‘Australia is a leveraged time bomb waiting to blow’: SocGen

‘Australia is a leveraged time bomb waiting to blow’: SocGen

Business Insider | 13/06/13 | Last Updated: 13/06/12 2:34 PM ET
Australia’s GDP growth expanded merely 0.6% in the first quarter. This was after a 0.6% rise in Q4 2012. Meanwhile, there are a lot of people shorting the Australian dollar.

Minus export growth however, Societe Generale’s Albert Edwards writes that gross national expenditure (GNE) has fallen for two straight quarters.

“One of the biggest economic bubbles in history is now about to go into the Minsky masher,” writes Edwards. This refers to periods of speculation that lead to crisis, and was named after economist Hyman Minsky who wrote about the inherent instability of bull markets.“Make no mistake – the Australian tide is going to be heading way out as China is about to have what our economist Wei Yao described as its’ Minsky moment’, or in layman’s terms, its day of reckoning! But even before China suffers this ‘moment’, final demand in the commodity dependent Western Australia (WA) has fallen into recession. The Australian Treasury’s preferred measure of activity, State Final Demand (SFD) contracted a striking 3.9% qoq (flat yoy) led by a sharp 10.7% qoq decline in private investment. This follows a 0.9% decline in 2012 Q4 (previously estimated to be 0.5%).”

This isn’t the first time the folks at Societe Generale have warned about Australia. Last year, Dylan Grice, who has since moved on to Edelweiss Holdings, published a note in which he described Australia as “a credit bubble built on a commodity market built on an even bigger Chinese credit bubble, Australia looks like leveraged leverage, a CDO squared.”

Edward follows on that today:

“We repeat the prognosis we gave this time last year that Australia is a leveraged time bomb waiting to blow. It is not a CDO, but a CDO squared. All we have in Australia is, at its simplest, a credit bubble built upon a commodity boom dependent for its sustenance on an even greater credit bubble in China. Yet even with Australia having enjoyed a commodity export boom it still managed to rack up a current account deficit of 4% of GDP last year! Australians have been living beyond their very ample means for a long, long time. Of all the economic bubbles I have seen over the last 30 years in this industry, this one is even more obvious than the rather prominent nose on my increasingly haggard face. And its ultimate fate is obvious to me too.

“Although a Chinese bumpy/hard landing will bring Australia to its knees, what will really deliver that killer crunching kick into the solar plexus will be all too familiar to followers of credit fuelled economic bubbles. What will send Australia into a deep recession after 22 years is the collapse in its grotesquely over-valued housing market. The outstanding 2013 Demographia International Housing Affordability Study has just been published and every single Australian region comes out as severely overvalued. And as in the 2012 study, 5 of the 15 most expensive cities of the world are in Australia! If China really is, as we believe, about to have its ‘Minsky moment’ there is no shadow of doubt in my mind that Australia will, end up in a deep, deep recession as 22 years of complacency and excess are unwound.”

With Australia having gone 22 years without a recession, their appetite for debt has grown too. The problem is, trouble in China, spells trouble for Australia.

As for the politicians slamming negative commentary following recent data releases, Edwards writes this just raises more “alarm bells.”