“It’s our long corruption, short property play.” – Jim Chanos, founder Kynikos Associates
Jim Chanos is one of the big guns in investing. He’s up there with Warren Buffett, Jim Rogers, George Soros and Jeremy Grantham.
Chanos is “short” China. In other words, he’s banking on analysis that says China is overvalued and due for a fall… We agree.
But to be short China actually means being short something else. You can probably guess what we’re talking about. Here’s a clue. Again, from Jim Chanos:
“We’re short Chinese banks, the property developers, commodity companies that sell into China. Anything related to property there is still a short.”
That’s right, it means being short Australia. Something the rest of the world is starting to figure out. The only ones yet to get the picture are Aussie mainstream investors and the mainstream press.
But more on that in a moment. First…
We couldn’t let today pass without mentioning the two-day Federal Open Market Committee (FOMC) meeting. The key part of the Fed announcement reads:
“The Committee intends to purchase, by the end of June 2012, $400 billion of Treasury securities with remaining maturities of 6 years to 30 years and to sell an equal amount of Treasury securities with remaining maturities of 3 years or less.”
Just as the market expected, the Fed will implement Operation Twist… buying longer-term government bonds and selling shorter-term government bonds. The aim is to flatten the yield curve. That means forcing long-term interest rates lower.
The theory is it will make businesses more likely to invest in capital goods and make individuals more likely to buy a home. That’s because in both require long-term loans.
We’ll be honest, we expected the Fed to do more. Why? Because they’re mad. And mad people do mad things. In this case, perhaps they aren’t as mad as we thought… or the Fed is playing a game… trying to prove to the three FOMC members who disagree with Dr. Bernanke’s view that the Fed must do more.
The fact is, the U.S. economy is headed for another recession and depression. This will happen whether or not the Fed meddles. It’s just a case of whether it’s now and inflicts a lot of pain… or whether it’s in a few months… and inflicts more pain.
And make no mistake, what’s bad for the U.S. is bad for China. And what’s bad for China is bad for Australia.
That’s despite what you’ll hear from mainstream commentators…
…Such as our old pal, Michael Pascoe at the Age. Earlier this week he wrote:
“While Europe and Washington fiddle around fires of varying intensity, foreign central banks buying increasing amounts of commonwealth bonds are sending a message: Australia is a safe haven.”
Yeah sure. Does anyone really think the financial advice of central bankers is advice worth following?
These are the guys who sold gold before it tripled in price. The Reserve Bank of Australia sold two-thirds of its gold in 1997. (By the way, Peter Costello was Treasurer then, so for all those folks who think Costello should get the Euromoney finance minister award rather than Wayne Swan… think again!)
And as for the bright central bankers who bought Aussie government bonds for safety, well, they’ve seen the value drop 10% in recent weeks. As the “safe” Aussie dollar has sunk from USD$1.10 to USD$1.00 today.
We’ve mentioned before that it’s foolish to believe any investor sees Australia as a haven. Australia is a risky investment. Foreign investors invest in Australia as a way to invest in China.
If you believe the China resources boom will last 50 years, then why not buy into the country that’s helping support the boom – Australia. But as soon as the boom stops, Australia’s haven status will be forgotten in a flash.
Because the China boom may not be as secure as many think. Jim Chanos makes the point that while China’s government debt is low, other debt isn’t…
In fact, according to 2008 numbers compiled by Global Finance, China’s total debt to GDP was 159%. That includes government, non-financial business, households and financial institutions.
One of the biggest beneficiaries of that debt is Australia.
What we’re saying is, don’t fall for the idea that China has bought and paid for Aussie resources. Because there’s one bit missing… it has borrowed, bought and paid for Aussie resources.
It used those resources to build tall buildings, shiny new roads, sports stadiums, and of course, consumer goods. But one day the spending will slow down and possibly stop.
Because even if China’s growth continues… even if China one day passes the U.S. as the world’s largest economy… it won’t happen in a straight line… with no bumps or recession along the way.
You can see from the chart below, the U.S. economy has had 17 recessions (shaded areas) in the past 90 years:
That was despite it being the biggest economy and biggest consumer of resources. Importantly, the recessions in the U.S. were felt in one way or another around the world… including in Australia.
Put simply, of its top 10 trade partners in 2010, one-third of China’s trade involved the U.S. and Germany… add in Japan’s basket-case economy and you’re looking at one-half of China’s trade.
Like it or not, a recession in the Western world (U.S. and Europe) will impact China.
And so, at some point, China’s economy will slow. That spells trouble for Australia because foreign investors buy Aussie assets for one reason: China.
Let’s get is straight: Australia isn’t a haven for foreign investors. And the Aussie dollar isn’t a reserve currency.
So when we’re told a U.S. or European recession won’t affect China… and therefore won’t affect Australia. We don’t believe a word of it and neither should you.
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Written by Kris Sayce
Kris Sayce is Editor in Chief of Australia’s biggest circulation daily financial email — Money Morning. (You can subscribe to Money Morning for free here).
Kris is also editor of Australian Small-Cap Investigator, his small-cap stock research service, where he provides detailed analysis on some the brightest, smallest listed companies on the ASX.
If you’re already a subscriber to these publications, or want to follow his financial world view more closely, then we recommend you join Kris on Google+. It’s where he shares investment insight, commentary and ideas that he can’t always fit into his regular Money Morning essays.