Australia’s thirty year boom deserves a thirty year bust

And now for a terms of trade shock. Just what an income denuded, surplus-obsessed, stall speed economy does not need.

Yesterday’s trade balance numbers finally registered the inevitable as it fell from a surplus of $6.8bn to $4.5bn on the back of clubbed bulk commodoty prices:

This is just the beginning. My base case for next year is for $60 iron ore and thermal coal plus $120 for coking coal as Chinese realty slows. This will erase the trade surplus completely.

Nor do I expect it get better from there. The major driver is actually supply side adjustment in bulk commodity markets as earlier shocks dissipate. There is another 150mt of iron ore coming to market out to 2022. Scrap will keep rising too. Then the Simandou Pilbara killer looms in 2026.

We could easily see iron ore at $50 in 2021 and $40 in 2022.

As a base case, I see the terms of trade falling away at good pace from here in a reversion to mean pattern as China goes ex-growth:

This is not a global shock scenario. It only assumes the stready slowing of China to 4% growth which will be, in reality, virtual zero. Check out the China versus Japan development analogy:

This will lay waste to Australian nominal GDP, destroy the Budget outlook and eviscerate wages. It is the basis for my long term forecast of the Australian dollar at 40 cents as the housing market gives up the ghost for good.

If you think that sounds extreme, consider that it took four years for the currency to fall 40% from the China boom peak. Is it really such a big call to see that repeated over the next six?

Australians have had a tough time of it in the past ten years but the next ten will be worse.


David Llewellyn-Smith is Chief Strategist at the MB fund and MB Super which is overweight international shares that will benefit from a falling Australian dollar.

David Llewellyn-Smith

David Llewellyn-Smith is Chief Strategist at the MB Fund and MB Super. David is the founding publisher and editor of MacroBusiness and was the founding publisher and global economy editor of The Diplomat, the Asia Pacific’s leading geo-politics and economics portal.

He is also a former gold trader and economic commentator at The Sydney Morning Herald, The Age, the ABC and Business Spectator. He is the co-author of The Great Crash of 2008 with Ross Garnaut and was the editor of the second Garnaut Climate Change Review.

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Comments

  1. Well said. Australia is a “how to” example of “gearing up” or leveraging all the factors of the boom, with nil reckoning of the inevitability of the eventual crash. I’m trying to think of a good analogy; a gambler on a winning streak who won’t stop “re-investing” every cent? An in-air refuelling exercise like the British did to get a Vulcan bomber to the Falklands, that hasn’t planned for any of the aircraft to actually get home again?

  2. GunnamattaMEMBER

    And the key thing to think about for mine, is that next time that terms of Trade chart heads back towards the levels of the 1970s-1990s – we will be there without any manufacturing

    • proofreadersMEMBER

      Nah – we have our world-class naval shipbuilding industry, compliments of Private Pyne?

    • Feels like one point is being glossed over, the mining sector will remain just as dominant under H&H’s scenario. US$40 iron ore at A$0.40 is A$100 per ton, diesel is probably the only US$ input and very minor so still raking in the profits. LNG and coal too, though coking coal has an even more limited life than thermal it will be completely substituted. Base metals, gold, commodities like potash, the mining sector will do very well. At least with Argentina the agri sector revenues make it out to a wider base of the population.

      • Mining employs 1.8% of Australia’s workforce and only 20% of the profits go to Australians, mostly Gina the Hutt.

  3. So please tell me how house prices aren’t going to fall (crash) 30% to 50%) min
    I’m genuinely interested to know please ????
    30 to 50% is BASE CASE

    • ErmingtonPlumbingMEMBER

      The Falling dollar with massively jacked up immigration will keep nominal prices relatively stable under H&Hs analysis.
      Dave also said,
      “This is not a global shock scenario.”

        • There is no house price crash coming. That should be obvious by now. Low rates, falling supply and 300,000 migrants each year make sure of that.

          • Yet you only look at demand for housing factors.
            Credit impulse is dieing. Unemployment trending higher and could easily spike up. Bank margins being squeezed.

            I see house prices falling, but standards of living falling even harder as there is insufficient supply, 1890s style. Even with the AUD dropping hard on terms of trade.

            How do you support prices with massive debts and a hollow ecconomy? Where is the productivity growth and jobs growth to support it? It’s all deflationary, and demographics means it’s structural and permanent. HnH is right that this is the start of a 30 year cyclical slump.

          • like real demand matters for house prices
            only speculative demand matters and with economy tanking few will be able to speculate

          • Low rates don’t hold or push house prices up, it’s falling interest rates we are at the bottom now
            How are immigrants going to borrow money to buy without a job
            I picked my GF up from Tullamarine airport and she counted 75 cranes she could see from Citi link Bolte bridge
            *** when people lose their job, they’ll move home and share
            *** when unemployment skyrockets in Melb and Syd once this EPIC construction bust hits immigrants will leave along with unemployed
            Sorry Simon there isn’t a supply shortage, that’s a myth made up by the “bubble boys”

            You all have some time to get your finances in order.

            The only way to survive
            Get your debt down, don’t have too much money in the bank, have some cash on hand (small notes), diversify at the right time, gold, good defensive equities, keep your home you live in as long as it has low body corp
            It’s the only way to survive the next decade

          • That’s a big call.
            – Low rates do not ‘guarantee’ a prop for housing. Sentiment, credit availability, unemployment are what matter.
            – The number of immigrants is irrelevant, particularly given their evident ‘quality’ – the latest cohort can’t even help the retail sector off the mat (300k per annum cannot move the dial! wtf)
            – The US is a good chance of going into recession next year and a global recession too — when unemployment spikes to 8 or 9% here, how are the immigrants going to go? Other than go home. A global recession will make almost everyone poorer putting education in Straya out of reach for many who may have had a shot at coming.
            – When things are good, people feel good. When things turn bad, many migrants won’t be feeling the love Down Under, however much the pollies want them here.

            I think you’re being very naïve.

          • Don’t forget the banks can charge whatever margin they want. If their balance sheets are on fire you’ll find they charge quite a lot.

          • From memory we’ve just had two years of 15% negative sideways movement whilst adding 300K immigrants. Not as much of a factor as we think, as Florida, Nevada, Ireland, Spain et.al would attest (immigration of 4% compared to our measly 2%), just as they went bust. Credit is the key. If they can keep shovelling it out in spades and there’s an appetite for it, who knows.

            BC, I’m thinking defensive equities will cop it too. Any examples? These rising and receding tides seem to lift/drop all boats.

      • DLS has said many times his analysis is base case without an external shock
        He’s never said there won’t be an external shock
        There is a serious external shock at minimum every decade, it’s not far away

    • Damn, just how thick is that skull of yours bcbich? You’d think after 10+ years of observing the market you’d have learnt something by now. You are the epitome of a delusional permatard

      • RB
        It’s very easy to critisize and use language like that.
        It actually shows your intelligence and a little about your character
        You sound like you actually really dumb
        You have nothing intelligent to say
        And you have no opinion or have any guts to even give a forecast.
        I’d probably say deep down you are a moron with very little character
        Come tell us any view you have
        I’d really like to debate you through discussion on any financial topic that’s on this site, modern day, fast draw shoot out
        You also obviously can’t afford a membership that indicates you have never had any financial success in your life

  4. It completely blows me away, how is this happening – the demand for Ore is almost at the point it was at the peak of the stimulus. Here is a green magazine which looks at the issue from an environmental rather than political “spin” point of view and reveals some interesting points.

    “The country has the largest buildings market in the world, making up 20 percent of all construction investment globally. And it’s set to grow: China is expected to spend nearly $13 trillion on buildings by 2030 (PDF).”

    Wow. Ok.

    https://www.greenbiz.com/article/13-trillion-chinas-expected-construction-spending-2030-will-some-go-zero-carbon-buildings

    Ok – this goes someway in explaining it – and it means there will be huge demand for steel for at least another 5 years minimum.

    https://archpaper.com/2019/11/chinas-belt-and-road-initiative/

    Why does this get dismissed so much around here when it is clearly the reason behind the boom in ore and coal demand ? Doesn’t make sense to ignore it. The Marshal plan was $100 Billion in todays dollar terms and was seen as the single biggest infrastructure investment in human history – this plan is 13 times larger at $1.3 Trillion and pretty much ALL of it is steel.

    Until this ends there will be zero drop in demand for steel unless it comes from Vale or the new Simandou project in Guinnea. These projects continue on out to 2027 and are all fully funded and signed off on ?

    • Belt and Road – highly questionable that it all gets built. It’s in other countries (not like apartments where China has total control) and there is a reason the stuff hasn’t been built already –
      – not economically viable
      – politically untenable
      – logistically complicated

      Now I’m not saying the Chinese can’t overcome all that in theory. Spray enough money and push politically hard enough and some will get done. But the most likely is that the low hanging fruit gets built (still at a loss) and the rest slowly slips into a quagmire and never gets done.

      • Indeed. That report PDF that the subsequent report relies on is nearly 4 years old now (2016) – the quantum of pipelined development. A lot has changed in 4 years ( just ask Donald!)

        • Indeed – and look at the Iron Ore export graph above Janet. And as I pointed out to Arrow2 the Belt and Road as announced in 2013, people have been saying as Arrow have that it will never get built – but its now already well over 60% complete with the remaining projects underway or in the final stages of preparation – its not just going to get done, its basically already done but people are still viewing things like its 2013 and refusing to accept the reality.

          I just don’t think people are realizing Chinas infrastructure construction capacity because we do not see ANY of it in Australia. We focus on their manufacturing and apartment building and just completely and utterly ignore what is by far the most transformational project the world has ever seen – literally – financially speaking it is 13 times larger than the Marshal Plan.

          Just a really strange mental position to put ourselves into – its like living in denial.

      • Again, this is not conjecture – this is all being built as we speak. The Belt and road was announced 7 years ago – it gets finished between 2025-2027 – its already 60% complete with the remaining projects well underway. This isn’t pie in the sky – this is 100% happening, on the ground work.

        I’m really confused how people are still saying what you are saying – it really doesn’t make sense when these projects are all being done, and more than half are already finished ?

    • “China is expected to spend nearly $13 trillion on buildings by 2030.”

      Lol. No way on earth. With what money, exactly? It’s BS of the highest order. China have already built so many units they could easily house every man, woman and child in the country – with tens of thousands of units to spare.

      China’s economy is slowing sharply and their banking system is insolvent. That’s all you need to know. China’s economic Frankenstein Monster is cooked. Their best people are fleeing or have fled the country and so has a lot of wealth – all tied up in real estate around the world. How does a country continue to build sh*t at the rate they do when it is uneconomic to do so? They are not a wealthy country — they just have mountains of debt. You need the requisite economic assets to be able to support that debt and if you don’t you have a big reckoning bearing down on you.

    • most of that 1.3t is going to be wasted on inefficiency and bureaucracy
      marshal’s plan was targeted efficient rebuilding of essential infrastructure in war devastated countries where majority of labour and material was either free or almost free

  5. St JacquesMEMBER

    It doesn’t “deserve”, it will simply get that thirty year bust. It”s baked in. Technically we could recover in about 15 years, but those years will be wasted by a political system with entrenched business interests that got us into this situation and will blame everybody else but themselves. They’re already doing it. So there’s years and years of ever increasing poltical anarchy up ahead, and the Australian dollar will finally become like the Argentine peso, something you convert into US dollars the moment your’re paid. Australia as a poor colonial Pacific Argentina owned and run by a Chinese elite connected with China’s elite and flooded with cheap third world labour from everywhere is close to being assured. Of course this may lead to an out and out fascist revolt, but given the servile “roll over and think of the money” attitude of our dumbed down country, I don’t think it likely.

    • We may have a bust baked in but there is no need for it to mirror the length of the boom — it’s only if you attempted to pay off all the debt that this may be so (ultimately endless rounds of money printing). If you allowed a proper correction to take place i.e. fast and furious …. mass defaults etc and a return to a sustainable monetary system, a recovery could begin within a couple of years.

      The only problem will be the ‘price’ extracted: a huge hit to aggregate wealth (Boomers would get slayed), an insolvent banking system (Boomers, again!) and a vastly reduced public sector (including welfare system). So, you can see that the status quo won’t be relinquished readily.

      The worst outcome is that the powers that be try to hang on for dear life — this will be death by a thousand cuts, initially but there will eventually be an almighty bust leading to the outcome above. Just don’t have too many cash assets while this all unfolds 😉

  6. Jumping jack flash

    Interesting angle but I agree.
    It will take 30 years for enough of the debt to be repaid so wages can start rising again, and that’s only if the debt stops growing. Stagnant debt will bring its own set of problems.

    The debt is sucking far too much productive money out of the economy.

    Other shocks will only make this necessary deleveraging period worse.

    • I’m not sure that 40c is an absolute cert given that all countries will be engaged in a race to the bottom (including the US).

      The ‘tell’ is the gold price in AUD.

      • That’s also true. The issue will be whether our private debt will cause a systemic Aussie banking crisis. Pretty sure it was in the process of doing that until the giant stick save post-election.

        The logic goes like this:
        – Our house prices can’t fall because it’s Australia
        – More debt is great for everyone, especially the banks
        – Oh shit! Prices are tumbling
        – Oh my god, look at all that negative equity
        – Oh crap, apartments are death traps for lives and equity
        – Really, did we lend all that money interest only? How will they ever pay it off? Oh, I remember, house prices only ever go up. Oops
        – The banks are unquestionably weak, totally corrupt and riddled with malfeasance AND pay out all their profit. How did that giant can break my toes again?
        – Fark me! The only solution to too much debt is way more debt, otherwise the banks will go bust and trash the economy
        – Play pass the parcel and musical chairs at the same time
        – Pollies and media trumpet “it’s all good, mate!”
        – FOMO!!
        – Immigrants!!
        – Build more apartments
        – Sell more debt
        – Thoughts and prayers

        • Without question, if we have a full blown banking crisis the AUD will get buried. The context I was using was more a broad global recession where everyone is in the doldrums. But a full scale housing crash is a definite possibility whatever some on the threads at MB may think. The bubble in straya is so much bigger than people can comprehend. It’s more than one and half times the size of the US housing bubble at its peak before the GFC. But nobody thinks that’s relevant, apparently. Because, migrants, or something.

          • 10-12x debt to income in Sydney/Melbourne and Ireland fell over at 6x times and went to 2.5.

            Nothing to see here. It’s all good

  7. ErmingtonPlumbingMEMBER

    So If I sell my house now for 1.2 million to wait 18 mths to buy it back for 600k where should I put
    my $900,000 in the interim period?,…the Macro business fund or Gold Bars?

      • ErmingtonPlumbingMEMBER

        Won’t that make the gold bars hard to resell,…. You know being all irradiated and that.

        • Of course, you won’t stockpile uranium. Just indirectly own uranium underground by owning uranium miners.

          Granted, miners are capital intensive businesses that require constant exploration expenditures. If uranium miners do not sound attractive to you for this reason, then own technology companies that specializes in the uranium fuel cycle.

    • Get out of the banking system – gold bars. Highly liquid + 8.5% long-term appreciation + big spikes in a crisis.

  8. It’s all a question of how long is Australia going to be in denial that “we just need to get property moving up again”, or that “house prices going up means that the market is ‘recovering” and all the other b***hit lines handed to us by the property bubble ponzi pumpers. Once Australians accept it as the lie that it was then maybe we can have a discussion about reform. I’m doing my bit to advance the conversation but it’s slow going. Hopefully, it won’t take another decade.

    • St JacquesMEMBER

      Coz if u keep crying “bust” about the biggest mining boom in world history, eventually you’ll get it right. It’s all about the timing, they jumped the gun, but this time I think they’re on the ball.

      And I’m never wrong. Trust me.,,,,

    • Indeed.

      We are literally days away from 2020 yet iron ore is still nowhere near the $20-30 as predicted (D day was supposedly 2016). SydMelb house prices still have not experienced any significant nominal price crash and are close to erasing the recent mild declines. China is still ticking along and the oft mentioned global shock has yet to materialise. Its been more than a decade since the GFC and permatards have been singing the armageddon tune perennially. Think of all the potential investment gains you would have lost if you listened to those clowns.

      The key point that permatards fail to realise is that for humans/society to advance the base case HAS to be slightly biased to optimism. Otherwise there’d be no motivation or incentive to do anything in life. Most ppl get this and act accordingly. And hence why permatards are always out of sync with reality and more often than not wrong with their forecasts/predictions

      • St JacquesMEMBER

        pffft The mining boom got an extension post GFC because of an unprecedented construction stimulus that has brought forward China’s infrastructure development by decades. It’s peaked and it will decline, in due course like every single major mining boom in history. THE ONLY QUESTION IS THE SPEED AND TIMING. Retard.

        • Fck off frenchy

          Stop whining and buy a house already, you lil bitch

          Thats another trait of you fcktards, you missed out buying a house at a reasonable price but instead of accepting it and moving on you change your whole perspective so that you can believe prices will eventually come down to what YOU think is fair. Enjoy renting the rest of your life, fkn idiot

  9. I think MB has a serious obligation to only let members write comments
    I’ve written this many times
    Let the freeloaders read a few articles
    HNH I’ve run many businesses
    Your product is superior to anyone else in the market
    If you only allow members access to the site
    Ie members only site
    You will get a lot more clients being exclusive