One Word of Advice For Those Playing the Australian Boom

By Bill Bonner

One Word of Advice For Those Playing the Australian Boom

12/10/10 Baltimore, Maryland – We should have more thoughts. But to tell you the truth, many of our thoughts went out of our head on our recent round-the-world trip. You need constant air pressure in order to maintain thoughts. And regular hours. Start getting up at midnight and going to bed at noon; thoughts have a way of disappearing by late afternoon. If they were ever there in the first place.

One thought that disappeared somewhere over the pacific was this:

The suntanned country must be close to getting burnt.

Australia is booming. Prices are high. It cost $38 for breakfast in the Crown Towers hotel. Even so, you could have only one cup of café latte. You’d have to pay extra for another one.

Our total bill for 3 nights was over $2,000. Impossible? Well, we thought so too. But when you throw in a bit of laundry…transfer from the airport…and breakfast for a friend, not to mention a consumption tax of $184, you end up over 2,000 bucks – without even a single dirty movie.

The boom has been going on Down Under for the last 19 years. Not even the Great Correction is stopping it. Each year, it sells more dirt to Asia… from 40% of its exports 10 years ago to 72% today. It should probably just sell all of Western Australia to the Asians and be done with it.

Meanwhile, the Ozzies enjoy their boom…raise their glasses…and throw raw meat on the barbie. Our colleague’s house in Melbourne has risen 200% in price since we sent her there four years ago. And it’s still going up. Converted shipping containers, transformed into mobile homes, sell for as much as $1 million. And truck drivers in the mining areas earn more than $100,000 a year.

How long can this go on? We don’t know. But our advice to our colleague was simple enough:

“Sell!”

Bill Bonner
for The Daily Reckoning

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"Patriotism means being loyal to your country all the time and to its government when it deserves it."-- Mark Twain

"Inter arma silent Musae"--when the weapons speak, the muses fall silent.

An't nanum hearm deth, doth hwaet ye willath.

It is forbidden to kill; therefore all murderers are punished
unless they kill in large numbers and to the sound of trumpets. -Voltaire

Economic Left/Right: -3.88
Authoritarian/Libertarian: -4.36

How can you tell the boom is over? Maybe she is selling 4-5 years too early? Bubbles tend to go on for longer than you believe possible. China still got a couple of trillions of $ reserve to spend...

It;s all about timing... And timing is a bitch.

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Unless otherwise specified, I am posting as a regular poster. When I will act as a mod, I'll make sure you're in no doubt.

Also from a Peak Oil perspective, Australia looks pretty good. It's a country with lots of natural reserves (they are one of the major producers of uranium, for example), and at the same time, the country is not very densely populated, i.e., they can easily feed themselves. Looks to me like a winning ticket after the end of cheap fossil fuels.

Quote:

It's all about timing... And timing is a bitch.

It is indeed, but it is better to pass up a possible winfall, with the risk of loosing everything in a bust, and take some profits that you can then play with further if you want.

F

__________________
"Patriotism means being loyal to your country all the time and to its government when it deserves it."-- Mark Twain

"Inter arma silent Musae"--when the weapons speak, the muses fall silent.

An't nanum hearm deth, doth hwaet ye willath.

It is forbidden to kill; therefore all murderers are punished
unless they kill in large numbers and to the sound of trumpets. -Voltaire

Economic Left/Right: -3.88
Authoritarian/Libertarian: -4.36

That starts to sound a bit more like an investment strategy... beyond just "sell"...

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Unless otherwise specified, I am posting as a regular poster. When I will act as a mod, I'll make sure you're in no doubt.

Bill Bonner joins the many American economic analysts who arrive at superficial judgements about the Australian economy without any real investigation. If he chooses to stay at the Crown Towers, beside the Melbourne Casino, it costs what it costs. If he wanted a cheap, American-style breakfast with reasonable coffee he could have ducked around the corner to the nearby McDonalds. There are plenty of five star hotels in Melbourne that cost rather less than the Crown.

Ross Gittins, economics editor of The Sydney Morning Herald writes today:

[...] The thought that we're making a lot of our income merely by digging stuff out of the ground and shipping it overseas seems to worry a lot of people. Is that the best we can do?

Considering the fuss politicians, economists and the media are making about the resources boom, you could be forgiven for thinking mining had taken over the economy, but it isn't true. A lot of people think a nation makes its living by selling stuff to the rest of the world. That isn't true, either. Roughly 80 per cent of all the goods and services Australians produce (gross domestic product) is sold to Australians, not foreigners. Similarly, roughly 80 per cent of the goods and services Australians buy is bought from Australians.

In other words, our economy is roughly 80 per cent self-sufficient. At a pinch, we could make it completely self-sufficient, though this would involve a significant decline in our standard of living. Why? Because we'd be denying ourselves access to all those goods and services that other countries produce better or more cheaply than we could. [...]

Though minerals and energy now account for about 42 per cent of our export earnings, this still leaves 58 per cent coming from other parts of the economy: 18 per cent from agriculture, 17 per cent from manufacturing and 23 per cent from services (particularly tourism and education).

When you get down to it, mining accounts for only 7 per cent of the value of all the goods and services Australians produce. That leaves agriculture accounting for 3 per cent, manufacturing for 12 per cent and the services sector for 78 per cent. [...]

There is no doubt that the booming market for digging up and exporting Australia has its down side. Amongst other effects, it has fueled a rising exchange rate. The AUD is essentially on parity with the USD, another factor that would have drained Bonner's pocket. (In times past it has been worth less than 60 US cents.)

Australia's terms of international trade are higher than they have ever been with the exception of a brief period during the Korean war, when there was an extraordinary peak in the price of wool. Informed opinion is that they will moderate over the next decade or two, but stay much above levels of towards the end of last century.

If Bonner thinks that he paid too much then he ought to get a better travel agent. He should also demand that his employer pay him in Swiss francs or yen rather than US dollars. And francly, if this is typical of the depth of his economic analysis, I'd ignore him.

Those who believe that correlation proves causality may be excited by the following chart, prepared by Alexander Liddington-Cox.

It clearly indicates that when Australian cricketers are winning the Ashes, the Australian economy goes down the tubes, but when, as at present, British cricketers are winning, the British unemployment rate sky-rockets:



Australia's unemployment rate is currently 5.2% and the economy is expected to grow by 3.5% in 2011. The usual disclaimer about forward-looking statements applies of course. Who knows what black swan events are out there waiting to happen?

Originally Posted by roadkill

A lot of people think a nation makes its living by selling stuff to the rest of the world. That isn't true, either.

So you got only 20% trade openness (For a discussion on trade openness measure, see: Trade openness is popularly measured as (X+M)/GDP in the hundreds of studies
published to date. However, irrespective of the data set used, the world’s biggest trading countries such as the USA, Germany, Japan, and China are consistently determined to be closed economies using this measure. How sensible is it to use a measure of trade openness that determines that the world’s largest trading countries are closed from international trade? This paper suggests a new measure of trade openness that more accurately reflects reality by combining two important dimensions of trade openness: trade intensity and the relative importance of an economy to total world trade. http://www.business.curtin.edu.au/fi...lli_wilson.pdf). I think Germany is actually pretty open on that traditional measure, as is France but they're mostly open to each others and to the EU, i.e. the EU itself is pretty closed. As you'd imagined.

But that's not a guarantee of anything. The USA and China are pretty "closed" economy, as the article points out. They still suffered severely.

Quote:

Though minerals and energy now account for about 42 per cent of our export earnings, this still leaves 58 per cent coming from other parts of the economy: 18 per cent from agriculture, 17 per cent from manufacturing and 23 per cent from services (particularly tourism and education).

You got to be kidding me. Anything making more than 15% of the trade balance is pretty meaningful. 40% is huge - Especially as 17% for 'manufacturing' and 23% for 'services' will cover a great variety of diverse industries that may not be correlated. As opposed to mining - Which is only one thing, unless you got some severely different and uncorrelated extracting activities (unlikely).

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When you get down to it, mining accounts for only 7 per cent of the value of all the goods and services Australians produce.

And the subprime sector was small and the US GDP only went down 3% in 2009. Only 3%. And look at what's it's been doing to them...

Quote:

And frankly, if this is typical of the depth of his economic analysis, I'd ignore him.

I tend to take the doom sayers Fredfredson seems to love so much with a huge grain of salt. But the article you quoted in reply is an exercise in denialism. We'll find out if China hit a wall and burst within the next 18 months to 2 years... If they do, I am willing to bet CHF10 that Australia will scream like a stuck pig...

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Oh dear.

Another analysis from the top without looking at the data.

Quote:

And the subprime sector was small and the US GDP only went down 3% in 2009. Only 3%. And look at what's it's been doing to them...

This is relevant because...? Australia had, and has, a sensible sub-prime lending market and its major banks, scarred by the events in the early 1990s when then largest bank Westpac almost collapsed, has a sound financial sector.

Suppose demand from the Old Western Hemisphere (specifically the northern half) and from Old Europe (specifically the western half) vanishes down the tubes.

What then for Australia?

India and China plan $100b trade in 5 years

India and China have spelt out a clear strategy to scale up bilateral trade to $100 billion in five years from an estimated $60 billion in 2010-11.

After the summit, prime minister Manmohan Singh and Chinese premier Wen Jiabao met here on Thursday, the latter agreed to the imbalance in trade by providing greater access to Indian pharmaceuticals, IT services and agricultural products. Bilateral trade between the two countries is hugely skewed in favour of China, which enjoys a surplus of $19 billion. As a first step, cooperation between drug companies of the two countries will be enhanced, and China will give Indian IT services greater access to its market and sort out phyto-sanitary issues holding up farm exports from India.

China also committed to pushing Indian products and services across regional and its own trade platforms, apart from advancing trade facilitation. A joint communiqué reflected the shift in focus with trade and investment taking centrestage.

Commerce secretary Rahul Khullar told Financial Chronicle that achieving $100 billion trade with China was a distinct possibility. But he had a word of caution: “If the $40 billion additional import happens only from the Chinese end,it does not work for us.”

Khullar said China must work out a mechanism to correct the trade balance. “Trade worth $100 billion makes sense only when its 50 per export from India and 50 per cent import from China and not 80 per import from China, as it is happening today. This is an unsustainable situation,” he added.

China and India also agreed to expand economic cooperation in infrastructure, environment protection, information technology, telecommunications, investment and finance.

Chinese companies would invest in roads, railways and manufacturing in India. Both sides also agreed to encourage mutual investments and project contracting between enterprises of the two countries.

On Thursday, the two sides signed six agreements, providing for partnership in banking, green technologies, water resources, media and culture.

A memorandum of understanding (MoU) between China Banking Regulatory Commission and the Reserve Bank of India would have 10 banks from each country to operate in the other.

Similarly, an agreement between the Exim Bank of India and China Develo*pment Bank Corporation would support investments both ways. The Exim Bank chairman, T B A Ranganathan, told FC, “ The MoU will lead to financing industry projects in both countries, apart from exchanging information and knowledge.” [...]

This report is from an Indian business web site with which I am not familiar, but it is consistent with reports yesterday from The Australian Financial Review (gated), which maintains correspondents in Beijing, Shanghai and New Delhi.

As if that is not enough there is also the growing economic influence of South America.. Brazil's Vale is effectively challenging Austra/English BHP/Billiton and Swiss/British Rio Tinto to build competition in the extractive minerals market. That can only help to grow its customers.

As Nassim Nicholas Taleb has gone to some lengths to point out, extreme events that upset the apple cart occur more often than people suppose. I am open to the possibility that some cataclysmic event may occur that reduces our entire continent to destitution. If anyone else knew what that event might be, they would be offering to sell futures contracts from which buyers would benefit from the economic destruction of Australia.

Unfortunately there is no current market, as I think I could make useful money by buying a few.