The good news keeps on coming – the RBA released its commodity price index yesterday (here):
And from the RBA:
Over the past year, the index has risen 53 per cent in SDR terms. Much of this rise has been due to increases in iron ore, coking coal and thermal coal export prices, although all components of the index increased over this period. With the appreciation of the exchange rate over the year, the index rose by 38 per cent in Australian dollar terms.
The miracle growth in China’s economy has treated Australia well. Of course, while the prices for Australia’s export commodities are back to their highs by the RBA’s reckoning, our equity market remains well below its peak:
The fact is – risk appetite is just not what it once was. Without the bottomless credit-creation cup, the leveraged risk taker has vanished. Risk premiums have risen pretty much across the board. Assuming all else were constant, this in itself could go a long way to explaining why the All Ordinaries remains ~33% off its peak.
But all else ain’t constant. Credit was all pervasive prior to the GFC. The end of the developed world’s thirst for leveraged consumption has also strangled the West’s nuts-and-bolts economies. Structurally higher levels of unemployment, declining house prices, and recurrent concerns about the strength of government finances continue to undermine the developed world’s economic growth. Under the new world order, uncertainty lauds it over those willing to push out the risk curve.
History would suggest that once started, the impulse to deleverage is difficult to stop. A balance sheet recession requires the debt to be overcome. This will take time.
Which perhaps is the key point – leverage will continue to fall – at the very least in relative terms (relative to incomes, GDP, however you think about it).
In this less-liquid environment, the macro trade dominates. We get a couple of optimistically spun data points, the risk markets rally. Funds flow out of perceived safe havens and up the risk curve. A bad data grab will send the flows into reverse. Sentiment, and the stop loss mentality that comes with it, drives short term market direction.
In this context, China has been swimming hard against the tide. The fact that it has maintained ~10% GDP growth rates is a testament to its willingness to borrow against future demand for its goods – most hopefully from the emerging Chinese consumer, less so from the Western world. Capital investment has been a key pillar of this growth strategy – and hence Australia’s resources have been in hot demand.
The question is then how long can China continue to hold out against the currents? There are some pretty deep pockets betting that it will succumb sooner rather than later. Still, as the longevity of the credit boom showed, unsustainable circumstances can be sustained for an unreasonably long time. Till then the Australian trade balance will shine.
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