Now's not the time to buy, but it's certainly a time to do your research and work out who will continue to perform well in a more subdued spending environment. The question is though, just how subdued will the spending environment become as the China rebalancing story plays out over the next few years?

Well, Ross Garnaut, Australia's well-known China watcher, is vying with your editor to be the biggest China bear. He reckons mining investment as a percentage of GDP in Australia's economy will fall from the current 8% all the way back to 2%. And if that happens without consumption or housing or business investment taking up the slack, come 2014 Australia could be looking at its first recession in 23 years...

We've been making the same argument. We've been saying this recent rally in shares and house prices is a trap...a trap to make you think everything is as it's always been.

But the point of our (and Garnaut's) warnings is that Australia's economic future will be very much unlike its past. Our largest trading partner is undergoing a dangerous economic rebalancing which will mean much less demand for our raw materials.

The profit warnings from all the mining services companies are simply a warning for Australia's economy. Times are changing!

But if the action from the mining services sector portends a different, more austere future for Australia's economy, no one is telling Commonwealth Bank investors. Yesterday, the stock hit an all-time high. On a price-to-book value basis, it's the most expensive bank stock in the world, according to analysis from UBS.

'Price-to-book' simply tells you how much of a premium a company's share price has to its equity, or 'book' value. According to UBS, Comm Bank trades at 3.6x its tangible equity value. That's high, and reflects the banks' very strong competitive positioning and high return on equity.

But you would have to question how long Comm Bank, and Australian banks in general, can maintain world-beating levels of return on equity as the economy faces a mining induced slowdown. Don't forget, banks are highly leveraged entities. They do very well in good times due to this leverage. But as the Australian economy slows and unemployment picks up, the leverage works the other way.

The recent reporting period for the banks showed profit growth on the back of cost cutting and lower bad debt levels. Top line growth was flat at best. And as the Australian economy slows, you would expect to see bad debt levels pick up again. This is not an environment that appears to justify record high share prices for the sector.

If Australia's outlook is changing, then the banks are yet to admit it...

Regards,
Greg Canavan
for The Daily Reckoning Australia