By MoneyMorning.com.au
“So, in our view, the world is in the midst of a dramatic structural shift. This shift is unprecedented in its scale and potential long-term impact, and it is improving the lives of hundreds of millions of people. It did not happen overnight. Over thirty years ago, China embarked on a series of major economic reforms, which have driven strong, consistent, commodities-intensive growth. So, unlike a gold rush, this structural shift will not suddenly disappear. Rather, it will continue to drive long-term demand for minerals and energy; our products.” – Jac Nasser, Chairman, BHP Billiton
Mr. Nasser is a smart man. For two years until 2001 he was the chief executive of the Ford Motor Company [NYSE: F].
He’s also on the board of British Sky Broadcasting plc [LON: BSY]. And was made chairman of BHP Billiton [ASX: BHP] last year.
But that doesn’t mean he can’t get something wrong. Because like all China bulls, he’s made a simple, but key mistake… a mistake that could cost BHP shareholders millions of dollars over the next two years.
Before we go into the details, a quick reminder…
The Sydney Gold Symposium is only three weeks away. It takes place on 14 and 15 November at Luna Park in Sydney.
If you haven’t registered yet, you can do so by clicking here. One point to mention is we’re not getting paid to publicise the event. Our old pal, Australian Wealth Gameplan editor, Dan Denning has presented at the event for the past two years.
He reckons it’s one of the best financial conferences held in Australia… for that reason we’re prepared to give it a plug… and because your editor is chairing the second day of the symposium.
Besides, with the gold price cooling down after going bonkers in July and August, if you either own gold or you’re thinking about owning gold, you should have this event locked into your diary.
Hopefully you can make it. If so, we’ll see you there. Until then…
One of our biggest problems with the China bulls is the idea that we’re living through something “unprecedented in its scale”.
That China is doing something never done before… that because of its huge population, the China Boom will hast 20… 30… or even 50 years.
Today’s Australian newspaper reports:
“Treasury Wine Estates’ Penfolds brand found this out [China’s habit of copying from the West] last year when a lookalike brand dubbed Benfold’s started to turn up at Chinese wine shows, complete with marketing material featuring Penfold’s chief winemaker Peter Gago.”
Let’s get something straight: producing a wine and calling it “Benfold’s” hardly ranks in the top 10 of entrepreneurial ideas. Perhaps China got the idea from Fawlty Towers.
But we’ll give the China bulls the benefit of the doubt. And say China’s economic growth is “unprecedented in its scale”. Even so, it doesn’t mean the economy will grow in a straight line.
After all, let’s take a period that was arguably more “unprecedented in its scale” – the Industrial Revolution…
According to a review of Julian Hoppit’s 1986 book, Financial Crises in Eighteenth-Century England:
“The author counts thirteen crises (1701, 1710, 1715, 1720, 1726, 1745, 1761, 1763, 1772, 1778, 1788, 1793, 1797) based on figures and the opinion of contemporaries.”
In other words, financial crises (banking crises, credit crunches, recessions) happened before the Industrial Revolution… and they happened after it.
Or how about another period in world economic growth. When the United States emerged as the new power.
According to our pals at Wikipedia, the U.S. went through 15 recessions between the end of the U.S. Civil War and the outbreak of World War I. That’s roughly one every four years.
So the idea that because China is using all these raw materials and that people are moving from the country to the city… that somehow this will prevent a recession in China and elsewhere, is well, flying in the face of history.
Nothing grows in a straight line without taking a break. Not inflation, not house prices, not stocks markets, not the gold price.
There’s no doubt the Chinese economy has gone through an amazing growth spurt. But translating this growth spurt into a never-ending boom really stretches credibility. Because make no mistake, the China boom (like all booms) is built on rapid credit growth – both within China and outside China.
And history tells us a credit boom will always bust.
For an indication of the size of the bust, it’s worth taking note of a paragraph from last week’s Sydney Morning Herald:
“Investment bank UBS estimates the Chinese bank’s domestic credit is equal to about 145 per cent of the nation’s nearly $US6 trillion annual GDP, with the ratio swelling to 170 per cent when so-called off-balance [sheet] lending is included. By comparison, domestic credit in US institutions totalled just over 100 per cent of GDP in 2010.”
The idea that China is doing something different or better to the rest of the world is false. If we’re prepared to give China some credit, it’s that it’s a quick learner. Trouble it has mostly learnt the West’s bad habits – credit, stimulus and bailouts.
So, one thing is certain: what’s happened in the West is sure to happen in the East. Only it will be bigger than anything you’ve ever seen. Perhaps it won’t be the biggest bust in history… but certainly the biggest bust in your lifetime.
Cheers.
Kris.
