Ausnomics #4

Ausnomics #4: Ruinous Nation was published in ExposAsia No 27/2010.

Betting against the Australian equity market and the Australian dollar has been about as profitable as betting against Japanese JGBs and the yen - both currencies and both asset classes continue to defy gravity. But while, in our view, there is a logical rationale behind the yen's strength and the Japanese population's needs, the same cannot be said for Australia.

Truth be told, Australia is a warrant on China, pure and simple. Its fortunes are intrinsically bound up with those of the Mainland and, by extension, those of the US. In asset markets at the moment that chain of interconnection is good for equity prices and the Aussie dollar (cheap US money and the prospect of more of it flooding into the Chinese economy to further destabilise and unbalance production but at least produce activity which, in turn, raises the demand for Australian commodities).

Australian activity benefits from the straight line extrapolation of demand in China that is being drawn by commodity companies (thus raising capital expenditure commitments) and the money rush benefits to Australian domestic speculators who - like their American counterparts - have bought property and forced up prices like there is no tomorrow.

This is unbalancing the Australian economy in the same way as China and the US before it. All it will take is a catalyst to bring that whole edifice down.

To understand the plight and precisely why and how the Australian economy might implode, you will have to read the full paper in ExposAsia No 27/2010, Ruinous Nation. In this precarious world in which we live, the triggers could come from many directions. For those of the view that the monetary Ponzi-scheme that lies behind the enthusiasm for all things paper and all things emerging is destined to end in tears, Australia is the natural home for the shorts to make the most money - albeit not necessarily in the next several months.

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