Market Bears Lining Up

How Australia Looks From The outside

We must look like we're living in some cloud-cuckoo land to outside observers. We haven't had a year without economic growth for twenty-oddyears, and we sailed through the GFC without having serious market corrections in Real Estate. Our Equity markets haven't exactly recaptured the highs before the GFC but dividends have been robust. For an economy largely dependent on commodity exports, it simply looks like the GFC hasn't quite caught up with us.

With that in mind, it's almost refreshing to be told we will soon fall back to earth.

"Domestically, mining output is still strong, but investment in the sector is not, and iron ore prices are plummeting," wrote Roubini's local analyst David Nowakowski.

"Although some easing of China's credit crunch will help Australian exports in the short run, we see lower Chinese growth in 2015 as a headwind that will weaken Australia's growth and inflation next year, and weigh on growth-orientated assets such as equities and the Australian dollar." 

Mr Nowakowski said flagging growth and low inflation would create room for the Reserve Bank of Australia to make a "cut or two in interest rates, to 2 per cent". 

This would help drive the Australian dollar down as the US Federal Reserve started to lift interest rates, he said. "The Australian dollar is likely to weaken to below US75¢ - a fall of around 20 per cent - on a combination of the lower interest rate differential and slumping GDP growth, with commodity price effects outweighing volumes," he said. 

The local unit was fetching about US89.50¢ in early afternoon trade on Monday, up slightly on the day. After recovering slightly throughout last week, the price of iron more settled down again on Friday at a new five-year low of $US81.70 a tonne. 

The bearish Roubini report also identifies Australia's housing boom as "increasingly out of line with fundamentals", including demand for goods and services and the unemployment rate.

Ah. So in amongst all that, Dr. Roubini thinks there's something wrong with the housing price boom. It's interesting to see this today of all days because the share market essentially has given up all the gains of 2014 to date. The Australian Dollar has been retreating significantly to below 90cents, hitting a 7month low today. Taken together withe collapse in iron ore prices and the wide-spread perception that China is finally about to crack, we might be about to see Dr. Roubini's scenario come true.

There's even a joke going around that if Mac Bank is handing out exorbitant pay packets to its top execs we must be close to the end of the cycle. You get the feeling that investors are heading for the door, and the outward momentum is building. If the RBA cuts rates next month, we'll know we're headed towards "ZIRP" - anything to keep asset prices up.