View From The Couch - 13/Aug/2015

Double Dose of Chinese Reality

For two days in a row, the Chinese government devalued the Renminbi in what is seen as a currency war. Xi Jiping denied it was a currency war, but sometimes when you get punched in the face, you have to accept it's a fight even though the other guy denies it was a punch thrown in anger. The devaluation hit the AUD as one would expect seeing that we are a handful of economies that are seen to be largely commodity-driven. Indeed, Brazil might be the only other nation that is just as deeply dependent on commodity exports and specifically exporting them to China.

As it stands we saw the bourse drop in Australia, as well as seeing the AUD drop 1.3% before it regained some ground. The good news is that China's share market crash doesn't reflect the entire Chinese economy; much in the same way that the All-Ords does not reflect the entire Australian economy. The bad news is that taken as a whole, the collapse in the Chinese markets as well as the devaluation and the resultant drop in the AUD and the ASX are all part of the one big picture where by China is struggling to adjust to slowing growth.

China of course even denies it is doing the devaluations because of the slowing economy. If a government lies this much about what it is doing, do we ever trust it with any announcement? It's hard to say. There's a certainly level where if it talks like a duck and walks like a duck but denies it's a duck, you call it a duck at your own peril because it's a duck that's in charge of 1billion people of the planet, and you never know what might do with those numbers.

A quick look at Brazil suggests that this downturn in demand for its commodity exports as wells the devaluation of the Yuan indicates this is a terrible thing to have happened to Brazil, one year out from their staging of the Olympics. Iron ore, copper, oil are all falling. Even agricultural commodities are falling to 6 year lows and 7 year lows. Those figures have not been this bad since 2009 when the markets turned around thanks to Quantitative Easing by the US Fed. Naturally, Australia is not too far behind in being hit by investors because the income we thought we had coming from China doesn't seem to look like it's going to materialise. It's not a catastrophe yet - but as Rob Gordon asks, does "yet" mean we will eventually end up doing/witnessing/living the catastrophe?

On The Radio They Said...

I caught a snippet on the radio in Pleiades' car today. They were saying that as unemployment has gone up, so has personal loan defaults. The bank spokesperson also said so far loan defaults have not broken out amongst mortgage holders, but they are "keeping an eye on it". An interesting thing is happening with the banks: they are posting record profits on then hand, but they're also raising capital from their shareholders. That bring up the question - why?

Obviously Basel II means they have to have a certain amount of cash handy to withstand any shocks to the financial system, but it's also curious that ANZ, NAB and the CBA have all chosen to undertake the raising of capital this year. If nothing else, it telegraphs they are expecting trouble. If China really falters, then there will be deeper impacts to Australia's economy. Investors will run to the door. If that brings about a collapse in the property market in Australia...