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Could I Be Any More Worried For Australia?

I have returned back to the ShareCafe columns after some extended time away from the office and I have to say I am very concerned about what I have been witnessing in my absence. The fundamentals for Australia are concerning and the charts give no reason to doubt them. 2018 could be very dangerous for the complacent.

The key scenario that seems to be apparent is that Australia’s “lucky country” mantra is about to run out irrespective of how well the rest of the world performs. Even in the scenario of the bull market continuing in the US, Australia seems to be on the cusp of “the correction we had to have”. And lookout if the US itself has a correction, things could be really ugly.

As we approach the 10-year anniversary of the GFC, led by a housing collapse in the US, Australia is dangerously at risk of repeating the GFC of 2008 which we somehow miraculously escaped without a recession. This places Australia now as the longest streak of economic growth in history.

My main concern is housing and the effects on the consumer, which we have clearly seen begin to cutback on spending as a result of housing unaffordability. The best way to some up housing is in the chart below. It encapsulates the historic boom currently underway and the reality of when this supply dries up. Any market that enters a parabolic phase like this exits out the other end the exact opposite. Down. Period. Tech boom, resources bubble, US and European housing boom of 2007, 1987 stockmarket crash etc. All suck people into believing this time is different and “easy” money can be made for little to no effort.

I can give countless examples of people I know who have quit jobs to flip houses, closed successful businesses to become property developers because (and I quote here), “the money is easier”. This is no different to people with no experience in trading quitting their jobs to become full-time traders because they had so much success during the bull market.

Fast forward and lets imagine a world where the above multi-storey supply drops back to even normal levels. Prices will ease, jobs will be lost, property developers will falter and consumers will cut spending sharply. We are already seeing it. Nick Scali gave a cautious outlook at its earnings result this week. New prestige car sales have dropped sharply over the course of the past 12 months and some of the big German brands are down 20% triggering profit downgrades from AP Eagers and Automotive Holdings Group. The Westpac consumer survey this week showed consumers are the most worried since 2008. My list of supporting factors is too long to cover now. But trust me, they are significant.

Now I wouldn’t be so concerned if the charts didn’t support my concerning outlook. Moreover, I struggle to find anyone who is as concerned as I am. Everybody says, “this time it’s different”.

The chart below is of the ASX 200 and it’s clearly been caught in a tight range for the past three months. Once earnings season is complete I strongly believe this market is vulnerable to a sell off as the risks of an economic slowdown intensify. The US market has been rallying on the back of a small handful tech mega-caps that have no relevance to the ASX 200 and if one were to strip these from the US indices they would all look like the ASX 200. The inability to break through 6000 earlier in the year is a clear heavy decade long resistance that will require a lot of energy and solid underlying fundamentals to surpass. We don’t have these. Not when our biggest – the banks- are in the midst a margin pressure, rising bad debts, rising taxes and a vulnerable property market. This is just not a bull market environment so don’t expect bull market performances from stocks.

The price action above support across 5650 does appear to be a clear head and shoulders pattern with any moves under 5650/5630 completing the topping process and signaling the start of a new fresh downtrend. Take into account as well that this top formation has been building throughout 2017 so this isn’t any small top that will be concluded with a mild correction, there is a strong probability of more sustainable de-rating occurring. The RSI indicator has also broken down out of its own equally long consolidation too.

Finally there are some similarities to 2011 in the ASX 200 performance as well as shown below. The rally off the two major lows of the past decade (2009 and 2011) have both been 59%. Following this the topping out process involved firm resistance levels that have capped gains for 12-24 months (forming double top formations and corrections all came in the same annual time period of July-October.

I am not a perennial bear as people who know will testify. I am often a raging bull and have been in the past decade on many, many occasions. But more now than ever before, the signs of the property market impacting the stock market are greater than ever. Just be careful and give it some thought. Don’t be too quick to dismiss.

On a positive note it’s not all doom and gloom and I see major opportunities brewing for the next major boom. I will discuss that next week.

View More Articles By Greg Tolpigin

Greg is the Head of Proprietary Trading at Global Prime and has over 20 years of experience as proprietary trader and high level strategist for the major investment banks including Citigroup, Bankers Trust and Macquarie Bank. He has been involved across all asset classes including commodities, bonds, currencies and equities right across the globe.

After a 10-year career within the comforts of the large investment banks and research firms he branched out on his own to form his own proprietary trading firm successfully building the business into a multi-million dollar trading operation that turned over a billion dollars a year. This same team now runs the proprietary trading desk at Global Prime, risking their own money in line with the firm's and client's capital.

Greg has appeared on CNBC, Channel 9 - Business Sunday programme, a guest columnist for the Australian Financial Review, a regular author for Personal Investor, Wealth Creator and Shares magazine and is the former Treasurer of the Australian Technical Analysts Association.



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