5 Reasons This Country Is In For Big Trouble

Capitalist Exploits's picture

By Chris at www.CapitalistExploits.at

My little girl came into my office the other day and was looking over my shoulder. Suddenly she ran out of the room calling to her brother. “I know Dad’s password! I know Dad’s password!”, she yelled. “What is it?”, my son asked? “It’s 8 stars.”

Sometimes we look at things believing with sincerity we know and understand what we’re seeing. But we’re really as dumb as a box of rocks.

This brings me to our “trusted” friends at the rating agencies.

In March of this year Fitch took out their big rating agency stamp and hammered a AAA rating on Australia:

“Australia's 'AAA' rating is underpinned by the economy's high income, strong institutions and effective governance. The free-floating exchange rate, credible monetary policy framework, low public debt and growing recognition of the Australian dollar as a reserve currency allow the economy to adjust to changing economic conditions.”

Say What

Reading rating agency reports is like being immersed in a warm bath, with a glass of hot milk, while being read Winnie The Pooh and Peter Rabbit. You feel all warm and fuzzy inside but it’s one big fairy tale.

Let me take a necessary sledgehammer to the above statement.

“The economy is underpinned by high income, strong institutions and effective governance.”

Actually there are 4 pillars underpinning Aussie economic growth:

  1. The investment bubble in mining. Many of the high incomes have been tied to the mining boom. This is now over.
  2. Sales of exports to China which, while still there, have been falling steadily thanks to a hollowing out of the manufacturing sector.
  3. Government spending, which they keep promising to cut back on. Ha!
  4. Rising mortgage debt.

Of the 4 pillars above the only one still rising is mortgage debt. Pillars should be built of concrete. This one is built from polystyrene and it's holding up the economy.

I'm struggling to understand how an economy increasingly running on the over consumption of real estate financed by mortgage debt is anything but insane?

For those of you who think in pictures, Jonathan Tepper of Variant Perception did his own analysis of Australian real estate and provides some excellent graphical representations of the problem:

Residential Mortgages

Move on, nothing to see here. Remember, Australia is different. It’s the lucky country.

Or is it?

High prices in themselves are not a problem so long as they are relative to high incomes. An executive living in NY, earning $500,000 a year, and living in a $1m house is the same as an executive in Kansas, earning $100,000, and living in a $200,000 house.

But over in the "lucky country" incomes bear no sustainable relationship with asset prices:

Household Debt

For context. Back in the 80’s private sector debt to GDP was 20%. Today it’s a whopping 95% while total household debt (mortgages, credit card debt, consumer loans) clocks in at 123% of GDP - the highest in the world.

Debt to GDP

Housing debt has now grown to 125% of GDP. This is only a problem if you think history repeats. If, on the other hand, you subscribe to the "we're different because the weather is better here"theory then stop reading now because the rest will just have you hurling insults at me.

Let me remind you that Ireland and Japan had ratios of 3.5 times GDP at the very peak of their respective booms. Right before epic busts that "nobody" saw coming.

So how is this mother load of debt financed?

Interest Only Residential Loans

Nearly half of all mortgages in Australia are now interest only mortgages. Oy vey!

The only reason you’d pay interest only on a mortgage is if you were letting the property and receiving a positive yield or if you simply couldn’t afford to make principal payments. Since yields are strongly negative, we know borrowers can't actually make principal payments.

The banks tell us they’re just fine but their loan books are so heavily biased towards residential real estate at a time when the manufacturing sector is being completely hollowed out. The way it's supposed to work is that incomes drive asset values (not the other way around). None of this will end well.


According to Fitch (and Winnie the Pooh), it’s perfectly fine. The next point made by Fitch...

"A free floating exchange rate, credible monetary policy, and low public debt."

Let me tackle monetary policy first. Everywhere in the developed world it’s incredible.




1. impossible to believe.

As for a floating exchange rate: when I grew up there was a regulation that all kitchens by law had to have two exits. Most household fires begin in the kitchen and nobody wants to be trapped. You need an exit. And a free floating exchange rate is like the kitchen back door. It is the proverbial exit valve.

When investors see fire, they bolt out the “kitchen door” and the exchange rate is repriced.

It is true that public debt is relatively low, however private debt, as I've shown earlier, is outrageously high. The US mortgage crisis had little to do with public debt and it still rocked the world.

And then there's this...

...growing recognition of the Australian dollar as a reserve currency allow the economy to adjust to changing economic conditions.

Where to start?

Adjusting to economic conditions?

Do they mean China, commodity prices, the emerging market slowdown, relative outperformance of the US economy, US interest rates tightening cycle, and the pending Aussie housing crash?

If so, they certainly have some adjustments to contend with.

And so despite what Fitch may have to say I'm short the Australian dollar and here are 5 reasons why:

  1. The USD bull market (as discussed here, here, and when explaining how the carry trade works), is not over yet. This is de facto negative for the Australian dollar.
  2. When the rest of the world is loosening monetary policy and the Fed are either not hiking or hiking the synthetic yield difference becomes self reinforcing.
  3. With $2 trillion in household debt, on the back of a $1.6 trillion GDP, the RBA will continue to slash rates. In so doing, the yield differential that the Australian dollar has been enjoying evaporates. Traders who have gotten used to playing the AUD/USD carry trade will have no incentive to do so, thus reversing capital flows.
  4. Everything that Australia makes, sans housing stock, is under pressure as China grapples with a domestic credit bubble and excess capacity.
  5. As I tweeted back in February, Australian banks are beginning to see an increase in loan impairment.

Commonwealth Bank

Banks are going to find that hiding the real story is going to become increasingly difficult. Maybe Fitch should take notice.


I've seen Australian houses and believe me, they're just as boring as houses elsewhere in the world. And despite what the fine folks at Fitch have to say on the matter, Australia is not A-OK.

While Australia has certainly been the lucky country: sporting good weather, littered with commodities, an educated workforce, and even Kylie Minogue, there are some major imbalances which need to be worked out. With an open capital market and floating exchange rate, a housing bust will only add extra juice to a currency which I believe will weaken regardless.

- Chris

"Think it over, think it under." - A.A. Milne, Winnie-the-Pooh


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wholy1's picture

The "modus operandi" of "rating agencies":  rating the majority of retail parasitic "investors" ("persons" who provide no real productive contribution to the "common good/prosperity" as the easily/eventually hood-winked.  Difficult to have any empathy for said "investors" when their illusory "debt wealth" gets zeroed out.  What's the nutritional value of paper and electronic bits?

InnVestuhrr's picture

Eleoquent declaration of envy, personal failure and worthlessness coming from a loser who has created nothing, built nothing, earned nothing, saved nothing.

Winston Churchill's picture

Not to worry, everything is dinkum according to my sister in law in Oz.

Lost in translation's picture

Know-nothing oldster here.

Please correct me if I'm mistaken, but, since Oz is a signatory to the TPP, won't their mining sector be wiped out if they can't sell to China? China isn't included in TPP so I'm assuming there are stiff financial disincentives (penalties) to TPP countries that sell to them.

Am I missing something?

Jack Oliver's picture

You are likely spot on - Australia has SHIT on China's goodwill completely !! 

Squid-puppets a-go-go's picture

china is a bigger trade partner to Aus than the US is.

Unless we are ruled by total imbeciles - and im not saying we're not - there's no way theyd sign a TTP that disallows trade with china

sekhars's picture

TPP shit production has limited demand any where now. Monsanto is a dead company now with protest getting out of hand around the world ? what else US produces which can be fiscally competitive ? nothing except USD. TPP is nothing but may be some pharma which people may have to buy and as no one can supply them 

vegan's picture

"Credible monetary policy".


Well, Australian gold kangaroos have a face value of $100, making them legal tender. I might go long on some of those, just because it seems strange putting 100% of my cash into silver.

Jack Oliver's picture

Why would CHINA buy off us ?? (Australia) when they can develop strong business relations with other BRICS countries !!!

We are allied to the Zionist/US - Unless we start treating our biggest trading partner with a little more courtesy - CHINA will tell Australia to FUCK right off completely !! 


Who would blame them ???

GreatUncle's picture

The Obama new TPP Pacific trade agreement is going to blow Australia out of the water because with the US taking that kind of position Australia just got caught between a rock and a hard place.


The countries are :-


The TPP is between Australia, Brunei Darussalam, Canada Chile, Japan, Malaysia, Mexico, New Zealand, Peru, Singapore, the United States, and Vietnam.


Excluded :- India and China.


The mining situation under a such an agreement deteriorates rapidly you are NOT ALLOWED TO SELL TO CHINA WITHOUT TARRIFS. Ooo - la -la what you going to do? Like what is happening all over the world right now as nations try to make thier economies work you need self determination and sovereignty more than being locked into rigid trade agreements.


US through the utilisation of puppet states does not remove the sovereignty issue so now there becomes a conflict of interest like in the UK and Cameron BREXIT or BREMAIN. The US wants BREMAIN to the detriment of the population to support its economy and Australia can now have a TPP or NOTPP position.


JailBanksters's picture

The Number one reason is, it's totally run by Zionists since the day is was founded.

And it makes no difference who is sitting in the corner office.

JailBanksters's picture

I see the Jew Bots are still active

buttmint's picture

disjointed article. Please call an editor....por favor!

hooligan2009's picture

are young people religious? who do they worship? God or Darth Vader?



Nexus789's picture

Preying for a crash might not work out the way they want. Sure asset prices will fall and may fall a lot but for that to happen the economy has to be screwed and the likelihood is that people will loose their jobs. On top of that the banks will have hemorrhaging balance sheets and make loan terms onerous so even if you see that nice house at $400k instead of $800k you probably won't be able to get a mortgage.

0b1knob's picture

"This Country" on ZH =/= Aus-fail-ia.