Recent Data and other Reports we’ve been Reading

by Marc Lerner

Several of the big names in the hedge-fund community have recently written letters mentioning their views on China and the impacts its slowing could have on Australia. In his latest letter, Kyle Bass says that Chinese growth “appears to be stumbling dramatically” and that the scale and pace of credit expansion in China over the last 5 years is “truly staggering”, with the rate of credit growth now 3 times total credit system growth the US had at the peak of the bubble in 2006. He discusses the view his fund now holds that a limit has been reached in terms of how much credit expansion in China can now filter through into real economic growth and wealth creation, as the newer debt is being used to maintain balance sheets rather in an environment of slowing growth than into productive new investments. He also says that a significant slowdown in China would have “devastating” impacts on marketplaces leveraged to a continually booming China such as Brazil and Australia.

Hugh Hendry, a well-known Scottish manager who has previously discussed his views on China (similar to Bass’), mentions in his latest letter that his fund has been investing with the view that the Reserve Bank of Australia (along with that of South Korea, another economy heavily leveraged to China) will continue to cut short-term interest rates aggressively, faced with “ rapidly deteriorating domestic consumption and international trade activity”.

In other news relevant to the thesis of a slowing China (and consequently Australia), there have been recent reports of sharply falling rents in mining towns in Western Australia as mining investment slows. In Karratha rents have fallen for seven quarters in a row, falling almost $500 a week, while in Port Hedland and South Hedland, the number of properties available for rent rose 37 percent during the June quarter. At Valor Private Wealth, we think this trend is likely to continue and worsen, although its severity may be reduced if the dollar falls sharply and far enough that Australian manufacturing, agriculture and tourism are able to make a strong rebound, so that those in the mining industry who have heavily geared themselves into properties in WA can continue to pay off their loans as they find jobs in these other industries. If the dollar stays high, it will mean those whose incomes come from the mining boom will have trouble finding work as the mining investment boom unwinds, with potentially negative implications for the banks who have lent to them, and the housing market throughout the rest of the country (through flow-on effects such as reduced lending elsewhere by the banks and negative effects on the rest of the economy of the end of the mining boom).

In contrast to this depressing trend, a new report has found that Google – one of our largest holdings for our clients – now accounts for 25% of all consumer Internet traffic in North America, up from about 6% three years ago. Whilst this report draws on only some Internet Service Providers (ISPs) and thus only represents an estimate of total traffic, the figure is nonetheless very, very impressive. We are very happy to hold our client’s money in growing, global leaders rather than focussing purely on local mining and banking stocks leveraged to an entirely unsustainable, credit-driven fixed asset investment boom in China.