Who cares about American house prices? Or central banks causing double digit inflation in Europe?
What happens on the other side of the planet shouldn’t matter to Australian investors.
We have responsible central bankers. Our house prices never drop. Our banks would never engage in large scale fraudulent sub-prime lending. And our government is hardly overindebted.
Australia is safe…as houses.
Heck, we didn’t even have a recession during the biggest economic and financial meltdown since the Great Depression…
So, from the comfort of the ASX, it’s easy to ignore what’s going on overseas. Nothing short of a pandemic can bother us in the Lucky Country. Who cares what the crazies overseas have been up to now?
But the US sub-prime crisis did halve the price of Aussie stocks…
Inflation routed our bond market and kept a lid on the ASX200 for two and a half years…
And higher interest rates have caused serious pain even in the property sector.
So, you cannot ignore foreign financial crises entirely. Even if you think Australia is not susceptible to them directly, they still matter to investors.
In fact, it pays not to ignore them…
What if these overseas financial crises just create buying opportunities for Aussie stocks?
Each time something blows up in faraway places like Greece, our share prices get hammered. Despite our businesses and our economy being robust to the chaos.
Sometimes our ASX listed stocks even benefit from foreign financial crises thanks to the lower interest rates and stimulus dished out by governments and central banks overseas.
I’ve just polished off a report on The Australian Stock Exchange’s Tariff Dodgers. It profiles the ASX companies we expect to profit from Trump’s tariffs. They do so in a clever way Trump would approve of.
You might want to compare and contrast how they do it with the stocks you hold today. Is your portfolio on the right side of the tariffs?
But my point is that Australian investors are in the sweet spot. Our stocks correct on foreign financial chaos. But they are hardly likely to stay down thanks to Australia’s robust economy.
In Europe and Asia, it’s different. Some stock markets languish for decades thanks to the crises they face closer to home.
Today, I’d like to share the next foreign financial crisis that’ll pull the rug out from Aussie shares. And hand you yet another buying opportunity in the process…
Europe’s Sovereign Debt Crisis is about to go global
After the 2008 crisis, a bunch of European governments faced a debt crisis. They had to bail out their banking systems, tipping them over the edge of financial solvency.
Each country chose a different path out of the mess.
The Irish grew their way out. The country ended up with one of the highest GDP per capita rankings in the world.
The last time I visited Ireland, the finance minister who pulled it off sat behind me at the pub. Not many European finance ministers from that period can go anywhere near a pub anymore, let alone without bodyguards.
The Italians had their fellow countryman as President of the European Central Bank to keep them from defaulting. Then they appointed him Prime Minister to ensure they’d continue to get all the free money they needed during COVID too.
The Greeks defaulted on their debt and used an IMF plan to impose austerity.
The Cypriots tried to raid Russian bank accounts to cover their bills.
What the struggling countries had in common was their currency. And that was the problem. They couldn’t just print it willy nilly to bail themselves out. The frugal Germans wouldn’t hear of it.
Instead of crashing their currency by printing more of it to fund the government, euro-using countries went through a series of painful policies.
Not that inflation isn’t painful. As the world discovered in 2021. Back then, we all faced COVID, and so nobody objected to money printing anymore, even the Germans inside the euro.
The sovereign debt crises we’re facing next are of the latter kind. They’ll be about how much money needs to be printed. That’s the first thing Aussie investors need to know when the time comes.
And it may already be here…
Japan and the US wobble
Recently, bond markets have been in turmoil. Just as they were during the European Sovereign Debt Crisis. This time, it’s Japan and the United States’ turn.
As the Prime Minister of Japan put it, ‘Our country’s fiscal situation is undoubtedly extremely poor, worse than Greece.’
If my Japanese wife said that, I’d do a runner.
At least the PM is honest. But bond markets don’t like honesty.
Bond yields have surged in both the US and Japan. This has two effects.
It becomes more expensive for the government to borrow money, including refinancing past loans.
And the value of the bonds fall, which leaves their owners facing losses…if they sell.
The first effect is a measure of how fast the crisis is accelerating. If governments must spend ever more money on interest, it squeezes all other spending. And implies a bigger crisis down the road, when larger cuts must be made.
If a government is paying an interest rate that exceeds its nominal GDP growth rate, and continues to run a primary budget deficit, then the debt-to-GDP ratio will rise over time. If left unchecked, this could eventually lead to fiscal stress or a crisis.
What’s the link to Australia?
Japan remains a major Australian trading partner. After all, someone has to sell our gas to Victoria to keep the lights on…
A crashing yen would interfere with one of Australia’s most lucrative export markets.
Japan also invests a lot in Australia. Without Japanese money, all those LNG export terminals would struggle to get built…
The losses which investors are making on Japanese and US bonds could also spark a financial crisis. The US banks that failed in 2023 discovered this the hard way. And in 2008 we learned how interconnected the global banking system is. The Japanese one especially.
The inverse of this would be a stronger Australian dollar. Because our government would be one of the few with a healthy balance sheet.
And our government is backed by vast commodities in the ground. Gold, copper, coal and iron ore are very reliable taxpayers.
That said, the US and Japan do own a lot of assets too. Remember when Greece sold off its islands to pay down its debts? Perhaps the US will have to sell the Florida Keys? Or do this.
Let’s hope our Aussie stocks crash as the next countries to go through a financial crisis wreak havoc. Then we can buy on the cheap, again.
Until next time,
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Nick Hubble,
Editor, Strategic Intelligence Australia
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