If the Eurozone’s GDP is twelve times larger than Australia’s, how much bigger is their financial sector?
It’s a trick question. Australia’s financial sector is bigger, if you rank it by stock market capitalisation:
These two comments come to mind: ‘Holy smokes Batman,’ and, ‘Where there’s smoke there’s fire.’ At some point, Australia’s obese financial sector has to revert to a more normal size. The housing bubble’s bust is likely to trigger just that.
Banks and other financial institutions will plunge in price once Australian house prices do. (If you’re thinking ‘it can’t happen here’, we’ll be telling Daily Reckoning readers about Australia’s own subprime lending scandal on the weekend. That ‘can’t happen here’ either.)
But this article is about the other part of the 62% of the ASX/200 that’s toast.
‘…no two sectors dominate Australian portfolios more than banks and resources. Financials (excluding property) make up just under 40 per cent of the S&P/ASX 200, and materials just under 22 per cent, not counting the related industrials and energy sectors that comprise about another 13 per cent. All five of the nation’s largest stocks – BHP Billiton, Commonwealth Bank, Westpac, ANZ and NAB – are within this group, with fellow heavyweight Rio Tinto not far behind.’
What the Australian Financial Review article fails to mention is that Australia’s mining industry is just as dependent on the housing bubble as the financial sector. It’s just a different country’s housing bubble – China’s. That’s where all the iron ore and copper goes, after all. And when it stops going, the 22 percent of the ASX200 that hasn’t crashed because of Australia’s housing bubble will crash because of China’s housing bubble.
One Housing Bubble Begets Another
What makes the story really interesting is that China’s housing bubble is based on another country’s housing bubble – America’s. And the golden thread that ties them all together is our very favourite haunt – monetary policy.
Some people still haven’t figured out that printing money leads to housing bubbles. That’s what makes housing bubbles so predictable. Cases in point are Switzerland and Germany. They missed out on housing bubbles in the 2000s because interest rates were kept at appropriate levels.
But now, interest rates in those countries have plunged, and the money supply has skyrocketed.
Euros Flood Europe
Switzerland intervened in foreign exchange markets instead of interest rate markets like the Europeans, but with the same effect on its money supply:
Swiss Monetary Base
Sure enough, the media in both countries has picked up on booming house prices. What a surprise.
Switzerland: ‘the biggest real-estate boom in two decades’ and ‘surging prices’.
Germany: ‘Germany’s house price bubble is only just getting started’
Is China’s Housing Bubble Set to Pop Australia?
Anyway, it’s China we’re worried about as Australians. And over there, the housing bubble story is even more obvious. Not only are the money supply and prices jumping, but so is debt, government intervention and construction.
At least, they were jumping. Greg Canavan of Sound Money. Sound Investments. reckons the worm has already turned. You can watch his presentation on just what’s really going on here.
The biggest factor in China’s bubble is the same as Switzerland’s one. The Chinese pegged their exchange rate to the US dollar, just like the Swiss pegged theirs to the euro. That means the Chinese had to print money each time the Americans did – they effectively imported America’s monetary policy. And we know how that worked out for US house prices. A big boom and then a big crash.
You’ve probably heard about the ghost cities in China. And the vast stockpiles of unused Australian resources piling up in Chinese ports. These are all symptoms of the breakdown of a housing bubble.
Editor, Money Morning
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Written by Nick Hubble
Nick Hubble is feature Editor of The Daily Reckoning Australia – weekend edition. Nick has spent the last three years discovering lots of new, exciting and surprisingly simple ways to generate money for retirement. He’s put all these ideas into his investment publication The Money for Life Letter.
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