Monday, September 3, 2012
A Tipping Point For The Australian Economy?
Tipping Point: The prevalence of a social phenomenon sufficient to set in motion a process of rapid change; the moment when such a change begins to occur. - Oxford English Dictionary
As social science writer Malcolm Gladwell says in his book of the same name, when the tipping point is reached little things can make a big difference.
Fortescue cuts spending staff as ore prices fall
While Gladwell was largely writing about society and ideas, in the markets the impact of the tipping point, the butterfly effect, or whatever you want to call the apparently minor change can be even more extreme. With the price for assets, both physical and derivative, already set at the margin, when sentiment shifts it doesn't take long for things to change significantly.
Over the past few weeks, sentiment towards Australia and the sustainability of the mining boom has been shifting. While for some time at Macro Investor we've been talking about the fall in bulk commodity prices and the impact this move will have on national income, it's now entered the mainstream consciousness globally.
Everywhere from Financial Times to the Sacramento Bee the talk is that the mining boom is over, that China is not going to stimulate its own economy in the manner it did last time, that the forward-looking indicators of global growth are parlous. Australia has gone in a short space of time from the lucky country to the country whose luck is running out.
But on the main stage we still see business leaders, top commentators and politicians in a tizz, either denying there ever was a mining boom, saying it never mattered anyway, or reassuring us that it will endure for another 20 years.
And just to add to the confusion, the Australian government has distracted the electorate by removing the carbon price floor of $15 a tonne and offering big new packages for dentistry and education. With risks to balancing budgets from mining now compounded by risk to budget blowouts from carbon, schools and teeth, our much-vaunted AAA-rating will come under question if the government isn't clear and careful.
While we don't want to get into a partisan slinging match, foreign investors and media are watching with incredulity.
Before, Australia looked so smart: it had escaped the GFC, its banks were worth more than Europe's (despite serving a tenth the population) and its residential property market continued to outstrip wages, rents and inflation.
But now, Australia looks dumb: it's hitched its wagon to a flailing Chinese dragon, its got a series of budgetary black holes and its political debate looks as crazy as a Republican primary.
In a week where the headline economic news is likely to be dominated by industrial production data, European central banks and US non-farm payrolls, there are some serious questions being raised about the state of affairs down-under.
What happened to Australia's counter-cyclicality? What happened to Australia's competitive advantage? Are Australia's banks really worth that much when you can get a Credit Suisse and a Standard Chartered for the price of a CBA?
Moreover, are Australia's houses good value when a shack in Byron costs more than a flat in Paris? Are Australian wages reasonable when a truckie in Kalgoorlie earns more than a team in Jo'burg? Is Australia's dollar fairly priced when it buys you an ice-cream in Brisbane for the same as a dinner in Singapore?
When those answers are met with incredulity or proclamations that we're the best country in the world and that's the way things are, don't expect more than a cool response from the international hedge fund and asset management community.
Whipping up the patriotism might work when you're playing for a home crowd, but it won't impress those who observe our situation from the perspective of distance or neutrality.
Some are seeing this sudden crescendo of negative overseas sentiment towards Australia as a crowded trade, but it's perhaps crowded for a reason.
If commodity prices do not recover sustainably then the mining boom is very close to its peak. A large current account deficit is in the offing as LNG construction and still-too-high consumption drives big imports but export revenues fall heavily.
Then there's the drive to government surplus which supports the nation's public and private credit ratings and keeps at bay the ever-present questions about our expensive houses.
Indeed, once the herd starts moving, those in the way better move out of the hooves' way.
With the Australian dollar where it is despite no action from the US Federal Reserve and with Aussie bank credit default swaps pricing in smooth sailing despite brewing September storms in Europe, both these assets are looking like obvious shorts.
And with China facing a situation where it cannot risk stimulus without risking inflation, despite a rapidly weakening construction and export market, signs are few that there'll be a rebound in mining in the short term.
Things look rosy when viewed within the prism of Australia's unique position in the global economic landscape, but look beyond our shores or the last reporting season and confidence looks misplaced or worse.
Just like that fabled moment in time, when the grounds of the Imperial Palace in Tokyo were worth more than the entire real estate market of California, we wonder if a tipping point has been reached for Australia.