Why Australian Stocks are in Dangerous Territory

The Australian stock market has opened down. But our friend Phil Anderson is not worried. We’ve been working with Phil on a new project that you’ll hear about later this week. He reckons the all-time highs on the S&P 500 and the Dow Jones Industrials are confirmation that markets are heading much higher rather than crashing.

Phil looks at short-, medium-, and long-term cycles. The core of his work is the contention that an 18-year property cycle is at work in Australia, derived from a similar cycle in US land values. His basic claim now is that the US stock market is a signal that the Australian property market is on the verge of…well, we’ll let him tell you later this week.

But it was his forecast for commodities that caught us most off-guard when we last spoke with him. Phil has studied the work of 20th century Soviet cycle theorist Nickolai Kondratiev. Kondratiev argued that commodity prices moved in long cycles, or waves, of 60 years, with 30 years up and 30 years down.

Do a bit of googling and you’ll find many an analyst who tells you we’re in the middle of a Kondratiev winter. That is, folks will argue the commodity market peaked in 2007 and we’re in the early stages of a long-term downtrend. This is a version of Vern Gowdie’s secular bear market, but applied to commodities.

Vern’s position on Australian stocks will be correct if we’re in a 30-year bear market for commodities. But in the meantime, in his recorded remarks, Phil has told us that the commodity cycle isn’t even halfway over in Australia! You can imagine our surprise hearing that. But he made his case in detail.

You’ll hear more about that case in the coming days. But for now, have a look at the chart below from Australia’s official resource forecaster, the Bureau of Resource and Energy Economics (BREE). Last week, BREE reported that investment in the resources sector has reached a cyclical peak at around $256 billion.

BREE also reported that over $150 billion worth of projects have been cancelled or delayed in the last twelve months. It concluded that, ‘The stock of committed investment has peaked and is projected to decline over the next five years as a result of fewer high value projects progressing through the investment pipeline.’ Uh oh.

Source: BREE
This is a dangerous moment for Australian stocks, maybe as dangerous as any since 2007. Foreign capital seems to be leaving these shores. The Australian dollar’s fall makes the country’s assets riskier than they have been in the last three years. This is through no fault of the Australian dollar. It’s simply the weak Japanese Yen making US-dollar denominated assets more desirable.

But there ARE signs of domestic unhappiness in Australia. The terms of trade are one such sign. The coming blow to national income through a falling terms of trade could be much bigger and burlier than is commonly expected, at least according to chart published last week by the Australian Parliamentary Budget Office. Have a look below.

Source: Parliamentary Budget Office
When we showed the chart to our colleague Greg Canavan at Sound Money Sound Investments — who’s been following a version of it for over a year now — he sent back the following reply, ‘Thank goodness for iron ore and coal huh? Now for the aftermath…national pay cut, which will manifest in higher unemployment, and a renewed downturn in property prices.’

There you have it! On one side of the argument you have forecasts for a stock market crash, a secular bear market, and falling property prices. And on the other, an argument for higher stock prices and an 18-year property boom. Who’s right? Stay tuned for more tomorrow.

Dan Denning
for Markets and Money

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From the Archives…

How a Slowing Chinese Economy is About to Hand Australia a Pay-Cut
24-05-13 – Greg Canavan

Your Forefathers’ Pain Can Be Your Gain
23-05-13 – Vern Gowdie

The Fatal Flaw at the Heart of Modern Economics
22-05-13 ­– Bill Bonner

The Warning Signs for Australia’s Economy
21-05-13 – Greg Canavan

A Simple Interpretation on Gold for Times of Monetary Madness
20-05-13 – Greg Canavan

Dan Denning examines the geopolitical and economic events that can affect your investments domestically. He raises the questions you need to answer, in order to survive financially in these turbulent times.

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