By Peter Switzer
Will China bring down a “house of cards” called the world economy and really hurt one of its most dependent economies called Australia? That’s the residual question following a huge think piece by one of Australia’s smartest guys in the room — CEO of Freelancer.com, Matt Barrie.
Matt sent me his seemingly endless document via email on why China will fall over and we will follow like a domino and end up in a recession, with stock prices tumbling like they usually do. His tome on why we looked economically screwed was picked up by a journalist in The Australian and gave birth to a headline that read: “Australian economy news 2017: Recession, depression predicted.”
Always on the lookout for a scary story to ensure you never get complacent, the AFR came up with: “Matt Barrie says doomed Australia needs ‘an Apollo program’.”
One other forgettable publication served this up: “Freelancer CEO Matt Barrie goes nuclear on Australian meltdown.”
When I replied to Matt, this is what I said: “Impressive Matt but you made an Armageddon call years ago at the CEO sleep out! One day you will be right but when?
“The pivotal point rests on a Chinese expert on Chinese banking — if he’s wrong or the Chinese Government buries the problem, as Communist Governments can do for a long time, you have worried us all too early.
“As I say, a crash and recession will happen eventually but I’d rather you work harder on getting the freelancer share price up and hopefully you are spending less time in Kings Cross night clubs!”
Matt is the founder of Freelancer.com and is a smart tech-entrepreneur, who also doubles as an adjunct associate professor at the University of Sydney where he teaches classes in computer and network security since 2001 and technology venture creation since 2010.
As I pointed out above, some three or four years ago, Matt was on the Armageddon gravy train with other doomsday merchants and I told him what I said in the email: “Crashes and recession always happen but now is not the time.”
By the way, I don’t do this lightly but this is my job in the media, for my financial planning clients and those invested in the Switzer Dividend Growth Fund or SWTZ. I’m always working out what’s likely to happen to key world economies, major companies’ profits, the course of share prices, what bond markets are warning us of and whether the hard-to-see ‘black swans’ are coming for us.
The most recent black swan event was the fact that debt ratings agencies didn’t tell the truth about large parcels of debts that were being sold with inaccurate ratings on them. What looked like a AAA parcel of loans had a lot of dodgy, sub-prime loans in them and when this was recognised by some smart guys in the room (like Matt but who were financial market experts and players) it gave birth to the story that inspired the movie The Big Short.
Now some people try and scare us about an upcoming debt disaster because they’re shorting the stock market or certain stocks in the market. A famous shorter called Jim Chanos in the USA has been trying to make money out of shorting China but has failed for nearly a decade.
One day after Matt’s prediction of a China Syndrome-like economic and market meltdown, one of the most respected economists, Jim O’Neill, who famously coined the term BRIC economies (which stood for the emerging economies of Brazil, Russia, India and China), allayed Matt’s fears.
And what’s interesting is that on the same day Matt was doing a Paul Revere, warning us that the day of reckoning was nigh, Jim was warning about underestimating China.
In an interview with CNBC, this highly respected economist said investors should overlook the growing debt pile in China, highlighting various positive factors for the world's second-largest economy.
"I can't get excited about the debt issue," Jim O'Neill, former chairman of Goldman Sachs Asset Management, said. “Not least because in the past few months there's evidence that the rise of debt growth has slowed pretty dramatically and indeed with nominal GDP growth accelerating I think even some of the doom and gloom people about China would concede that the scale of the debt problem has come down a little.”
Now to be fair to Matt, the IMF is not relaxed about China. In August it noted: “International experience suggests that China's credit growth is on a dangerous trajectory, with increasing risks of a disruptive adjustment and/or a marked growth slowdown."
China’s total debt is expected to hit 300% of GDP by 2022 and that’s big, so it’s silly to be too relaxed about it but O’Neill thinks doomsday merchants ignore a pretty important point. You see, as he explains, “it's a country with an enormous amount of savings."
If there is a global financial fallout, we’re more exposed because we borrow a lot from overseas — we use other people’s savings from overseas to bankroll our lives and investments — but China borrows from themselves and lends a lot to countries such as the USA!
Matt’s work has merit and one day the economic miracle which has been China over the past 10-15 years will become a nightmare, just like we saw with Japan in the 1990s, but I’m betting that time is not nigh and I hope that Jim and I are right and Matt is too early with his Armageddon call.
By the way, my reference to Matt and Kings Cross nightclubs harks back to another opinion piece he penned some years ago, which went viral worldwide, where he complained about Sydney’s lock-out laws for pubs and clubs in the Cross that he said made us look like an embarrassing tourist backwater.
Matt is an opinion-maker and is very smart but history has shown me that it doesn’t make you right on the economy. I reckon he started off with the view that he was worried about debt and went looking for stuff to vindicate his fears.
However, a good economist will also objectively test out their own objectivity, which is really hard to do.
I hope Jim O’Neill and I are doing that because I suspect Matt isn’t.
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