The RBA and Government are as Deluded as Ever

Australia’s household debt levels are at record highs.

Australia’s government debt levels are at record highs too. Government debt on issue is now at $410 billion, up from $350 billion this time last year.

But don’t worry…it’s all good. The RBA thinks the economy is improving. All that debt accumulation is of course creating a short term boost in activity. This helps to propel the narrative that Australia is successfully transitioning from the mining boom to other forms of growth.

But the market is saying such growth will be short-lived. Our largest trading partner, China, is slowing rapidly. News out over the weekend revealed that it lost another US$100 billion in foreign exchange reserves in January.

This was a slower rate of loss than occurred in December, and a little better than market forecasts. But considering China runs a massive trade surplus (which reflects an INFLOW of capital) such large overall foreign exchange outflows are a sign that all is not well.

But you wouldn’t know reading the RBA’s just released ‘Statement on Monetary Policy’. Predictably, the RBA doesn’t show too much concern about China’s economy. The best it can come up with is to say it’s a key source of uncertainty:

The outlook for China continues to be a key source of uncertainty for the forecasts. While growth in China has been expected to slow gradually for some time, the recent bout of global financial market volatility has been characterised, in part, by concerns about the evolving balance of risks in China and the ability of the Chinese authorities to manage a challenging economic transition. The authorities still have scope to respond if the economy turns out to be much weaker than expected, but any sharp slowing in economic activity or increase in financial stresses in China could spill over to other economies in the region and adversely affect commodity prices, including those that are important for Australia.’

And then there was this classic. The collapse in the share prices of the LNG producers clearly isn’t a concern for the RBA:

Resource exports have also continued to support growth. Iron ore exports, particularly to China, remained at a high level in 2015 while the ramp-up in liquefied natural gas exports is expected to gain pace as more projects begin production.

But where are these new projects going to send their gas? The ABC reports:

Chinese imports of liquefied natural gas (LNG) have fallen for the first time since the trade began 10 years ago. The US Energy Information Agency has reported that LNG imports declined 1.1 per cent in 2015.

It is a further blow to Australia’s fledgling and struggling coal seam gas exporters who have spent more than $75 billion building export terminals at Gladstone in Queensland alone.

It should come as no surprise that China’s appetite for LNG appears to have plateaued – at least for the time being – given the rapid and well documented cooling of the economy.

It should come as no surprise, but it will to such forecasting giants as the RBA. But it doesn’t matter, does it? Australia has other forms of growth to fall back on. Like the housing boom and everything associated with it.

But there’s one little problem with that. The financials index, which I called the rentiers index (it’s made up of rent seeking companies) recently broke down to three year lows.

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Check out the chart. This is hardly a picture of a healthy financial economy. The market discounts the future. This chart isn’t pointing to a particularly robust future.

Source: BigCharts

But again, you wouldn’t know it. If the RBA is deluded, so is the government. Apparently, an increase in the goods and services tax is off the table. Malcolm Turnbull isn’t convinced of its merits.

In other words, he doesn’t think he can pull it off without getting the electorate offside.

But if you think about it, done properly an increase in the GST is a very sensible move. Right now Australia taxes production heavily and consumption lightly. Do you think that is a recipe for long term economic strength?

We tax the additional effort of labour at 50% of income at the highest rate. We tax company profits (profits on production) at 30%. This is way higher than most of our overseas competitors.

Yet we tax consumption at 10%.

It would be far smarter to increase the tax on consumption and reduce the tax on production. But Australia doesn’t do smart. We do dumb luck masquerading as smart, and refuse to see ourselves falling further and further behind the international pack.

As I’ve long said, it takes a real crisis to bring about real reform. Australia is slowly but surely grinding towards a real crisis.

Perhaps that’s why gold in Aussie dollars just made a new long term high. On Friday in US trade, it closed at $1,662 an ounce, the highest level since late 2012. I’ve argued for a while now that gold priced in Aussie dollars is in a bull market. The recent strong move to new highs confirms this view.

So if you want to avoid the slow-motion train wreck that is the Australian economy, make sure you have some gold in your portfolio. Or just avoid the big lumbering stocks that are tied to Australia’s dwindling economic fortunes.

One way of doing this is to check out the fantastic work of my mate and small cap editor, Sam Volkering. Sam’s identified a number of ‘shockproof’ companies on the ASX…those that he reckons are immune from the broader market volatility.

They are too, as recent events have clearly shown. You can check out Sam’s presentation and see for yourself, here.

Just don’t listen to the multitude of rent seeking parasites slowly eating away at the Aussie economy. Soon, they will have nothing left to eat.

Greg Canavan,

For Markets and Money

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Greg Canavan
Greg Canavan is a contributing Editor of Markets and Money and is the foremost authority for retail investors on value investing in Australia. He is a former head of Australasian Research for an Australian asset-management group and has been a regular guest on CNBC, Sky Business’s The Perrett Report and Lateline Business. Greg is also the editor of Crisis & Opportunity, an investment publication designed to help investors profit from companies and stocks that are undervalued on the market. To follow Greg's financial world view more closely you can subscribe to Markets and Money for free here. If you’re already a Markets and Money subscriber, then we recommend you also join him on Google+. It's where he shares investment research, commentary and ideas that he can't always fit into his regular Markets and Money emails. For more on Greg go here.

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