Australia’s worst-case trade scenario — 5 years of no growth

SYDNEY, Jan 24 — Australia is staring down the barrel of its worst export slump in 50 years and a bigger shock to the nation's terms of trade than any time since the 1997-98 Asian crisis.

The nation's top 10 trading partners are in the middle of, or entering, an economic meltdown, with Western and Asian economies entering a cycle of contraction that experts fear could mean up to five years of flat global growth.

The next shock to the Australian financial system is expected to come when contract prices for its exports, particularly iron ore and coal, are renegotiated. The nation's terms of trade — the difference between export prices and import prices — hit record highs last year thanks to the seemingly endless commodities boom. But the news from Asia — the destination for more than half its exports — hasn't been good this week.

UBS economist George Tharenou told The Weekend Australian: “The main near-term weakness is going to come through export terms of trade. There will be a considerable fall from the second quarter onwards when bulk commodity price are renegotiated downwards.''

Export figures for the last quarter of last year are also shaping up as the worst for 50 years. “Fourth-quarter 2008 and first-quarter 2009 exports volume will be weak. We are expecting exports in them to fall by 5 per cent for (the December quarter),'' Tharenou said.

If this is correct, it will be the worst for the past 50 years, beating the 4.8 per cent fall in the third quarter of 1997 as the Asian currency crisis hit Australia.

The most important terms-of-trade negotiations — the iron ore price talks with China — have been brought forward by Australia's biggest miner, BHP Billiton. Analysts expect prices for iron ore and other minerals to come down between 30 and 50 per cent. This would bring the terms of trade to levels of two years ago but the negative shock will be in the swing from last year's large increases — almost 80 per cent for iron ore — to sharp falls.

The growing problems for Australia's exports markets, and the flow-on effect to the broader economy, were underscored this week by an avalanche of worse than expected economic data from the region — the destination of most Australian exports. China, Korea and Japan alone take 42 per cent of Australian exports. Figures this week revealed China's growth had slowed from 9 per cent to a seven-year low of 6.8 per cent in the December quarter. Japan is already in recession and Korea probably is too.

“Realistically it will be a bad first half across the region,'' said Macquarie Securities chief Asian economist Bill Belchere. “It will probably flatten a bit in the second half and then bottom.''

But he warned that the bottoming could last some years. “There could be three to five years perhaps before the global economy does hit potential growth,'' Belchere said. He said there were deep structural problems with Asian economies being geared to consumption in OECD countries that had now dried up.

This week's figures have confirmed the worst fears of analysts, who now see few signs of recovery this year.

“The outlook for the global economy continues to deteriorate,'' Citi global chief economist Lewis Alexander said. “Incoming data have, almost uniformly, surprised on the downside.

“A combination of declining wealth, notably higher uncertainty and financial disruptions appears to have led to sharp declines in demand around the world.

“A significant contraction in international trade is helping to propagate these shocks around the globe.''

Alexander said that sharply contracting output was likely to lead to further declines in demand as income falls rapidly.

“There are scant signs that the momentum of this negative cycle is waning,'' he said. “It's hard to fathom the breadth and depth of bad news that is now pouring forth from north Asia particularly, as well as other major economies across the region, such as Taiwan, Singapore and Malaysia.''

Australia biggest two-way trading partner — China — has grabbed headlines this week as its growth fell off a cliff. But the problems are a lot worse in other countries.

The economy in South Korea, Australia's No. 4 trading partner, grew just 2.5 per cent over the whole of 2008, the slowest pace since the Asian financial crisis of 1997-98, after it contracted an astonishing 5.6 per cent in the December quarter.

Only last month the South Korean central bank forecast 2 per cent growth this calendar year but a contraction of 1-3 per cent is now widely expected.

“Domestic demand was the clear drag in (the fourth quarter) and will likely continue to keep growth down in (the first half of 2009),'' a Credit Suisse report said yesterday. “In our view, a rapid recovery seems unlikely until visibility of global demand improves.''

Japanese exports fell by a record 35 per cent in December as demand for imports, including Australian raw materials, continued to slide.

“Import volume was indeed down from a year earlier for each of these categories and, with commodities prices having plunged so steeply since mid-2008, we expect lower prices and weaker demand to translate into year-on-year declines in import value from April 2009 onwards,'' Credit Suisse economists said.

Malaysia is viewed as one of non-Japan Asia's most vulnerable economies to the global economic downturn. Malaysia is also indirectly but heavily exposed to falling commodity prices and falling tourism arrivals.

The flow-on effects as Asian markets seize up, punching gaping holes in Australian exports markets, will be by way of a massive pay cut in terms of national income. “The record terms of trade has been boosting nominal gross domestic product, meaning things have felt a lot better,'' Tharenou said.

“Now, there will be less money sloshing around from corporate profits and taxation. This will mean no budget surpluses, less money for tax handouts and the possibility of a budget deficit position.''

This will trigger cuts in export-associated industries as resource and mining companies slash jobs, flowing on to less demand for general consumables and housing.

“The trickle-down effect will be that there is less national income available and that will feel like a pay cut for the economy.''

Still, some analysts suggest that it is not a relentless picture of doom and gloom, especially from China.

Credit Suisse China analyst Dong Tao said the most important figures released by China this week were not the GDP numbers but those for industrial production. These reported 7 per cent growth in December compared with the same month last year, up from 5.4 per cent in November.

“This is consistent with our call that production growth might be bottoming,'' Tao said. “We do acknowledge that this is a minor rebound from an extremely low level, but nonetheless the rise is significant. We suspect the rebound is largely caused by a slowdown in inventory correction in the materials sector after a drastic change in price expectations on commodity prices.'' — The Australian

Roubini Sees China Recession Despite ‘Massaged’ GDP (Update1)

By Michael Patterson

Jan. 22 (Bloomberg) -- China is in a recession despite government statistics today showing the world’s third-largest economy expanded in the fourth quarter from a year earlier, according to Nouriel Roubini, the New York University professor who predicted last year’s economic crisis.

“China is in a recession regardless of what the highly massaged official numbers claim,” Roubini, a professor at NYU’s Stern School of Business and the chairman of consulting firm Roubini Global Economics, wrote in a note today on his Web site. “When growth is slowing down sharply the Chinese way to measure GDP is highly misleading.”

Unlike the U.S. and western Europe, China’s figures on gross domestic product measure growth from the same quarter a year ago rather than the previous three months. The year-on-year figures fail to capture the economy’s slowdown at the end of 2008 because growth was so high in the preceding quarters, Roubini wrote.

The government’s statistics bureau said fourth-quarter GDP grew 6.8 percent from a year earlier, after gains of at least 9 percent in the previous three quarters.

China’s stocks rose to a one-month high after the GDP figure matched the median estimate of economists surveyed by Bloomberg News. Health-care stocks including North China Pharmaceutical Co. climbed after the government said it will spend 850 billion yuan ($124 billion) to help expand medical care. The CSI 300 Index rose 1.1 percent to 2,044.55, the highest close since Dec. 19.

Falling Exports

Investors should buy China’s agriculture, water treatment, power generation and infrastructure stocks because the companies won’t be hurt by the nation’s slowing economy, investor Jim Rogers said in an interview today.

“There is a lot happening in China and there will be those that will hold up well,” said Rogers, who correctly predicted the start of the commodities rally in 1999 and wrote books on investing including “A Bull in China: Investing Profitably in the World’s Greatest Market.”

Declining power output and shrinking manufacturing suggest the economy is contracting, Roubini wrote.

China’s electricity production declined more than 7 percent from a year earlier in November and fell about 3 percent in October, the first declines since February 2002, according to China Economic Information Net data compiled by Bloomberg. China’s exports fell 2.8 percent in December, the most in almost a decade, as the deepening global recession cut demand for the nation’s toys, clothes and electronics.

Roubini said at a conference in Dubai this week that U.S. financial losses from the credit crisis may reach $3.6 trillion, suggesting the banking system is “effectively insolvent.” He also predicted oil prices will trade between $30 and $40 a barrel all year.

Roubini wasn’t immediately available to comment on the report, his spokesman said.

To contact the reporter on this story: Michael Patterson in London at mpatterson10@bloomberg.net.

Last Updated: January 22, 2009 08:49 EST

Thousands ruined as Chinese tea bubble bursts

KUNMING, Jan 18 – Saudi Arabia has its oil. South Africa has its diamonds. And here in China’s temperate south-west, prosperity has come from the scrubby green tea trees that blanket the mountains of fabled Menghai County.

Over the past decade, as the nation went wild for the region’s brand of tea, known as pu’er, farmers bought minivans, manufacturers became millionaires and Chinese citizens ploughed their savings into black bricks of compacted pu’er.

But that was before the collapse of the tea market turned thousands of farmers and dealers into paupers and provided the nation with a very pungent lesson about gullibility, greed and the perils of the speculative bubble.

“Most of us are ruined,” said Mr Fu Wei, 43, one of the few tea traders to survive the implosion of the pu’er market. “A lot of people behaved like idiots.”

A pleasantly aromatic beverage that promoters claim reduces cholesterol and cures hangovers, pu’er became the darling of the sipping classes in recent years as this nation’s nouveaux riches embraced a distinctly Chinese way to display their wealth and invest their savings.

From 1999 to 2007, the price of pu’er, a fermented brew invented by Tang Dynasty traders, increased tenfold, to a high of US$150 (S$220) a pound for the finest aged pu’er, before tumbling far below its pre-boom levels.

For tens of thousands of wholesalers, farmers and other Chinese citizens who poured their money into compressed disks of tea leaves, the crash of the pu’er market has been nothing short of disastrous.

Many investors were led to believe that pu’er prices could only go up.

“The saying around here was ‘It’s better to save pu’er than to save money’,” said Wang Ruoyu, a long-time dealer in Xishuangbanna, the lush, tea-growing region of Yunnan province that abuts the Myanmar border.

“Everyone thought they were going to get rich.”

Fermented tea was hardly the only caffeinated investment frenzy that swept China during its boom years.

The urban middle class speculated mainly in stock and real estate, pushing prices to stratospheric levels before exports slumped, growth slowed and hundreds of billions of dollars in paper profits disappeared over the past year.

In the mountainous pu’er belt of Yunnan, a cabal of manipulative buyers cornered the tea market and drove prices to record levels, giving some farmers and county traders a taste of the country’s bubble - and its bitter aftermath.

At least a third of the 3,000 tea manufacturers and merchants have called it quits in recent months. Farmers have begun replacing newly planted tea trees with more nourishing - and now, more lucrative - staples like corn and rice.

Wu Xiduan, secretary-general of the China Tea Marketing Association, said many naive investors had been taken in by the frenzied atmosphere, largely whipped up by out-of-town wholesalers who promoted pu’er as drinkable gold and then bought up as much as they could, sometimes paying up to 30 per cent more than in previous harvests.

He said that as farmers planted more tea, production doubled, from 2006 to 2007, to 100,000 tonnes.

In the final free-for-all months, some producers shipped their tea to Yunnan from other provinces, labelled it pu’er, and then enjoyed huge mark-ups.

When values hit absurd levels last spring, the buyers unloaded their stocks and disappeared. – NYT

Market crash

Been waiting for these sell down for 2 months now. Finally it arrived - after I lost 3k on Put Options in Dec and Jan ! Was too early by 5 weeks only. If only the Jan option expire next Friday instead of tomorrow. Big mistake to buy Jan 09 options.

Nmd. Recovered half the losses in these Few days with Feb 09 Put Option at 600p for S&P500.

Citi is collapsing to new low. Well I bought just 1 lot of Put at $5 Feb 09. Yiha...just made USD100 bucks..not bad for 1 night.

Now only down by 1.2k.... hope to recovered all losses and profit some more.

I am convinced that S&P will hit 500 this year-just a matter of time.

Perhaps in April or July.
So my strategy will be to prolong the play - I have to limit my monthly exposure to a smaller size - say 1k..

Hope to make a few k this round. Then tens of k in April, followed by hundreds of k in July. Well the economy is facing a black hole - possibly global depression. China may implode with exports down 20% yoy...very bad.

And Asia will be hit big time.

Hello everybody

Why do I start this blog?

- to share my analysis and research on investment oppurtunities with my readers [currently I like cash rich companies and Singapore-REITs]
- to share inside news without fear and favour. You know this is tough as most whistle blowers are not protected nor rewarded. Hence we have so much hanky panky. The authorities place so much burden of proof on them that it is simply not worth it. Except for the case when a senior exec blew the whistle on a cigarette company earning himself millions. But that can only happen in the US, right? Look at the Madoff case on the other hand - someone did informed SEC years ago but they did a lousy job.

Well nowadays it is up to us small time investors to be wary - caveat emptor.