My goodness, Australia is a lucky country.
Things were looking seriously shaky for our international finance position back in 2016.
Mining has since bailed us out again!
The November trade figures came out this week.
We’ve now minted our 23rd consecutive monthly trade surplus.
We can thank iron ore, coal and gas.
I reckon few people appreciate how important this is to reducing the risk of a major financial crunch in Australia.
Our foreign borrowing is enormous — via the banking system mostly.
This debt has to be constantly serviced and rolled over…
Higher exports, lower imports = good news!
Foreign lenders can take a much more benign view of their risk when Australia runs a trade surplus…certainly not something we’ve always done!
It means we’re much more capable of servicing our obligations.
A trade surplus also grows the reserve bank’s foreign exchange reserves, which, compared to major exporters like China and Japan, are thin at best.
These are a nice bulwark to have when global times get tough.
All this certainly keeps interest rates lower than they otherwise might have been.
It also always pays to store away wealth for a rainy day. A big one might be coming sooner rather than later.
The World Bank is currently sounding the alarm about the pace of debt growth over the last 10 years.
A new report says there have four big waves of debt since the Second World War.
The one we’ve just seen is apparently the ‘largest, fastest and most broad-based’ in global borrowing since the 1970s.
An overarching question is whether this debt was used productively for capital formation or squandered on consumption and speculation.
My guess is the latter.
We’ll find out once interest rates start to rise and stress test the world economy.
Traditionally, one would look to gold as a bellwether for the safety of the global system.
But can we trust the central banks not to manipulate its price in the financial markets?
Casino capitalism at work
I’m not sure we can. They’ve encroached into bond markets on an epic scale since the 2008 collapse.
It wouldn’t surprise me in the slightest to find some shenanigans going on elsewhere.
Certainly the Fed is barnstorming its way through the repo market.
It added another US$83 billion in Thursday’s US trade.
The Wall Street Journal reports the Fed is now saying it may need to stay active here until April.
When they first intervened here, back in September last year, they pegged the end of January as the termination date.
Something doesn’t make sense here, but your guess is as good as mine as to what’s driving all this.
But it does mean more liquidity can keep pumping up stock markets.
US and Aussie stocks are now in new all-time highs.
The bull market cannot run forever. We need to be making hay while the sun shines.
Last year I wrote a lot about how new shipping rules could drive oil higher.
It hasn’t quite happened in the benchmarks we hear about — WTI and Brent — but it’s happening for some grades of oil.
That’s another small tailwind for Australia.
The oil out of offshore Western Australia is particularly suitable for what refiners need.
Check this out from Reuters…
‘Supply has tightened in trading markets in Asia and Europe and now in the United States.
‘On Wednesday VLSFO in Houston traded at $642 per ton, compared with $667 per ton for marine gasoil, S&P Global Platts data showed. That $25 spread was at $152 half a year ago.’
It’s another reason to keep a wary eye on developments in Iran and Libya as this dynamic continues to hit the market.