Zombie Economy – The pin approaches the bubble

Following on from my post on the impending Australian property crisis
comes a fantastic article today penned by Ainslie Bullion. Summarised here is the dire state of the Australian economy.

Citing JCP Investment Partners, the Australian Financial Review has font-paged the idea that “High-risk mortgage loans to young families, professionals and other over-extended borrowers amounting to more than six times household incomes could wipe out 20 per cent of the major banks' equity base”. This is big news given that the big 4 banks (ANZ, NAB, Commonwealth and Westpac) make up a little less than 30% of the ASX 200 by weight. This is exacerbated by the fact that many will hold equity in these institutions via superannuation.

Last week’s employment figure release was positive with a drop in unemployment to 5.7%. This was however entirely due to less stable part-time jobs. Citing Credit Suisse, "employment quality was even more questionable considering statistical distortion. If we were to remove upward statistical biases, the decline in full-time employment in April would have been even greater than officially reported."

Ainslie points out that "these two factors – rampant household debt in a bubble like property market and weak earnings fundamentals – are a concerning mix.” And what’s more, there are political motivations to keep the property bubble inflated, as explained by Prof. Steve Keen who sees further expansion in debt ahead.

Australia boasts one of the highest personal debt levels in the world and has been plagued with stagnant wage growth. Naturally, the recent federal budget was largely predicated on quite the opposite scenario and was only just successful in retaining Standard & Poors AAA rating.

Finally, “on Friday we had J P Morgan substantially downgrade its forecast for Australian GDP for 2017 to 2.1% from 2.8%. That is well short of the budget’s assumptions of course, but budgets these days are less budget, more political propaganda.”

An excellent summary of the whole mess. Find the original article here.