Down And Out In Down Under

Tyler Durden's picture

For all the talk China's economic problems are getting (and yes, its official PMI came just slightly ahead of expectations on Saturday printing at 50.8 with consensus looking for 50.0: after all the Politburo can't give the impression of an out of control stall), the real action continues to unfold in its primary derivative economy, that of Australia, and particularly its "China-feeder" resource space, which is a far more accurate indicator of the true demand picture in China than manipulated data out of Beijing.  What is going on there, for those who have not been paying attention, is in one word, a disaster.

CLSA's Damien Kestel summarizes, "As noted in recent weeks it has been happy days for investors enjoying the highs on the S&P 500 and associated rallies across Germany, the UK, Japan and elsewhere. But that joy is a world away from the pain that has been inflicted on the majority of resource related equities and their investors. The AS39 Index on Bloomberg includes 87 mid and (now) small cap Australian resource companies. It has been smashed – just like many of its constituents. From early 2011 it has fallen >65% to now sit at GFC levels while there are plenty of examples of stocks that not so long ago had mkt caps of $800m that are now $50m. The evidence of pain in the resources space is everywhere but probably none more so than in Western Australia, the “engine room of Australia”.

Kestel goes on to compile a page of quotes from "conversations over the past week with friends and associates in the Perth mining game and it brought back memories of the Asian Crisis, Tech bust and of course the GFC."

  • “We’re seeing a much sharper contraction in the Australian economy than we’d anticipated four or five months ago”. Coffey MD, John Douglas. The engineering group has seen its shares, which traded above $4 in 2007, hit 10c last week.
     
  • “We’ve still got a lot of construction under way or committed and there’s a lot of activity that will go on for the next three years or so. I think where the question mark comes in my mind is, well, what will follow those projects?”. Western Australia’s Premier, Colin Barnett
     
  • “Perth has the highest population per capita of self made millionaires in the world”. Extract from a list of fun facts on Western Australia. I dare say there are a few less after the recent carnage in mining stocks.
     
  • The current feeling on St George’s Terrace (Perth’s main business street) amongst brokers and miners is that today is worse than the GFC ever was. It’s 100% pain out there” Perth mining investor
     
  • “I was at the Mines and Money conference in Hong Kong recently. They should really call it Mines and No-Money because no one has any and no one wants to give it to them” Mining CEO
     
  • “By 10am, the Fitness First gym in the city is packed full of brokers who’ve had a gutful of sitting at their desk doing nothing – salary cuts are starting and next it will be jobs” Perth broker
     
  • “Oh mate, the funding market is dead. You are now seeing a few deeply discounted rights issues for those that are reaching desperate levels ….. liquidity has completely disappeared” Perth broker
     
  • “Private equity firms are gearing up for a multi-billion-dollar push into the mining sector, with a wave of proposed asset sales by the big miners, a shortage of competing buyers and the funding headaches faced by smaller companies paving the way for a rise in deals”. The Australian

So, bargain-basement purchasing opportunity, or just the beginning of a secular shift and much more pain to come, as the China "paradigm" finally cracks?

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Fred123's picture

Note: Actually my history is very accurate.

I suggest you read about history rather than the social rubbish you have been taught. It's obvious from your post that you are not yet 50. Such an amazing difference in education standards in the last 40 years makes it easy to spot the youngsters.

GMadScientist's picture

Then tell us something useful about the state of China prior to the arrival of your oh so prententious, if not entirely efficacious, educational standards, dear Limey.

Tell us how they turned away your ambassador because your pathetic industry provided nothing they needed before you did what you always do and returned with gunships (just like you did to those upstart Americans when they endangered your monopolies).

Such an amazing difference in relevant details makes it easy to spot the propagandists.

Totentänzerlied's picture

If you asked them, they'd have said there is nothing they need that they don't already have - because anything the Middle Kingdom lacks cannot be worth having, anyway. The degree of insularity and myopia was (and is)... infinite.

4000 years this insanity has been going on.

short screwed's picture

 Economic fundamentals are so passe.  Australian central bank just needs to flood the economy with more paper prosperity.  That will fix everything.

disabledvet's picture

http://theage.drive.com.au/demise-of-ford-leaves-nations-car-industry-in... see ya' later australia. good luck. i've seen that plant in Taiwan..."they made they're deal before you did."

NoTTD's picture

It's not reassuring that the only thing Labor can think of is larger government subsidies.

Haager's picture

Bargain, but not really basement. If you're in Euro-dreamland you may consider to put your savings in Australian stocks, and then don't look at it the next 6 month. I think $audeur has bottomed, China will pull itself out of any problems during the next 2 decades, just because they still have options left - contrary to US, Japan, Europe.

With their economical ally situation doesn't look that bad at al in the short term, and with some support in the fx-crosspair your investment may still gain even if stockprices will have some fluctuations.

Jason T's picture

sounds awfully deflationary.. yet interest rates are rising.. this is interesting

Dewey Cheatum Howe's picture

Off topic but looks like China found a solution to it's pig problem. This should guarantee no more pig carcasses floating in the rivers there.

http://www.reuters.com/article/2013/05/31/us-smithfield-shuanghui-dealta...

 

Washington may still be digesting news of China Inc's latest bold move into America with the nearly $5 billion takeover of Smithfield Foods Inc (SFD.N), but early indications are the deal will not inflame enough nationalistic opposition to kill it, and success could pave the way for more Chinese purchases.

 

Shuanghui International Holdings' agreement to buy Smithfield would be the largest ever acquisition of a U.S. company by a Chinese one. The bid - an effort to feed a growing Chinese appetite for U.S. pork (cough bullshit cough) - has stirred some concern among U.S. politicians and will face review by a Treasury committee.

Yes a review by the same unbiased Treasury Committee that under Turbo Tax Timmay Geithner allowed the Chinese to do this.

Keep in mind this happened back in 2011 but certainly is relevant here and for the Treasury bond market in general today. We don't know what the Chinese are buying here on ground level unless you are part of the insider information network so weak bond auctions may not mean weak bonds since the Chinese are not bidding directly and probably is part of the game on the rigging of the interest rates by allowing a major buyer to purchase in the shadows and not be reflected in the information the FED projects concerning bonds. Think about it and how it potentially relates to QE either increasing or tapering and who knows who else has this same arrangement with the Treasury and is not showing what they are buying in the official auctions through the primary dealers.

http://finance.yahoo.com/blogs/daily-ticker/geithner-thinking-treasury-g...

 

In an unprecedented move, in June 2011 the U.S. Treasury Department granted the Chinese government direct-bidder status to purchase U.S. Treasuries direct from the U.S. government, reports Reuters. All other central banks must purchase U.S. Treasuries through primary dealers on Wall Street, which then place bids on their behalf at Treasury auctions.

The People's Bank of China holds roughly $1.2 trillion in U.S. debt, more than any other entity, and it is now the first foreign government with direct computer access to the U.S. government Treasury auction process. China, however, must sell U.S. Treasuries on the open market.

"It's a big deal because the Chinese are getting very special treatment," says Gordon Chang, Forbes columnist and author of the Coming Collapse of China, in an email to The Daily Ticker.

This special treatment does have the potential to save the Chinese government money, but not in transaction and commission costs because primary dealers are prohibited from charging its bidding customers fees. However, China could getting a better deal by keeping its purchases from Wall Street secret.  - But we all know about how tight the lips are at the FED with their reports.

 

Yeah like the Treasury is going to be unbiased in their review phuleaaaaseeeee.

 

falak pema's picture

hey michael I thought you had an existential problem, I now realise it was just a question of avatar change.

Appearances are so important in this world.

Unless Mike is not the Mike of old I'm being bold so I'm told when I bike to avoid running in my running shoes  which are not Nike; as I point my pen torch where its not bright; am I rite or am I rong when I ring the gong, bong bong.

Manipuflation's picture

So you two are in a first name calling relationship?

Dewey Cheatum Howe's picture

Must have me confused with someone else who used this name. It is a well these days an obscure pop culture reference to the Three Stooges.

NidStyles's picture

Soo many noobs here. Michael used to be the screen name with that particular avatar. He hasn't been around in like 7 months.

Dewey Cheatum Howe's picture

I don't know who you are referring to but I am not Mike. Maybe a former poster used this name? Seriously I'm not pulling your chain either.

Caput Lupinum's picture

A dingo ate my portfolio....

criticalreason's picture

and this report side by side with a peak resources thread.....is it really true that just as we are about to run out of commodites and with high commodity inflation, one of the biggest commodity producers is suffering more than anyone?

Peter Pan's picture

Australia has no doubt been a lucky country because her reources have made up for the lack of vision shown by her politicans.

Iron ore which is baically just another kind of dirt is still selling for over$100 per tonne but no one knows for how long given the uncertainty about China and the new sources coming on stream in Africa. And let us not forget Brazil's Vale.

On top of all this let us not forget that wage levels in the mining sector have become very rich and are a further drag on competiteveness.

Many projects are being shelved and many overseas LNG projects are coming on stream which will impact pricing negatively.

On September 14th it looks like the government will be soundly thrashed and rightly so following consecutive deficits now headed for well over 300 billion after splurging on non productive expenditure to build school halls to avoid the GFC correction as well as stuffing rooves with insulation that then had to be removed, not to mention causing about 100 deaths and many houses to burn down due to shoddy workmanship. The idiotic minister was rewarded with another portfolio.

The biggest pain is reserved for workers and the average man's pay packet. The mining boom has contributed to around 50% of pay increases over the last decade and this has made Australia uncompetitive as evidenced by scores of manufactuers either closing down or shifting to Asia.

The recent falll in the dollar is too little and too late and with the exception of fleeing Chinese hot money seeking a refuge outside China, it appears that real estate which is Australa's biggest sport on and off TV is destined for a correction even though itis still posting some dangerously optimistic gains thanks to lowered interest rates and Asian buyers.

Like I said, lucky country but stupid politicians who have been happy to see the ground being scooped and sent to China but very little by way of value added projects for creating non-dependancy on China as well as creating longer term skilled employment.

Hopefully if the dollar slumps it might give a reprieve of sorts although imported inflation will create problems.

Yes, a lucky country which has perhaps been too lucky for its own good.

Bazza McKenzie's picture

For the benefit of US readers you might have noted that the catastrophic government which will be destroyed in September is a Labor Party government, which is rougly equivalent to the Democrats in the US, lead by a woman, and is unarguably the worst government Australia has had in living memory.

thestarl's picture

Government debt to GDP is amongst the lowest in the world,average growth 2 to 3% as with inflation,AUD above parity with USD over 1.5 trillion in retirement savings a decent education and health system.

I think you spend to much time reading the Murdoch press Bazza.

NidStyles's picture

Except the policies of the government are being upheld by the strong mining industry and heavy taxation.

 

Totentänzerlied's picture

It would the first time in history a centrally planned economy successfully pulled off anything larger than a dinner party.

mkkby's picture

Well, that particular economy, centrally planned or not, has taken over most of the world's manufacturing capacity.  I'd say that moves them to the head of your dinner table.  The western world is bowing down to them now.

Ponder this, chimp brain -- how does the world look in 30 years when the US is no longer is able to fund a trillion dollar military?

NoTTD's picture

Joke which went around when the Soviets began buying wheat from the US:

Functionary: Why is the glorious USSR buying wheat from the running dogs of the US?

Kruschev:  We will order all the wheat they can provide, which will cause the price to rise so they produce more and more wheat and the price will go ever higher.  Soon it will become so profitable to grow wheat that they will devote more and more of their land to it, finally their capitalist greed will cause them to tear down their factories, rip up their roads, to plant more.  At last, the entire country will be one huge wheat field.

F: And then?

K: Then we cancel the order. 

11b40's picture

When China quits buying and runs off their stockpiles, economies crash, killing demand for the products they build from those stockpiles...then, their economy crashes.

Or, China buys mines in Australia So. America, Africa...and later foreign governments decide to nationalize, if they don't prohibit the sales outright in advance.

The tango is a complicated dance.

Peter Pan's picture

By the way, let me add that even hamburger flippers earn $17.63 an hour in Sydney plus superannuation, plus 4 weeks holiday, plus long service leave, public holidays etc.

Lest you become envious, let me inform you that rental on a 2 bedroom unit in the eastern areas of Sydney cannot be found for under $450 per week.

timbo_em's picture

Maybe just like the US has found a way to recreate a housing boom without using too much lumber, China has found a way to tun its economy without using raw materials and energy?

mickeyman's picture

Does GFC = Great Fucking Collapse?

pauhana's picture

I'm having a hard time reconciling this article with the one two down from it on peak gold - the rise of commodity prices that will bankrupt us all.  So which is it?

Yen Cross's picture

      Investors aren't piling out of the Australian 2 year and 10 year bonds. The 10 year is no where near the March 2013 highs. I think the aud/usd trade is due for a short squeeze. Lot's of news out of Australia later today. Lots of news out of China and Australia this week. One way or another, we'll find out the direction of that trade this week.

    http://www.investing.com/rates-bonds/australia-2-year-bond-yield

    http://www.investing.com/rates-bonds/australia-10-year-bond-yield

 

Cycling Fish's picture

THank God the "mining boom" is dead! The high Aussie dollar has been killing manufacturing companies and East Coast jobs for years.

If we can get the Aussie back around 70  - 80 US cents our manufacturing sector will expand and soak up unemployment.

 

InanimateCarbonRod's picture

There is an obvious disconnect between resource/commodity economies (ahem Canada/Australia) and the performance of companies that are dependant on those areas (hello bank and finance!).  Otherwise, how else would one explain the runup in local financial service companies in the respective countries in spite of the fact that they are all reporting significant slowdowns in capital market revenues, M&A activity etc.?

How else to explain the +17x multiple on stocks like MQG:ASX or RY;TSX?

Anyone want to buy a vowel?

M _  N _ P _ L _ T_ _ N.

thestarl's picture

Some time in the not to distant future a gereration of Ozzies are going to learn all about the Dutch Disease....parties over.

mallymcl's picture

I am chasing a very good little article I read that was pretty much saying... during resources booms how many small cap companies with no idea go around, get money of people who have no idea, achieve nothing etc and ultimately at the end of these booms you are left with the very small % of companies who have achieved something.

It was quite bearish/pessimistic but there was a lot of truth to it also. Anyone?