Domestic Bliss
There is a massive challenge looming in plain sight for asset prices in Australia but before we lay out this threat to long standing Australian domestic bliss, we must make a quick stop at the macro station.
In the US, rapid 1% plus declines across the yield curve suggest markets are spooked by something more consequential than CPI or payrolls. We’ve always believed, as nature intended, the legacy imbalances of modern era unconventional central banking are finally coming home to roost. Exacerbated by the gross excesses of post Covid fiscal stimulus and monetary expansion, the US financial system in particular (we’ll leave European bureaucratic peculiarities for another note), is saddled with untenable amounts of malinvestment and unproductive debt. Even the most optimistic bulls recognise excessive debt has consequences.
Combine this debt with excessive .gov growth and the associated retarding over regulation and we get what we’ve got today. In retrospect, the $10 trillion tidal wave of covid liquidity was sufficiently large to suspend the natural relationship between over indebtedness and its natural consequences.
The chart below shows, since the buildup of US debt began properly in the 1980’s, not only have rates been in steady decline, but on every occasion 10 year yields have backed up meaningfully, a financial crisis has ensued. The chart demonstrates remarkable consistency since 1985 but for the covid liquidity cycle.
U.S. 10-Year Treasury Yield (1977-2023)
Truth be told, we ‘re shocked long rates have been able to rise without causing more visible damage to the financial system but we’ve learnt the type of systemic indemnity $10 trillion can buy!! We now expect rates to decline further and faster than current consensus. Gold knows. More on this down the page.
On a more Australian focused outlook, we found a recent piece of analysis from Macquarie Bank Senior Global Strategist, Viktor Shvets, quite impactful. Australian investors should consider these expert views closely. His main comments were in relation to the current malaise in commodity prices and what could possibly drive them higher from here. He opines the current demand supply and pricing fundamentals could well be the new normal.
- “We are globally living in a twilight zone, no recession, no strong recovery as there is nothing to recover from. No bad debts, no horrible stuff, not yet at least (but we know what Central Bank response will at even a sniff of systemic stress)”
- “Growth and growth rates are getting shallower and shallower. If you go back a decade or two global growth rates were 4 -4.5%, then it was 3.5%, then 3% and today we’re barely travelling in the low 2’s. This 2% or lower applies to 2024, 2025 and will not be much different in 2026”.
Viktor then goes on to present one of the main reasons for high growth not returning (including excessive .gov and debt) is that China will not support global growth rates the way it has done over the last 20 years for the foreseeable future.
- “Chinese leadership now understands that the 4 stimulus cycles they have done since 2008 have resulted in a massive explosion of debt, from less than 5 to 65 trillion dollars, resulting in a significant decline in capital utilisation”
- “China now needs $10 of investment for every $1 of GDP growth, so they fully understand they cannot do another cycle the way they previously did over the previous 15 years or so”.
- “Therefore, it is unlikely China will support a global commodity complex the way it has done for the last 20 years.”
- “So, if you don’t have significant reliance on capital intensive stimuli, whether infrastructure or real estate, there will not be the support provision for commodities such as iron ore, copper or oil”.
- “Base case, China is incredibly unlikely to be anything like what we have seen in the previous 15 years and there is no other country in the world today that is able to replace China”.
And in Viktor’s view, this will stay this way for at least 10 years or longer. You’ve been warned.
From an Australian perspective, despite the undeniable challenges laid out above, investors still naively believe, “she’ll be right”. It won’t. What we do know is that struggling domestic and an international economic growth, constrained by debt but unburdened by what has been will be met with a mountain of stimulus.
However, this stimulus will be ineffective this time, there is no new “China” for Australia and we’re sure you’ve noticed India and others are preferring cheaper commodity suppliers than expensive ESG alternates. Such was the China stimulus through and post GFC that Australia felt very little of the recessionary conditions faced by the rest of the OECD.
With China out of the picture and domestic miners laying off workers at a rate of knots, what now underpins Australia’s insane (by any global metric) residential property values, especially on the East Coast?
And what happens from here to provide support? Lower rates, more debt fuelled stimulus, triple first homebuyers’ grants? We’d hate to be long AUD in this scenario. As we mentioned above, Gold has sniffed this out already, the gold miners not so much, yet!! AUD 3,700!
Even the vampire squid is in on this one:
- UBS: $2,600 gold by year-end
- Morgan Stanley: $2,650 gold in Q4 2024
- Goldman Sachs: $2,700 gold by December (base case)
However, real gold allocation yet to begin and if the month of September throws up a buying opportunity, just say thanks.
Gold & Gold Miners as a Percentage of Total Global Assets, 1921 – 2024
Source, Tavi Costa, Crescat Capital; www.silberjunge.de, Erste Group Research, Lawrence Lepard, Bloomberg, McKinsey & Co. Ltd.
Bonus Chart, despite the lack of forthcoming Chinese stimulus, this is just ridiculous.
Source: The Bank Credit Analyst
And finally, “if socialists understood economics, they wouldn’t be socialists”
Peace.
