BT: Australian dollar going to 40 cents

From Australia’s last sane analyst standing. Vimal Gor at BT Investment Management:

Calm before a currency storm?

May was a calm-ish month after the recent period of extreme volatility. This was not surprising given the confluence of risk events we have approaching over the coming weeks, including the BoJ, FOMC, ECB, possible Brexit and the Spanish election. The key event of May was the surprisingly hawkish Fed minutes which reopened the possibility of a Fed hike over the coming few meetings. This is in direct contrast to the uber-dovish message we received from Fed Chair Yellen in April and caused the front end of the US yield curve to give up its recent gains.

The picture was altered again early in June as US payrolls printed a seriously weak number and confirmed the growing risk to a slowing economy. While the Fed clearly wants to hike rates now and the rising inflation picture superficially supports this view, our belief continues to be that the US economy is now slowing and the uptick in wages pressures is the counterpart to falling productivity – a late cycle phenomenon. A rate hike now would only have the effect of slowing the economy further and driving the USD higher – the opposite of what the US and world economies need right now.

After the Fed there were two other significant events this month. The first was the rhetoric/ statement from China that it is stepping back from its recent stimulus and that it is ready to embrace more reform. The second was the RBA rate cut. We have been looking, and positioned, for this cut for a while now and generated strong returns when it happened, which helped us outperform strongly in all of our flagship funds over the month. In the RBA SOMP (statement of monetary policy) following the cut the RBA ‘marked to market’ its view and has clearly started the next rate cutting cycle which will take rates to 1% if not lower.

In this Newsletter I want to focus on the recent GDP numbers and the bad, and deteriorating, external situation to show how worrying the picture is for our beloved Aussie Dollar. We had originally thought 50c versus the US Dollar was achievable but our recent analysis highlights that we have been too optimistic and that 40c is now our base case.

Monetary policy 1; fiscal policy 0

Last month’s Newsletter highlighted the problems central banks have when trying to fix the underlying issues in the global economy by just using monetary policy. The aggressiveness of policy easing is one of the best examples of ‘Maslow’s hammer’, or more commonly: “if all you have is a hammer, everything looks like a nail”. While global central banks have seen the weakness in the global economy for what it is and correctly eased monetary policy, the tools available to central banks are few and limited in scope.

The RBA took its turn and pounded its hammer in early May, and in our opinion will follow with many more cuts in the next year to take the official interest rate to at least 1%, if not lower. I argued last month though that this may not end up having the desired effect to lift inflation back into the RBA’s band. In this world of competitive currency devaluations the race to zero interest rates is inevitable and, to extend the analogy, if you have any nails left in your nail gun you have no choice but to fire them even if you have no chance of stopping the strong winds of deflation ripping your roof clean off.

Over-extended analogies aside, while we expect the RBA will be forced to cut rates to keep up with the rest of the world, low rates in an economy like Australia will genuinely be a test of the stability of an economy that has a very specific relationship with the rest of the world. This relationship has become one of ever increasing reliance on foreign capital to continue to do business, and allow us to live beyond our means. When the commodity boom was in full force everyone wanted to be Australia’s best friend, but since the commodity boom ended with a whimper in 2014 Australia has become the little weedy kid no one wants on their team.

Paying away the gains

This reliance on foreign capital has come about because economic growth in Australian Dollars has been so weak for a number of years even as real economic growth continues to show some pretty encouraging headline numbers (Australian GDP last week printed a developed world-beating 3.1% on the year), yet we keep sending this growth overseas through high imports and paying out on past borrowings. This trend has deteriorated in the last year meaning we have to borrow from and sell assets to the rest of the world at a new, faster pace.

This reliance on outside capital to fund our lavish lifestyle, which is still stuck in 2006, puts us in a very different situation to pretty much every country that is currently running a zero or negative interest rate policy. These countries are generally exporting capital because of extremely strong export performance (or weak imports, or a combination of both) and are encouraging capital outflows because of the ultra-low rates available at home. Low interest rates in this situation have had a far smaller effect on allowing currencies to fall as much as some central banks have hoped (with the Euro and the ECB being the classic example), but the unique combination of a large and increasing reliance on foreign capital and fast falling interest rates means that the Australian Dollar is at far more risk than most people think.

A shock downside could easily see it move to 40c against the US Dollar if current trends continue, commodities fall to lows again and economic growth deteriorates. This is a highly likely outcome given the weakness in the composition of the latest GDP numbers.

Inside the balance of payments

Economists measure this reliance on foreign capital through the “balance of payments”. It can be an extremely dry topic because it’s hard to understand and analyse, but when looked at from a helicopter height it can give a lot of insight about the health of our country and its economic relationship with the outside world. It is similar to the financial accounts of a company in that it describes ‘why’ capital is moving across our border overseas (similar to a profit and loss statement), and ‘how’ this change is being funded/invested (the balance sheet of a company). The ‘why’ is made up primarily of two components – the trade balance and the flow of income.

When looking at the ‘why’ side of the accounts (otherwise known as the current account) the trade balance is the easiest to understand, being the difference between exports and imports at any point in time. If we import far more than we export (which is the case at the moment and it’s getting worse) we need to fund these purchases by either borrowing www.btim.com.au 3 money and running up debt, or by selling assets. The flow of income includes the difference between the income earned (this includes coupons, dividends and profits) by Australians owning overseas assets versus foreigners holding our assets. This measure has traditionally also been negative for Australia, meaning we are paying out far more to foreigners than we receive through our investments overseas.

Since both of these numbers are negative the ‘why’ is describing what is called a “current account deficit”’ it tells us about a country that is spending more than it is earning. This isn’t necessarily a bad thing, within reason. It is positive if prior borrowing that we are now paying interest on was invested well and produced returns above the servicing cost, but not so much if it was just ploughed into the existing stock of housing.

This leads us to the ‘how’ side of the accounts (otherwise known as the capital account). This part describes how the earnings/ spending of the ‘why’ side gets funded. If the current account is in deficit then the flows going out of the country will need to be funded from somewhere overseas to counter that outward flow. A company would have to do this by raising debt or issuing new equity; the options for an entire country are fairly similar. The main options are that we can choose to sell assets (foreign direct investment) or raise debt (either through the government running up debt or banks/ corporates borrowing from overseas). The capital account is another way of describing the difference between investment and saving within an economy. If the current account is perfectly balanced then no money is flowing in and out of the country. Investment and saving is matched domestically as no capital is needed from outside of the country. At last measure the Australian current account deficit was more than 5% of GDP. This is on par with the largest deficits seen at the more testing times for the Australian economy throughout the ‘80s and ‘90s, but under the debt-fuelled binge in the commodities boom of 2003 to 2007.

Australia takes a BOP to the head

The deterioration started a year ago as net trade and income payments to the rest of the world worsened with falling commodity prices. This is even during a time when real net exports are making up all the economic growth in Australia, and it shows how powerful the effect is of falling export prices is on the welfare of our economy. Right now it is the main story in describing how money flows into and out of the country. A recovery in the current account deficit tends to only be associated with economic weakness and recession as demand for imports weakens. The alternative is a much lower currency, but this brings about its own stability problems.

So if the current account is in deficit by more than 5% of GDP, collectively as a nation we have to raise this amount of capital from overseas to net the flow. In the commodity boom times the banks did this by borrowing a massive amount of money, mostly in the form of long-term bank bonds, from foreign markets. This grew the banking system to the massive size you see it today. To get away with this we effectively borrowed against the windfall of rising commodity prices, essentially acting as if they would last forever. This money went straight into house prices in Australia with housing credit growing at up to 20% every year. The income windfall from rising commodity prices was spent as quickly as we earned it. The balance sheets of CBA, Westpac and NAB more than doubled from 2003 to 2008, and foreigners were more than happy to oblige.

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This led to a record net foreign liability claim of 67% of GDP in the most recent balance of payments data. To put this 67% number into context, the IMF consider the 50% mark as the point at which the financial stability of a country comes into question. We are obviously well past that mark.

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The GFC put an end to this largesse – somewhat – and brought the current account back to around 3.5% of GDP. Commodity prices rose again in the commodity boom Mark II from 2010 onwards and it helped bring our trade balance back to surplus which has normally only been associated with recessions in the past. This period however was also defined by deleveraging of banks and the emergence of the government (at both the state and federal level) becoming a borrower for the first time in a decade. The budget hole opened up during the GFC has never been successfully closed, no matter how much forward budget estimates say that we are going to return to surplus.

The second deficit – the Budget

The status of the budget deficit, surely a point of frustration for our more conservative readers, is resulting in a record projected year of issuance of Commonwealth Government bonds at around $72 billion, or above 4% of GDP. This translates to more than $2 billion per available week of new issuance, requiring foreign central banks and funds to participate consistently to fund this deficit. Plans are to increase the issuance at the super long end of the yield curve as well, introducing bonds that mature well past 2040.

The first sign of disinterest has been evident at this part of the curve. Even though yield curves have flattened in nearly every market in the world our long bonds are steepening relative to 10 year bonds. A lot can be put down to a number of external influences but the fact remains that the market has been demanding more for these long dated bonds because even a yield that is well above a number of other markets isn’t sufficient for the extra risk. It is also likely that the amount of issuance in this part of the curve will increase further to fund new infrastructure initiatives, and therefore we believe this relative pricing move has got more room to move. We are short this part of the curve.

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Foreign direct investment became another funding source in more recent years. As we have discussed when looking at the US shale revolution in a prior monthly commentary, a huge amount of investment went into expanding supply of commodities as rates went to zero everywhere around the world. Australia received significant inward investment during this period by foreign owned companies investing in large projects such as LNG and iron ore. This investment was associated with rising imports as the capital goods needed came in from overseas, but a considerable amount of the investment from overseas was used to fund spending in other areas of the economy.

This direct investment is still coming through, and has been supported more recently by foreign buying of residential property. However, as mining capex reduces, this funding source will dry up. It is usually associated with future income flow out of the country as these investments pay their owners back. Not great news.

Twin deficits theory – the new Lazarus

The big issue with the large twin deficits (budget & current account) is that they are putting Australia’s AAA rating under pressure and this rating is likely to be put under review in the next few months. Debt at the government level has obviously risen quickly since the GFC, with future prospects for a contraction in the budget deficit looking grim.

The level of foreign capital needed to support the current account deficit is a clear weak point as well. A downward move in the rating to AA+ will still leave us as one of the highest rated countries in the world. But the move, at the margin, will make the debt of the government and more importantly the banks less desirable than it was before. A downgrade to the sovereign rating would see the banks likely moved down one notch as well, from AA- to A+ for the majors. This will drop their short-term debt out of the important rating of A1+ (the highest bracket for short-term debt), meaning it will be harder to find a buyer for this type of debt, particularly in markets such as the US and Europe where regulation around money market funds is changing substantially to make them safer. These moves will impact the Big 4 as it will make the cost of funding greater and place further pressure on their margins, other things being equal.

However, a current account deficit isn’t always a bad thing. In a lot of cases it is better than a surplus if the surplus leads you to lend to countries that you don’t really want to have exposure to, such as Germany to the PIIGS. Large surpluses/deficits shouldn’t exist if everyone had a proper floating currency as any large persistent flows would move currencies to balance competitiveness. On the other hand, though, borrowing too much through a large deficit from the rest of the world will eventually lead you to a point where you go ‘bust’, further digging yourself into a hole (funnily enough Australia dug enough holes to put itself into this hole).

Bank, and now government borrowing, is allowing us to live beyond our means as a nation. The borrowing we did in the early 2000s was OK given how fast our income was growing at the time. Unlike a promotion with an increased salary, the commodity prices that supported this income growth weren’t forever. So as these prices have fallen, our ability to support a current account deficit that is just as big as it was pre-crisis has fallen and we are now borrowing more than we are earning. This is a really poor and highly worrying trend.

The dynamics for the external balance aren’t very positive, and this is at a time when the spread of Australian interest rates is at a low to the G4. The move towards zero for the RBA will be the first for a country so reliant on foreign capital. Europe, Norway, Sweden, Denmark, Switzerland, Japan all have big current account surpluses, meaning that they have no requirement to access capital from anywhere else in the world. This partly explains why they’ve had to cut rates so much, but also explains how they’ve been able to do it.

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The exceptions to this current account surplus rule have been the US and the UK. While technically these economies didn’t get their rates to zero, they got close enough to warrant analysing them. The US enjoys the benefit of “exorbitant privilege” where they have very little choice but to run a current account deficit as they are the world’s reserve currency.

The UK cut rates before their current account was as negative as ours is now, but since that point in time things have deteriorated significantly. While the UK trade balance is doing OK, especially relative to our own one domestically, the income balance is falling rapidly. There are a number of reasons for this which mostly circle around foreign ownership of large companies in the UK paying out profits, while large UK companies having very poor performance in mainland Europe.

This extremely large current account deficit (at the same size as Australia’s at more than 5% of GDP) makes a Brexit even more perilous for the UK. The current account deficit needs to be funded. If a Brexit occurs that funding source may dry up while uncertainty rules about the status of the UK as it transitions out of the Union. This makes the high stakes of June 24th even greater for the global market, and the Brexit campaign is gaining steam again as I write.

Canucks no schmucks

Canada represents, in some ways, the antithesis of the historical government budgetary response as experienced in Australia. While Canada isn’t at zero rates, the target of 0.5% offers a realistic target for the RBA over the next two years, especially if commodities find a new low or China has a real misstep. Interesting parallels can be drawn from their experience, given that they are a very similar country in a number of ways, including their reliance on commodity markets for growth.

Canada cut rates in late 2008 with the rest of the world to 0.5% just as Lehman went under and oil prices briefly traded at $40. Immediately after this the current account deficit moved from being in surplus to deficit and hasn’t recovered since. Most of this is attributable to oil prices cratering of course, but this happened to Australia too. The Canadians are in a far better situation than Australia though, and it’s a result of restraint in the past rather than any choices available to Canada today.

The key difference was that Canada didn’t borrow against the windfall given by rising commodity prices through the strong days in the 2000s, choosing to take the income gains from rising commodity prices and become a creditor to the rest of the world. As a result while Australia owes the rest of the world debts totalling 67% of GDP, Canada is in a situation where the world owes them 15% of GDP and not the other way around. This saving has meant that they are in a far better position to weather a large downturn in commodity prices while the rest of the economy rebalances away from the positive income effect from the temporary boom.

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This can be shown by looking at the chart of growth in national income versus external borrowing. This chart for Canada shows a considerable amount of ‘saving’ in the boom years, sometimes above 8% of GDP. This saving managed to happen at a time also when demand for other commodities in Canada such as timber was decreasing rapidly, offsetting much of this gain. This has led to Canada being able to support a current account deficit without having to borrow against future income.

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The Canadian example shows how irresponsible Australia was during those times. Australia is now living beyond our means, borrowing from the future, and our past decisions to lever up on what was a temporary situation to create a “structural deficit”. The chart below highlights how little we saved and how much was squandered during that period of time. The same chart shows far smaller saving in the boom years (~3%), but now shows how much we are now borrowing from the future. This borrowing is being done almost entirely by the government sector.

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The bad news

The read through from all of this is that we are in more than a little bit of trouble. Ideally to fix it we would have to:

1. Fix the trade balance by cutting imports and save;

2. De-lever by paying back all the debt we’ve borrowed.

Both items are clearly damaging in terms of economic growth domestically, as they both essentially involve giving back all that we’ve taken in previous years. The more realistic outcome is that, as the RBA cuts interest rates and the spread to the US gets smaller and smaller (and maybe negative) we will find it harder to attract the capital that we need just to ‘keep the lights on’, which will result in an Australian Dollar that falls far further than a lot of people expect.

Economists have forecasts for the AUD at 75c in 2018 (according to Bloomberg). This will have to be far lower if questions about funding become an issue, and we will be treated like an emerging market rather than part of the developed market club. An AUD at 40c would force much lower imports and higher exports and will start the necessary rebalancing.

 

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Admittedly borrowing in the near future will be done by the best borrower in the country – the Australian Federal government – so the risk of such a move is low in the short-term. Right now that entity is rated at AAA, but that will likely change soon. We can see no clear path back to surplus for the government any time soon as tightening fiscal policy is highly unlikely given the backdrop of a flagging economy. The day to tighten belts will have to come some time, absent a growth miracle. In the world environment that we find ourselves in twin deficits are a really big problem and one that we should try to avoid at all costs. Our external balance and an RBA cutting rates aggressively might be the trigger to force some hard decisions given our extremely poor starting point.

And that, my friends, is why MB has had a 45 cent dollar forecast for four years.

Comments

  1. brettnicholsonMEMBER

    I called 39c and even h&h said I make MB look bullish.
    The problem now is that if US go to QE4 then my 39 is probably now 58c
    Currency is a relative game

      • But if it was to get that bad, would’t the pollies will just hit the immigration/ponzi button? Australia always has that.

        Income issues accepted….

      • “Australia always has that.”

        I think we’re about to find out that we don’t in fact always have that.

      • SBS on Thursday night featured a well qualified middle eastern ‘civil engineer’ who came here with his family under the ‘skills shortage visa program’, has applied for 200 jobs but as yet no interview.

        The ponzi you refer to will evaporate like the easy earnings of the commodities boom forever meme !

        In fact the Government should compensate this poor sod !

    • I think we are seeing it. It’s being talked up by media and politicians but we can all see and feel it.

      • Tassie TomMEMBER

        That’s why I wrote “industry”, not “industries”.

        Not such good news for the barista sector though – price of imported coffee beans will rise.

      • Coffee: not if you are buying from Northern Rivers or Atherton.

        Or buying from places where our currency relative to theirs is fine. India, Indo, PNG, Africa, etc etc

    • One might think so but most Aussie manufacturing exporters(import replace-ers) that I’ve looked at are running old, inefficient and uncompetitive equipment / process flows. Think about Whyalla steel works a lower AUD really wont help that much because their competitive position is really measured in terms of the Value that they add to raw Iron Ore. We can and do ship Aussie IO to China and bring Chinese Steel back to Australia. This suggests that Whyalla’s only differential value is the cost of shipping finished steel back to Australia against this value they need to subtract higher wage costs and much older less efficient Steel making furnaces/ facilities. For Whyalla to really be competitive they’ll need to make some major investments in automation and furnaces, how will these investments happen if the AUD is in freefall.
      A similar situation exists with many if not most Aussie manufacturing exporters. The last 10 years have been a very difficult time for Aussie manufacturers and as a result our Make section has under-invested. This sustained period of under-investment means we have slipped way behind global leaders on all business production metrics. There is only one way to actually redress this deficiency and it requires a massive amounts of capital invested in what politicians consider to be failing 20th century legacy industries. It’ll be difficult to find anyone willing to make these investments even if the AUD stays at around 75c. It’ll likely be game over if the Aussie falls to 40c. You see the problem is we are not in a position to make these factory upgrades ourselves, truth is we’ll need to buy the solutions (as in Import them) that others have developed, wrt steel this will mean buying Chinese steel making knowhow and technology at a time when they’ll have huge excesses in available capacity, this wont make much sense to anyone so good luck finding an investment banker to back the proposal.

      • i agree, and there is so little manufacturing left the skills are not here either, the tool maker I use wants to retire and I beg him not to every month as I cannot find any others

        the only hope for strayan manufacturing is foreign companies looking at opening a turn key plant with their own employees doing maintenance and training and aussies being the process workers

      • Ronin8317MEMBER

        I believe the underinvestment is linked to how owners of businesses will makes more money from selling the land their business is sitting on, then move the whole setup overseas.

      • @Alby, Very True, our experienced Australian Production focused Engineers are not just retiring themselves they’re retiring an entire Industry.
        Today we desperately need Young Engineers learning the Tricks of the last generation and applying their own modern twists, instead we have old Engineers working to sustain Old production flows followed by a complete demographic void. There are VERY few good young production focused engineers in Australia and I mean very few.
        A few years back, when I was still considering an Aussie Make type investment, I had to face the reality that every industry I looked at required a lot of external help. I would have needed to establish a network of foreign mentors for our young local Aussie engineers, if we ever wanted to transition these businesses from the old way to a new modern JIT automated production flow.
        It was on one of my many trips around this endless circle that I concluded my skills should be deployed elsewhere.

    • It will be great for manufacturing IF the pigs with their snouts currently in the trough are willing to go hungry. That is NOT going to happen. It will all just be a mess!

    • Thanassis Veggos

      Not really… most of it is foreign owned.
      Low AUD means low net gains for them, once they translate AUD gains to their currency.

  2. Bear porn is a great way to start the day. But between here and there we’ve got a long way to go and there’s a lot of ifs in this argument. I’ll reiterate my warning from last week: all you novice traders who went big on AUD shorts best have stops placed because anything can happen.

  3. HnH’s do you think there will need to be a specific trigger for the aud to breakdown to that level, or will it be more of a melt?

  4. adelaide_economist

    Not entirely sold on the rosy picture this paints for Canada. It’s a little selective – for example, Canada’s public debt as a % of GDP is way, way higher than Australia. Their housing bubble(s) is/are also as horrible as ours. Key industry decisions are made largely by foreigners – either officially or unofficially – just like us.

    The main benefit I see is that their major trading partner (the US) is ‘more like them’ so the things they trade and invest in are probably a bit more familiar and maybe smarter decisions can be made.

  5. The Chinese will continue to fund our lifestyles by purchasing our houses. This will last for 10 more years.
    Cant see the $A getting below 60c. Otherwise the Chinese will be getting a 2 for 1 deal on apartments, then there will be a stampede.

    • Not if the cracks start appearing first. The gamblers will take their chips elsewhere. They’re pulling money out of China. Things can’t be all that flash there either. Like I’ve said for years, if China is such global powerhouse, the future centre of global capitalism, why are so many of them in a hurry to get out of there?

      • Ha ha ha ha! China hasn’t resembled even the broadest definition of communism for decades. There’s another system it resembles, although people don’t like saying its name. Mussolini would recognise it in an instant.

      • [email protected]

        Two reasons:
        To protect their money from being “retrieved” by their government; often from whence it came!
        Playing the longer game re Chinese investment in Australia. There will be a time when the Chinese will make money out of their people; in Australia, on their terms.

    • “Otherwise the Chinese will be getting a 2 for 1 deal on apartments…”

      Except for those who have already bought and would have a 1 for 2 deal.

  6. Duh!!!! The Curreent Account matters!!!!?????????????? FFS!!!! Just 60 years too damned late with this analysis. It was ALWAYS going to end like this!! ALWAYS! The so-called reforms of Hawke/Keating floating the currency and open capital markets was just designed to postpone the inevitable but make it all so much worse.

    So where are all the bloody geniuses out of our Universities now who have brought us to this unholy mess? (Please leave out the ones who are going to print A$ to infinity as a solution)

    Strewth!

    • Ronin8317MEMBER

      Part of the neo-liberalism agenda is to eliminate the idea of national interest. China reverting back to it’s historical norm as the manufacturing center of the world will be a huge shock to the global system. Too many academics believe in the ‘end of history’ and how ‘this time it’s different’. If they look back at what happened throughout history, trade imbalance is never sustainable, and almost always leads to economic devastation.

      Most people associate Keynes with ‘running budget deficits’, and totally ignore his insight on balance of trade.

      http://www.sofer.com/blog/keynes-on-the-balance-of-trade.html

      • Terrified, mortified, petrified, stupefied…by you.~ Russell Crowe. A Beautiful Mind”

        What a wonderful reasoned response that adds so much to our collective knowledge.
        You out of nappies yet?

      • sunny I understand where you are coming from but I’ve been at this story for 50 years of economic awareness. Now it’s suddenly a big story???? To say it has been a frustrating experience is something of an understatement,

      • sunnyuberMEMBER

        I too have been following this story for ever……and for quite a few years my wife was interested to hear about what I was reading…but she’s so sick of waiting she now tells me to STFU. I’m certain this will end incredibly badly for many people….but how…. and when ?. There’s some serious money to be made for anyone that can pick which way it goes.

      • sunny yep! First truth is “They’re going to print’ It’s all they know – ALL the CB’s, So that is what they will try. Then we have to try to imagine how Aus fits in that. It’s just a nightmare but it is actually happening!

  7. The numbers don’t lie. The only question is when are overseas bankers going to accept the truth? That is the event horizon, opening the doors to our own version of Dante’s inferno

  8. The RBA will not be able to cut rates to zero or anywhere near if the crisis erupts in the external account. Interest rates will be far far closer to 12 than zero…unless we just sell everything….EVERYTHING…to foreigners.
    Unfortunately a that stage our democracy is not going to be the stable model of the last 60 years so likely our assets may not be such a premium price either.

  9. This is good for my kids who earn in USD, but bad for me and my wife, who have AUD savings

    • Then your savings should be in gold.
      The current US$ gold price is US$1267..so when the A$ goes to US$0.40, you multiply the US$ gold price by 2.5(1/0.40)
      to get the A$ gold price of A$3,167.50.

      • Aussie1929MEMBER

        although I agree 100% about savings in gold, I have noticed the last couple years, a correlation between the AUD and Gold spot price. Glad I got most of mine in 2014 at the dip.

  10. Theres another aspect of this problem that’s almost never talked about, it’s called Business Risk.
    Most economists seem to believe that business risk reduces for manufacturing exporters as the AUD falls, frankly I’m floored by this assumption.
    In modern business investing theory: Volatility = Risk
    There is no clearer business relationship than that which exists between Volatility and Risk. So AUD volatility creates by definition a tightened Businesses risk Vector. Given this increased Risk environment, what is it that leads Economists to expect a recovery in local manufacturing/ local exports?
    IMHO Long term the investment might happen, long after the AUD stabilizes at some new low, but short/medium term we’re properly @#$%ed if we’re expecting a revitalized Make section of the economy to pull us through.

  11. Is it possible that instead of the dollar going to 40c the pain is shared by both the currency and interest rates.
    For example – rather than interest rates at nil and the dollar at 40c, perhaps official interest rates are at 4% and our dollar bottoms at 60c??
    Of course official rates at 4% still blow up our debt bomb and the banks, but I am just trying to consider other factors that may stop the dollar going to extreme lows?

    • Are you mad, Dave??!!!
      “Share the pain”
      That’s the last thing anyone wants to do….that’s why we are where we are….
      Much better to inflict the pain on those who can’t fight back….those who have cash they are trying to preserve to deploy when they see a risk/return ratio that makes sense… Nope…it’s the A$ to 40 cents and interest rates to 0% as The Only Option….
      And here’s the irony. Just like banning short sellers from any market, there will be no one left to catch the economy when it falters. At that time not only will there be no manufacturers left to manufacture anything to export, but time will have eaten up the savings of those who would otherwise have stepped up to start economic life anew. As China Bob notes above…. we’re properly @#$%ed

      • Hmmm – your right, what was I thinking.
        However, if it gets as bad as you suggest, then I think we are going to go out “Brazil Style” = currency collapse and high interest rates. Greece economy – here we come!!

      • Anybody earning USD will be fine. Not many of them, but enough to become a new overclass. Australia will be like South America. A few very rich (many of them recent immigrants), lots of grinding poor. Higher crime, ghettos, playgrounds for the wealthy.

        The boomers will live to see it happen. They’ll be at the front line as the social safety net collapses.

  12. If you have your cash in gold instead of the bank and the A$ goes to US$0.40, then you will multiply the US$ gold price by 2.5 to arrive at the A$ gold price.

    This is why you buy gold… because it is the currency XAU.

    • So current XAU A$2250 = AU @ US$665 @ .4000. You could be right, of course, but it’s not that long ago that AU was US$665, and much, much lower. If we might have learned anything from the last 7 years it’s that ‘they’ will try to do whatever it takes to engineer their outcome…..George Soros or not!

      • “—-it’s not that long ago that AU was US$665, and much, much lower.”
        May 2006 was first time in last 10 years Gold got above $US 665 — it got to $775 that month. It again went to $665 in July ’06 AND stayed well above that from Sept 2007 onwards. Why I think Gold is a sure bet is because of the mind bending astronomical money printing that has happened since Sept 2007.

        While ALL Gov’ts hate Gold (it’s a canary in the coal mine) there’s a time limit to their ability to manipulate it for ever. Currently doing its job here in Australia (over A$1700 right now) in protecting savings – a whole lot LESS risky than trying to bet on fiat currencies or Short stocks.

        http://www.kitco.com/charts/historicalgold.html

      • And all that makes sense, even to me! Money printing ( which of course, it isn’t. It’s reallocating future debt to today’s economy – the actual amount of base money isn’t changed all that much); the implied threat of inflation etc etc. That’s why it went to $1900, and looked like it was on its way to Mars, along with AG that was about $50 at the time, and $100 was coming just next month….
        But inflation was never coming; isn’t coming and won’t come. If inflation was the reason for the original spike, it isn’t anymore. So the reason, now, has to be deflation. Right? That doesn’t make sense to me.
        That’s as much thought as I give to it really! Inflation isn’t coming, deflation is. Gold might mumble about at varying rates in different currencies, but all of them will be $US dependent, and if it falls….. gold isn’t going to come to the rescue of other currency denominated holders – the US economy being in strife and dragging us all along with it. How much will an indebted householder pay for gold if their property assets have halved etc? If they have it, if you do, you’ll probably join the queue of sellers….
        Just a view, of course.

      • The current gold(XAU)price is A$1708 or US$1267.
        If the A$=US$0.40 at this moment, the gold price would be A$3,167.50.

      • Hi Janet – Yes we know the Yanks banned Gold back in 1933 only to ramp up its value the next year by just on 32% ! They stole the savings of many who were stupid enough to surrender. As of January 1, 1975, U.S. citizens were again free to own gold in any form, including bullion.
        No one’s saying that Gold doesn’t fluctuate in Value – But you didn’t mention that Gold went from an average price of US$36 in 1970 to an average price of US$615 in 1980. -just on 1650%!

        Things are a huge magnitude worse today than in 1980 and Gold will again play its part in being an asset rather than a liability.
        http://www.nma.org/pdf/gold/his_gold_prices.pdf
        HISTORICAL AVERAGE GOLD PRICES 1833 – 2011

        BTW – Gold doesn’t need Inflation to boost its value -it does just as well in Deflation – Google it.

      • (Apologies for sloppy maths above, A! Somehow I managed to put in today’s spot as US$1667 not $1267 !)

        I did suggest you check the graph from 1980 AuRules? So I am aware of it. In fact, I was a buyer back then, when it had ‘retraced’ to a better level, and I have a first hand experience of what happened after that! And to be doubly sure I’d taken notice, I was a holder of gold mining stocks in October 1987. Twice bitten thrice shy, I guess….

      • “Twice bitten thrice shy, I guess….”

        Explains a lot there Janet – thanks for clearing things up !

      • Janet

        I’m just thinkin’!!!!

        At some point the USD fails. It almost did before Nixon scrapped the conversion to Gold. The world is aflood with USD That’s why UST are near enough to zero for any term. At some point they are not worth holding, The deflation theory seems paramount atm I grant. But there are now many countries working towards the end of the USD hegemony. China, Russia and Iran amongst them. I’ll go this far…this does not seem to be happening….until one day we will wake up and it has happened!
        Overall the details are more than I can hold in my head!!!!!

    • “This is why you buy gold… because it is the currency XAU.”

      Spot on athalone – you nailed it. A virtually risk free investment ( with no borrowed $ ) and with instant conversion to fiat if fiat needed.

      • 2 things. How convertible was gold in the USA after 1933? and remind yourself of the gold price by having a squiz at a graph after 1980. I’m pretty sure that both of those events were preceded by a sentiment akin to today’s, albeit for different reasons – the ‘preservation’ factor was the same….

      • Janet.
        ‘Liquidity’ thy name is gold.
        Ask yourself why 138 countries have gold in their foreign exchange.
        The US government advertises that its gold is 79% of its foreign exchange.
        Ask yourself why Mervyn King and Alan Greenspan, both knights of the realm ask people to hoard gold to protect themselves in the coming turmoil.

      • Gold might very well be liquid. It has enough history and followers to ensure that. But what is not certain is it’s future liquid price versus another commodity/currency. As I have suggested before, it may very well be the best survivor. But if that is at a substantial discount to today’s price, that will be of little comfort to those who hold it. Gold appears to me to be no different from property, stocks, cash – anything that is traded. It is a great buy and hold, until the market turns. Then, those who are true believers hold on far longer than they should….it’s human nature.

      • @ Janet… the triggers for gold will be geo-political. Think of a world with no reserve currency. Within 15 years the western world won’t be able to let China use 15 million Barrels of oil a day or India 10 million barrels of oil a day. We will need that oil to keep the Fed’s empire going. Already China is losing patience with us, but they know they need time to prepare so bare their necks for the time being.

        The day you will know that it is too late to get gold will be when the Russian underwater drones cut the cables from London to New York just as the Fed cohort are getting ready to rig the market in the pre-open as they do every day.

        You don’t have to go all in as you well know, you are going to lose 50% anyway on the stock market, property and bailed in bank deposits. Everyone is hoping that some sovereign bonds will only lose 15-20%

      • Janet

        I’m just thinkin’!!!!

        At some point the USD fails. It almost did before Nixon scrapped the conversion to Gold. The world is aflood with USD That’s why UST are near enough to zero for any term. At some point they are not worth holding, The deflation theory seems paramount atm I grant. But there are now many countries working towards the end of the USD hegemony. China, Russia and Iran amongst them. I’ll go this far…this does not seem to be happening….until one day we will wake up and it has happened!
        Overall the details are more than I can hold in my head!!!!!

        P.S. Fundamentally I agree with nyleta – one day the US doesn’t make all the rules – including the bullshit economics they have invented and we all have blindly followed

      • Hi AuRules.
        As you and I know it takes a long time for people to get their head around buying physical gold…years.
        If the people that are here haven’t already bought gold they will not exchange their debt-based fiat in time for the crash by end of year or early next year.
        Janet speaks of it as if it were poison.
        But after buying mine 5 years ago I still feel the responsibility to try to explain to people why you should buy it.
        This is a once in a lifetime opportunity.
        Meanwhile I’ll just be patient.

    • “This is a once in a lifetime opportunity. Meanwhile I’ll just be patient ”

      Exactly the way I feel although it ain’t easy as you know with the daily/weekly manipulation. Lucky for us the A$ going down town makes that a moot point. Janice & others are bearing scars from previous experiences – – . When Gold does run up – there will be eventually a time to get more spread around. I’ll be buying a home instead of renting.
      It’s like being invested in Banks (Big 4) – – I wasn’t but those that were got a great return. If they don’t get out soon they’ll get burnt to crisp 🙂

      • At one point in the article the analyst says:”?Large surpluses/deficits shouldn’t exist if everyone had a proper floating currency as any large persistent flows would move currencies to balance competitiveness.”
        This is funny because that is exactly what a gold standard is designed to do.

  13. haroldusMEMBER

    I guess this begs the question which European country is (and will remain) the least religious.

  14. Hunson Abadeer

    Great article, keep feeding through analysis from this guy, really well written.

  15. wasabinatorMEMBER

    So good idea for me to sell some more of the AUD “reserve currency” (hahaha) I am holding I guess.

  16. All these forecasts and predictions are not worth a dime unless it can tell when it will happen. All is about timing!

  17. – A Aud/Usd going to ~ 0.40 is not such a bold statement. I see more currencies going to down by say 50% against the USD. What I fear most is that interest rates (especially long term) are going rise significantly and that will kill demand & the Current Account Deficit.
    – But the ratio government debt to GDP is still remarkbly low here in “Down Under”.

    May you live in interesting times, right ?