Another $32 Billion Lost — Is This How it Begins?

Same story different week.

Fears regarding China’s economy slowing caused the Dow to shed 470 points last night.

Weak manufacturing data out of The far east spooked the Aussie market yesterday. Last week’s recuperation has all but been vaporised. The ASX lost 2.1%, or $32 million, in one day.

Adding to the marketplace’s woes was our worse than expected current accounts deficit (our net borrowings from the rest of the world) — a blowout of $19 billion.

The RBA has kept prices on hold. But I believe that, as the global economic situation continues to deteriorate, further rate cuts will be on the table.

The IMF issued an update warning…worldwide growth will be weaker than they forecast two months ago. Truthfully, why do we pay these folks? They are perpetual over-estimators.

Hark back to January. The year started out with such guarantee.

Share markets continued where these people left off in 2014…moving onto new highs.

Global growth forecasts were optimistic.

But issues haven’t quite worked out towards the rose-coloured plan the policymakers might have liked.

The scoreboard so far is:

• Commodities catalog down 10%
• Growing fears about the degree of the slowdown in China’s economy
• Eurozone Gross domestic product growth fell in 2nd quarter 2015
• Less likely the Given will raise interest rates this particular month
• Australia Bureau of Statistics introduced in June that Australia’s long-term unemployed hit a 16-year higher.
• The RBA has reduced cash through 2.5% to 2%
• And Australia’s mining field continues to struggle.

‘Alpha’s collapse shows more coal mines must close for others to survive‘

Australian Financial Review, 31 July 2015

While this is not the outcome the central bankers and politicians would have foreseen in January 2015, none of this may come as a surprise to you.

My outlook for 2015 was included in the Twenty-seven January 2015 edition of The Every day Reckoning, and has been reiterated many times in Money Morning and The Daily Reckoning since.

Understanding the big picture is crucial to investment success. In the trading game, avoiding risks is, on balance, more important than capitalising on opportunities.

Significant losses can set you back years and even years.

Appreciating what lies ahead is critical to long term wealth creation AND retention.

The End of Australia, my recently published book, is actually my big picture view on exactly how all these forces at play in the global economy lead to a fiscal collapse. And on what you can do to safeguard your family’s wealth, and profit from the recovery on the other side of this crisis. You can still purchase your free copy on the internet; click here to find out how.

The finest debt powder keg in history

The Great Depression was preceded by a debt crisis.

The long bust in Japan was beat by a debt crisis.

The globe is sitting atop the greatest level of accumulated debt in the history — in both dollar conditions and percentage of GDP. This cannot end well. Yet, as a society we are not getting any meaningful discussion concerning the single greatest threat to our living standards.

There is plenty associated with talk on marriage equal rights, becoming a republic or whether a retired judge intends to talk at a function.

While these topics may be near and expensive to individuals, none of it really matters if the world is turned upside down financially.

When the actual GFC hit, all talk about climate change (the great moral, economic and social challenge) was completely sidelined. Why? Because when it comes to what really matters to homes, money and employment are top of the list.

The fact the global debt issue is not entrance and centre in the nationwide forum is a reflection on the level of community complacency and politics deception we have in culture.

This, to me, is a further contrarian sign that an economic disaster on a par with The Great Depression awaits us.

For a bit of perspective on the recent market mayhem, which no one in the mainstream seems to have seen coming, beneath is an extract from my personal January article on the perspective for 2015.

Commodities in 2015

Firstly let me say that one of the risks in forecasting is the old ‘extrapolate the past into the future’ trick.

Commodities is a very broad container of goodies — agricultural, nutrient, timber, energy, livestock and precious metals.

Predicting the direction of each one of these is beyond my personal capabilities. However on the crucial commodities — iron ore, copper, natural gas and oil — my expectancy is the past price motion is likely to continue this year.

We possess world of increased supply meeting one of decreased demand. Ultimately price equilibrium will be restored but only after supply decreases or demand increases or perhaps a combination of both. The more probable scenario is for supply to lower as marginal players close-up shop.

In the fight for survival producers are inclined to lower prices to generate cash flow. My expectation is perfect for lower commodity prices this year. This outcome only increases the deflationary scenario we are facing.

China’s outlook

The slowing growth rate in China is a function of globalisation and domestic imbalances — a result of massive debt financed infrastructure spending.

Like the rest of the world, China believed at some point during the past six years the traditional western consumer would revert in order to type and the growth engine would once again purr into action. China backed this belief with a full throttle method of infrastructure investment.

In 2000, China’s credit score market debt was US$1 trillion. Today it is US$25 trillion.

China has generated it, but no-one (at least to not the numbers they need to service the debt) has come.

To achieve this objective China needs to create its own internal demand.

Eventually this’ll happen, but not in 2015.

In the meanwhile the continued retreat of the traditional western consumer and the challenge of stabilising an economy which has leveraged up 25x in Fifteen years will further slow China’s financial progress. In due course China is placed to register growth numbers beginning with a 3.

[…]

Thoughts on Australia

A slumping China means more discomfort for our mining sector.

More minor miners will close operations in 2015. Banks are already increasing their own bad debt provisions to the mining sector.

Higher unemployment calls from the resources slowdown together with the softening in global development.

A hostile and financially reckless Senate means the Federal Government operates larger budget deficits compared to originally projected.

The Official money rate is destined to fall below 2%, perhaps into the low 1% range.

Judging by the public backlash to government authorities that have had the temerity to tackle debt issues, it appears our political masters happen to be put on notice by an electorate that has very little urge for food for unfunded promises to be scaly back.

Australia dodged the worst of the GFC for two reasons. China’s full throttle response to infrastructure spending would be a huge boon to our source sector. And Federal Government financial debt was non-existent.

Australia will not be so fortunate when the next crisis arrives at our shores.

China’s decision to help ease up on infrastructure spending and transition to a more consumption dependent economy means the source sector will not play the role of the ‘white knight’.

In the space of seven years the us government has gone from being $20 billion in the black to $390 billion in debt.

As a percentage of GDP this is relatively modest through international standards, but it is of the sufficient level the Government has to be more considered in its stimulation responses…unless of course it goes down the path of the US, Europe, UK and Japan.

Summary

At some point over indebtedness may lead to massive debt write-offs (defaults). Resulting in serious financial pain for investors holding the invoices — bond holders and financial institution shareholders.

Governments will renege on their sociable contract regarding entitlements for life. The social upheaval from those ill-equipped (as distinct from those who are as well sick, old or disabled) to generate income independently will create a troubling and unsettled social mood. A depressed social mood will be reflected within the prices investors are prepared to pay for assets — shares and home.

Finally, overcapacity will be resolved initially by producers filing for bankruptcy or simply closing the doors on their reduction making enterprises. In due course the rest of the producers will benefit from the steady consumption uptake from China and in due course, Indian.

In summary over indebtedness, over promise and over capacity has put us all over a barrel. This can be a bad situation that has to be labored through. It cannot be avoided or solved with printed document and suppressed interest rates.

Many in the mainstream press would have you think that the chaos on marketplaces for the last few weeks was something which no one saw coming. Fundamental essentials same figures that will sell you other market myths, like ‘stocks always go up in the long run’. That may even be true, however it won’t do you much great if it takes longer than your lifetime for them to recover from the crash.

Financial advisors and hedge fund managers with a vested curiosity about having your money in the market may claim not to have seen this particular crisis coming. But the leads to are there for anyone who cares to look. To read more about why the market is ripe for a drop, and what you can do to protect your own wealth, order your free copy of The End associated with Australia here.

Regards,

Vern Gowdie,

Editor, The Gowdie Letter