Wolf Richter: Australia Runs out of Luck, Now Needs a Miracle

By Lindsay David, Australia, author of Print: The Central Bankers Bubble, founder of LF Economics. Originally published at Wolf Street.

Australia, you have officially run out of luck.

While leveraged property investors in Sydney and Melbourne are desperately hunting for a senseless “net-yield” that makes the yield on a German 2-year bund look rewarding, the Australian mining sector is screaming towards what may be one of the greatest and colossal economic breakdowns in modern Western history.

As iron ore illustrates, this is not a downturn; this is a spectacular crash in the spot price of a commodity. And the sad news is, there is no new demand scenarios (unless China builds more apartments than its population) to suggest that more supply is needed to fulfil the demand of the global economy.

Australia made two bets.

The first bet was that China would willingly consume every ounce of iron ore Australian miners could dig from the ground and pay a premium.

Unfortunately, Australia has built an (incredibly sophisticated and streamlined) iron ore production operation so big that the world may never be able to consume all that it can supply. Our treasury, RBA, Miners and politicians assumed that China would forever grow. But they failed to calculate over the long-term that if China continues to consume all the iron ore dug from Australia’s underground, the world’s most populous nation would literally need to build a national subway network, literally an airport every 22 kilometres apart from each other and literally more dwellings than people.

I truly wonder, how many decent Australians lost their job challenging their employer, whether it be in the mining industry, or at government level for doing the maths and saying something is simply not adding up.

And from the looks of it, as I strongly argued in my recent book “Print: The Central Bankers Bubble,” as a signal to the end of the Chinese property boom, if their stock markets were to surge, it meant that property investors are pulling out of the ‘no-yield’ real estate market and pumping their funds into Chinese stocks. My gauge on this seems to be spot on.

The second bet this nation made was to leverage Australian households through the roof and create an economic model that shares the same risk profile as a Ponzi scheme in order to assure that house prices only rise creating never-ending capital gain to those who took the most abnormal sums of risk to invest in a zero-sum game.

House prices have already ‘crashed’…yes ‘crashed’, across a plethora of our mining towns. These real estate markets were ‘property bubbles’, yes ‘property bubbles’ that have already ‘burst’. So for anyone to suggest there are no housing bubbles in Australia is nonsense.

Outside of Sydney and Melbourne, property prices have ‘stalled’. Not because these markets are taking (as the real estate pundits would say) a short breather, it’s because you probably have first time homebuyers in Adelaide thinking to themselves, ‘why the heck should I leverage my life away to live in this expensive shit-hole?’

I don’t care whether we are talking about Adelaide, Hobart, Alice Springs, Sydney or Melbourne. These property markets are as ridiculously expensive as they are today because they were fuelled by excessive sums of available credit which created an artificial sum of buyers in an Irish-style bubble myopia frenzy. And unless there is a ‘miracle’… it’s by all mathematical accounts, downhill from here.

I stand by my prediction that I made in my book ‘Australia: Boom to Bust’that the spot price of iron ore will touch $20 with three of the five largest iron ore producers in Australia going bust; that property prices across Australia will fall back to their long-term median house price to income ratios; and that at least one of the big four banks will either go bust, be bailed out, or nationalized before the end of 2017. And based on the recent data points, I’d say this prediction is looking pretty good! But this prediction will be a truly heartbreaking result for a good nation, where good people will unfortunately lose everything they have spent their lives working for.

Just when Australia’s resource boom has collapsed, and manufacturing too – though at least the housing bubble is still going strong in some places – attention turns to the banks. Read…  No Major Country Is More Exposed to Banks than Australia

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About Lambert Strether

Readers, I have had a correspondent characterize my views as realistic cynical. Let me briefly explain them. I believe in universal programs that provide concrete material benefits, especially to the working class. Medicare for All is the prime example, but tuition-free college and a Post Office Bank also fall under this heading. So do a Jobs Guarantee and a Debt Jubilee. Clearly, neither liberal Democrats nor conservative Republicans can deliver on such programs, because the two are different flavors of neoliberalism (“Because markets”). I don’t much care about the “ism” that delivers the benefits, although whichever one does have to put common humanity first, as opposed to markets. Could be a second FDR saving capitalism, democratic socialism leashing and collaring it, or communism razing it. I don’t much care, as long as the benefits are delivered. To me, the key issue — and this is why Medicare for All is always first with me — is the tens of thousands of excess “deaths from despair,” as described by the Case-Deaton study, and other recent studies. That enormous body count makes Medicare for All, at the very least, a moral and strategic imperative. And that level of suffering and organic damage makes the concerns of identity politics — even the worthy fight to help the refugees Bush, Obama, and Clinton’s wars created — bright shiny objects by comparison. Hence my frustration with the news flow — currently in my view the swirling intersection of two, separate Shock Doctrine campaigns, one by the Administration, and the other by out-of-power liberals and their allies in the State and in the press — a news flow that constantly forces me to focus on matters that I regard as of secondary importance to the excess deaths. What kind of political economy is it that halts or even reverses the increases in life expectancy that civilized societies have achieved? I am also very hopeful that the continuing destruction of both party establishments will open the space for voices supporting programs similar to those I have listed; let’s call such voices “the left.” Volatility creates opportunity, especially if the Democrat establishment, which puts markets first and opposes all such programs, isn’t allowed to get back into the saddle. Eyes on the prize! I love the tactical level, and secretly love even the horse race, since I’ve been blogging about it daily for fourteen years, but everything I write has this perspective at the back of it.


    1. EmilianoZ

      I’m bullish too. China can and will build more apartments than its population. The Chinese like new and shiny. They will destroy older houses and build new ones many times over before half the century has passed. And it’s not just about houses. They will build railways from Kamchatka to Portugal. They will build railways under the Everest, around it, above it. Australia had better step up the ore production to keep up with Chinese demand. Australia is golden, God’s own country.

      1. cnchal

        . . . and build new ones many times over . . .

        The drywall starts rotting when it comes off the rolls, and by the time it gets installed it’s a serious health hazard. They will be ripping that crap out, and replace it with crap that’s just as bad, many times over.

        GDP goes up, so economists like it.

  1. supermundane

    And to add, an anti-worker, anti-union government there has waged a concerted campaign against industries with high-organised labour participation in a bid to emulate Thatcher’s Britain and to drain the well of support of the Labor opposition. Australia one nation that promotes the interests of finance and parasitism over the productive economy like nowhere else – take negative gearing for example.

    The government openly supports the interests of finance and international capital – it will not tackle tax minimisation by multinationals and proceeds with indecent haste in signing Australia up to the TPP and signing away protections and sovereignty. Like no where else successive Australian governments have fetishised deregulation, tariff removals and so-called ‘free-trade’ against the sovereign interests of the nation leaving jobs and the social fabric prey to the market.

  2. norm de plume

    We’ll all be rooned, said Hanrahan. And Lindsay David.

    And they’re right. Things ARE crook in Tallarook. Or will be, for all but a few.

    But not to worry, we have the leader with the biggest shit-eating grin of the lot and we plan to just shirtfront our way thru it.

    Really, it doesn’t bear thinking about, so I try not to. Please get back to posts which limn Bad Things happening elsewhere…

  3. Mark K

    He forgot to mention that the housing boom was the creation of the central bank and government, wanting to transition the economy away from the mining boom to a construction boom.

    I read an interesting comment last night: there’s a generation of economic and governmental decision-makers who have never truly experienced a recession, indeed were not in power or close to power, when the last one happened in the early 90s. So no one has any idea…

  4. OpenThePodBayDoorsHAL

    Just some comments from someone who has lived here for 9 years. Yes iron ore will crater, but the #1 export is *coal* and I don’t see Indian and Chinese power plants cutting their orders anytime soon. The AUS dollar has come down to earth, but that brings me to point #2: AUS second most important industry is tourism and that booms when the AUD is lower. Lastly is the “learn English and get a good degree” factor, AUS is viewed as a great destination for that especially by the Chinese. Mom and Dad get off the plane with Junior, they freak out: air you can actually breathe, water you can actually drink, food you can actually eat, not to mention the beauty of the place. Their first stop is the real estate office. Add to that the huge number of Italian and Brazilian and Greek etc economic refugees who show up (and their ability to control immigration quality with no land borders with anyone)…it’s a pretty good story. And with the minimum wage around $16.00, mandatory 10% corporate retirement contributions (cash money), health care still very reasonable and good, university fees still very reasonable, lowest debt to GDP in the OECD, most profitable banks in the world…it’s not all doom and gloom in my view. The AUD was an easy short at $1.04 but unlikely we go below $0.65 (now at $0.75-ish)

    1. Knute Rife

      So what are the economic refugees bringing as their tickets in? Just cash, or are certain skill sets in demand?

      1. Jack

        Italians, Brazilians, Greeks are all Christians – and no doubt bring great morals and work ethic. It’s the “economic immigrants” posing as refugees from certain 3rd World countries that we need to look out for, as the primary thing they bring is “Islam” – and we all know where that leads.

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