Sometimes we just believe what we want to believe. In the US yesterday, global mining heavyweight Caterpillar reported a 45% drop in first quarter earnings (compared to the same period last year) and lowered its earnings guidance for the full year. And what did the share price do? It rallied nearly 3% as investors clung to the hope that this is about as bad as it will get in the mining sector.
That’s the part of Caterpillar’s business that is struggling. In its statement to the exchange, Caterpillar CEO Doug Oberhelman said:
‘While expectations for Construction Industries and Power Systems are similar to our previous outlook, our expectations for mining have decreased significantly. Our revised 2013 outlook reflects a sales decline of about 50 percent from 2012 for traditional Cat machines used in mining…’
But when the market is in bullish mode, a 50% decline is good news, because it can only get better from here. Maybe it will, maybe it won’t. It’s not a bet we’d make. After all, the outlook for mining is inextricably linked to China. And China hasn’t even really slowed down yet. What will things look like when it really does slow down…when its credit bubble does turn to bust.
And what will it mean for Australia? According to Deloitte Access Economics, Australia is in for one of those rosy soft landings as the mining booms ends. They expect low interest rates to feed into consumer and housing demand, which will seamlessly replace the lost output from the fall in mining investment.
We’ll see how that works out.
We’re not sure consumers will receive much of a boost from lower interest rates anyway. First of all you have to be in debt to get the boost, and any benefit may just go to keeping one’s head above water. Prices in Australia are bordering on the ridiculous. What you save in mortgage interest costs you absorb in the price of cigarettes, beer and/or coffee. (We’re assuming everyone has a vice of some sort.)
As not so subtly pointed out in today’s Age, the price of just about everything in Australia is going up, up and up. On an international scale, we are now world class.
‘In the past 11 years Australia has become one of the most expensive places to live, costlier than New York, London, Frankfurt and Singapore on everything from five-star hotels, car rentals, public transport, a pint of beer, cigarettes, jeans and an iPhone.’
How all this happened while inflation apparently remained low just goes to show the official inflation figures are a joke. On the one hand the statistician makes adjustments for products that, while may be increasing in price, deliver more bang for the buck in terms of productivity. This turns price inflation into price deflation. But they completely ignore the effect of shrinkage and lower quality inputs, especially in relation to food.
For example, we bought a chocolate bar the other day, having not had this one particular brand for years. Upon opening it, we realised it was about 20-30% smaller than what it used to be. This had obviously occurred over a number of years, allowing the manufacturer to keep costs down while maintaining revenues. Dodgy.
And it’s not just chocolate bars. This sort of stuff occurs across a whole range of food products. In the real world, a lower quality product and a slightly higher price equals high inflation. But no. We’re told inflation is constantly tame, which allows interest rates to keep on falling, which encourages more borrowing and reckless spending, which makes us increasingly unproductive, which feeds through, eventually, into higher inflation and lower living standards.
But it’s not all bad news. Not yet anyway. We’ve had a remarkable increase in prices over the past decade because we’ve had a remarkable commodity boom, which has pushed Australia’s per capita GDP rates to amongst the highest in the world.
In other words, we’re amongst the highest paid people in the world. So should we be complaining about having a high cost of goods and services relative to the rest of the world too?
Well, let’s see how we’ve handled that increase in income. What have we done with it? Well, the government hasn’t saved any of it. When a country gets a big pay rise, its economic managers should make sure they take in more than they pay out, saving the difference (the surplus) for the times when we get a pay cut. And those times are heading our way. It’s called a downturn in the terms of trade.
But that’s not happening. With the mining boom peaking, it’s pretty clear that Australia is heading towards an era of perpetual deficits. As fellow reckoner Dan Denning wrote today of the government’s mismanagement of the boom:
‘By misunderstanding the cyclicality of the mining business, it locked in higher revenue expectations, including the mining tax. It further locked in higher revenue expectations with the carbon price linked to the European carbon market, which has now collapsed.
‘Based on revenue it expected to collect in the future, it increased spending now. And not just the Federal government either.
‘That has put the budget not just in a temporary deficit. But now we are on the long road to a structural deficit…where expenses always exceed income.’
And Australia’s private sector is not much better. Instead of paying down debt and producing more than we consume, we’ve simply maintained our historic role as net consumers. Except for a few quarters during the bulk commodities boom, Australia has run a trade deficit throughout our period of prosperity. Our current account deficit continues to grow, meaning we continue to rely on foreigners to maintain our standard of living. If they pull the plug, we go down the drain.
We have wasted the boom. Now it is receding. Something will have to give. Foreigners will still lend us money, but they may want a bit more compensation for the risk of lending to an indebted country whose biggest selling point is being China’s major customer.
Interest rates are unlikely to spike higher, so the ‘increased compensation’ may come via a weaker dollar. And when that time arrives, it could be fast and furious.
for Markets and Money
From the Archives…
Why Too Much Data Might Actually Protect Your Privacy
19-04-13 – Sam Volkering
This Gold Bug Ain’t for Turning!
18-04-13 – Bill Bonner
Music for Contrarian Ears
17-04-13 – Dan Denning
Bring on the Gold Correction
16-04-13 – Bill Bonner
Why China’s ‘Population Pagoda’ Could Mean Slower Growth for Australia
15-04-13 – Dan Denning