Puru Saxena on China, Commodities and Australia

Financial Sense Interview with Puru Saxena (click to listen) 

A reader, ‘Sceptic’, today posted the above link to an interview on Financial Sense with Puru Saxena. Mr Saxena runs Puru Saxena Wealth Management, an established money management firm based in Hong Kong. Mr Saxena produces the monthly Money Matters report, which follows economic, historical and geo-political trends, and explores investment opportunities in unpopular and distressed markets.

It’s a fascinating interview that covers a broad range of areas, including: the outlook for the Chinese economy; commodities markets; and the implications of the Federal Reserve’s quantitative easing (‘money printing’) efforts.

On China, Mr Saxena believes that there will be a pull-back in Chinese economic growth within a few months. He is extremely worried about the euphoria in the Chinese and Hong Kong housing markets, describing both as a “severe and gigantic bubble that is going to end very badly”.

Mr Saxena notes that China’s housing value to GDP is currently around 350% of GDP, which is only slightly below the peak value reached by Japanese real estate (370%) just prior to its collapse in 1990. Similarly, Hong Kong’s housing value to GDP ratio is currently 330%, which is above its peak level reached just prior the Asian Financial Crisis in the mid-1990s.

However, Mr Saxena notes that, unlike their counterparts in the United States, Chinese households are not particularly leveraged. As such, if China’s housing bubble bursts, it is likely to have less impact on household consumption than that experienced in the United States in the wake of its house price collapse.

Nevertheless, Mr Saxena warns that base metals prices (e.g. iron ore – Australia’s biggest export) could collapse following a significant decline in construction activity. Mining companies, most notably BHP, RIO and Vale, would be hit hard, as would the Australian economy. Saxena believes that any slowdown in China would likely prick Australia’s housing bubble, which he claims has reached “absurd levels”.

Mr Saxena also discusses how loose monetary policy and money printing by the world’s central banks is creating all kinds of asset bubbles. However, now that we are getting price inflation in oil and food, central banks will soon have to begin raising interest rates in order to ward off inflation, which will likely collapse asset markets (except US treasuries). He thinks that we will see a repeat of the last crash (the Global Financial Crisis) within two to three years – “equities, commodities, precious metals, everything will collapse”.   

Finally, Mr Saxena believes that energy production is about to enter terminal decline. He, therefore, recommends that investors gain exposure to energy companies, particularly “upstream oil companies, oil services stocks, offshore drilling companies… solar companies, electric car manufactures, battery manufactures, etc”.    

Overall, it’s an excellent interview that commands 20 minutes of your time (click to listen).

Cheers Leith

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Leith van Onselen

Leith van Onselen is Chief Economist at the MB Fund and MB Super. Leith has previously worked at the Australian Treasury, Victorian Treasury and Goldman Sachs.

Comments

  1. “Saxena believes that any slowdown in China would likely prick Australia’s housing bubble, which he claims has reached “absurd levels”.”

    It’s always reassuring when overseas investors look here and see “absurd” house prices.

    When I think I should just buy a house, its comments like this that remind me that waiting is the sane approach.

    • Unfortunately, he is still in the minority. All I hear (in London) is “came through the recession unscathed”, “strong banking sector”, “beneficiary of Chinese demand”. Housing affordability or aggregate indebtedness isn’t even mentioned.

    • Truly, it is my honest opinion that the bubble has already burst – in fact, I’m of the opinion that it actually started to pop in October 2010…but I’m a bit of an annoying micro-trend watcher, so I might be alone in that…

      Nonetheless, I assert one way or the other that the momentum is already there,a lready expressing itself and picking up momentum as we speak.

      Additionally, I think we need to largely reject the notion that an external factor is needed to pop the bubble, such as an unemployment increase, a slowdown in China, interest rate increases, etc. Instead, these factors merely accelerate the day of reckoning, so to speak.

      For, if indeed the Australian property market has a significant Ponzi-style character, and, as such, capital increases cannot keep up with debt increases (via wage increase and disposable income sacrifice), then debt-saturation, aka “Peak Debt”, is sufficient to collapse the system under it’s own weight.

      Therefore, IMHO, we should stop holding our breath and just look around, including looking at the right indicators – the pop has already happened and the results are already exerting themselves. Other factors only exacerbate the wound.

      And the mainstream, concentrating on all the traditional indicators that see them miss just about every other bubble and collapse, will only tell you about it after the fact.

      My two cents.

      Stewart

      • Stewart, I think May 2010 will go down in history as the peak of the great Australian real estate bubble.

        From May 2010 to Sept 2010 there was basically zero price growth and in Sept 2010 prices started falling.

  2. Saxena is from India. For him to mention nothing about India’s housing bubble, which is the most ABSURD bubble ever in the history of the world, is just plain and utter hypocrisy. China comes close to India’s bubble, but every other country in the world has had very little home price appreciation when compared to India.

    • While I agree with you on the India house price bubble, probably Saxena simply has no stake in whether India bubble bursts or not.

      Another thing is the the “Australia will benefit from Chindia” generalization that you hear from the MSM pundits like Pascoe, Joye and others.

      While India does import coal from Australia, India (as H&H keeps pointing out) actually exports iron ore to China and therefore competes with Australia.

  3. “However, Mr Saxena notes that, unlike their counterparts in the United States, Chinese households are not particularly leveraged.”

    Perhaps because all that leverage is from black market lending….

    • Or intra family lending. Buyers usually borrow off parents AND other relatives (including in-laws) whose house price has risen significantly, which the relatives would mortgage out. Unless the buyer is from a super rich family, they would have a long line of creditors (i.e. family members) before they even go to the bank for a loan.

  4. FrankieFourFingers

    China’s investment in Africa doesn’t get any mention. BHP and RIO will not dictate prices forever.