I just spent a wonderful few days in Sydney Australia. What a beautiful city! I loved the feel of the city, the architecture, and the people.
However, I was left with an overwhelming feeling that there is going to be a bear market in Australia particularly with the A$.
I have bullish for months, mainly on the idea that rising commodity prices are bullish for the A$. That theory has been true and profitable.
But I am seeing a potential change.
First, Australia is now very expensive. A Diet Coke at a convenience store costs US$5.00. That same Diet Coke in a convenience store in Singapore is about US$1.50 and nobody will claim that Singapore is a cheap country. Everything was expensive. No exceptions!
But a country cannot be competitive if expenses are high. There must eventually be an adjustment. Either the rest of the world gets more expensive or Australia must become more inexpensive. I’m voting for the latter.
Second, the current government has put in two major terrible laws. The first was passed some months ago and that is a massive tax on mining. One of the basic Rules of Reality is that you will always get less of something if you tax it. So we should expect that Australian miners will show declining production simply because they cannot compete with lower cost producers around the world. So the commodity boom will be a less compelling reason for owning Australia.
The second major law is the imposition of the highest carbon tax in the world. The total tax on Australia will be the highest in absolute terms than anywhere in the world! Australia is a small country but will pay more in carbon tax than any other country! Insane!
The whole of Europe will eventually pay about twice what Australia will pay but that is for the whole of Europe not an individual country.
Once again, taxing carbon will create less carbon in society but how will that carbon be reduced? There are only two ways. One, apply technology to clean the carbon from whatever is creating it. This means much higher prices for energy. Two, produce less energy.
The net effect of the carbon tax will be to sharply increase the price of energy in Australia which will reduce such things as mining, which is very energy dependent, as well as reduce the economic wealth of all of Australia and will reduce production of goods and services. This new law is a major drag on the Australian economy.
The bottom line is that I look for a top in Australia assets particularly the A$.
The good news is that I can now visit that wonderful country more cheaply!