Hurrah! The central bank just loosened the straps on credit. But boo! Here's why...
SO IF YOU haven't yet prepared your investment portfolio for a world with a lot less economic growth, there's still time, writes Dan Denning in his Daily Reckoning Australia.
But maybe not as much time as you think. The transition from a world led by American consumption to one led by Chinese consumption isn't going to be seamless. And it probably includes an extended stop-over at Deleveragingville, during which time not all stocks will be treated equally.
The good news out of China – the news that the bulls will seize on – is that the People's Bank of China cut reserve requirements at banks and injected $63 billion into the economy over the weekend. The Bank is trying to free up liquidity, lower interest rates and generate economic activity. Which brings us to the bad news.
Economic activity in China is slowing down. The slowdown touches all parts of the economy, too. For example, April industrial production was 9.3% higher year-over-year. But that was the weakest reading for industrial production in three years. It was also lower than the 11.9% rate in March.
Now, an industrial production of 9.3% doesn't seem like a disaster. It seems pretty solid. It's certainly not the kind of disastrous figure that precedes a big crash. But you do have to wonder how much you can trust any official government numbers these days.
It's not so much that the statistics themselves lie. It's that the people providing the statistics may be lying. They do so in order to inflate their growth numbers to the party higher-ups. High growth is the currency with which you can purchase political advancement. And in any case, the lower production number had plenty of company in the last week.
April imports in China were up just 0.3% year-over-year. Analysts expected 11% growth. That expectation was based on an average monthly growth rate of 25% in 2011. That string of strong export figures fully supported the idea that China was seamlessly switching from export-led growth to more domestic consumption. Last week's data challenges the narrative.
Last week's retail sales figures also showed slower growth, and so did the fixed asset investment figures. That's the very definition of a statistical double whammy! Both figures represent different growth models.
Retail sales should rise as China's per capita incomes rise and consumption increases in the economy. Fixed asset investment – the resource-intensive building of roads, houses, bridges, and infrastructure – should gradually decline, at least as a portion of over-all GDP. Less investment, more spending. That's the simple explanation of what everyone expects to see in China.
But instead you see this: less investing, less spending, less building, less importing, less exporting, and less lending, despite cheaper credit. What kind of a world is that? That's a world that's not growing as fast, or is even contracting.
Maybe this is all just a gradual moderation in China's growth rate. You can grow your economy at double digit rates when you're coming off a low base, but as GDP creeps up, sustaining that infernal pace becomes impossible. Developing economies grow at double digits. Developed economies don't.
"China has been the largest single contributor to global economic growth in recent years," notes the New York Times, "and a sustained slowdown in its economy could pose problems for many other countries. Particularly exposed are countries that export commodities like iron ore and oil and rely on demand from China's steel mills and ever-growing ranks of car owners."
Question for Australian investors: Which 'particularly exposed countries' could the Times possibly mean?
The China growth story is evolving. The next ten years on the Aussie market aren't going to look anything like the last ten years. You can't afford to invest as if nothing will change. But what CAN you do?
Well, we'd expect more de-leveraging. JP Morgan's $2 billion trading loss reported last week – admittedly a pittance relative to the size of the company's balance sheet – is more evidence that the world's financial markets are highly leveraged. You have trillions in assets sitting on top of a very small sliver of equity. In fact, the leverage is probably higher and more dangerous than in 2007, when the global financial crisis began.
The world's financial markets are more fragile and interconnected now than they were five years ago. That means commodities, resource stocks, and the Aussie Dollar are all in danger of big falls if the 'risk off' mentality leads to more deleveraging in the financial world. You saw what happened in 2008. Now imagine that was just a preview. And it's not something that could happen far off in the future. It's something that could happen now, in 2012.
It's hard to reconcile that gloomy forecast with a bullish forecast on energy, but if you're looking 20-30 years out like Total, it's not as hard. It means a falling Aussie Dollar is the perfect opportunity to buy Aussie energy assets on the cheap. You then have a tangible asset that's at the centre of the Asian growth story for the next 30 years – natural gas.
Of course most investors are not investing for the next 30 years. Most investors can't afford another bad three years, or another three years of average returns. So if we're right about the commodity shift AND the deleveraging in the markets, what's the best position to take?
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