
Simon: To find out how the China slowdown will bleed deeper into the Aussie economy in 2013, watch Greg’s new video presentation ‘The Fuse Is Lit‘.
Markets and Money