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A thought on AUD
A long time ago I made a bad rate bet (and yes, a good many since). I
put on a deflation trade based on what I thought might happen. The exact
opposite was the result. The “growth trade” was the right read of the tealeaves. My (very) leveraged bond and FX trades went to hell. Such is life.
A large earthquake had hit Japan. Damage all over the south.
Infrastructure, utilities and manufacturing facilities were hard hit.
Lots of residential damage. No trains. Roads closed. Ports closed.
Airports closed. Communications down all over.
My conclusion? This has to be deflationary. It would hurt growth. Bonds would go up and the currency would weaken as a result. Wrong, wrong wrong. It is actually the other way around. At least that is the case for most industrialized countries.
Insurance companies pay claims. That money is immediately put to work
making repairs and replacement construction. The state, city or national
governments pull out the stops. Charity comes into play in a big way.
Industry is also insured for most of the losses. Reserves/savings are
dipped into at every level from consumer to central government.
Utilities spend what they must to make repairs knowing they will recoup
losses with future rate increases.
The good thing about a market misread that costs you is you don’t forget
it. I have seen the growth trade play out a number of times since
getting hit on the head. South Florida, NO, Indonesia, lower Manhattan
come to mind. There might be another one in the making.
Looking at the chart of the AUDUSD since year-end I am wondering if there is not a bit of “sell on the flood”
in the current price. If so, that would be a misread based on my
experience. There will be a surge in domestic demand. For the AUD strong
domestic demand means higher interest rates and foreign capital flows.
It means a stronger AUDUSD.
There are always many factors that influence FX rates. Natural disasters
are just one. These headlines suggest that weather is playing an out
sized role. We shall see.
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Ooops.
Cooter
Well I have to respectfully disagree with the inflation/deflation thing. There's always an entanglement. For instance if there was a huge earthquake in japan it would be inflationary japan deflationary USD because most of their insurance is denominated in usd companies.
Now australia. All you have to do is research primary underwriters for home owners and auto insurance and commercial real estate to find the pairing. I didnt do it but my guess here is that it's going to be inflationary AUS and deflationary GBP. That it's not working like that is what seems odd to me. I think you might be on to something.
http://www.youtube.com/watch?v=aDip6a9kfB0
I agree with most here, AUD is a short, USD is a long. EUR is a short, had my first $1k Sunday night in about 9 months, shorting Euro futures. So much air beneath that!
Fear Factor is showing some interesting moves, see chart annotations.
http://oahutrading.blogspot.com/
Fear Factor just popped strongly above the upper Bollinger, that means a "surge of no fear". Since this whole chart depicts the "Great Bear Rally" (trademark HT), these pops usually preceed a small decline, but sometimes just a consolidation, NEVER a strong move up. I am betting against a strong move up.
The new VOC is shown
As opined last week, Euro did taunt and pop the PRS 177, now with a kick down from the Daily Person Pivot - the Magenta line.
I am Short Euro Futures from last Friday and lovin' it.
In the short term you can debate whether the floods are AUD positive or negative.
Over 12 months the floods constitute the biggest boost to Australian agriculture in a decade. The drought has ended, all irrigation areas will be full (and more).
Farmers are preparing to plant once-in-a decade crops across 1000s of square
miles of usually non-arable land.
Agriculture is Australia's #2 export (behind mining). Export prices
for grains, rice, cotton etc are at multi-decade highs. Nice timing.
Um your going to postulate 12 months down the road, when no one has yet even done any on the ground analysis, considering the enormity of events as of today, too future events....bawwwaaaaa! The toxicity now incorporated into the soil alone not withstanding all other factors (see above) speak volumes about the emncity of the task ahead, the legacy effects, can you say Ground Zero syndrome etc etc.
Skippy...Rudd old boy as a Queenslander my self, on the ground, tapped into every conceivable network hear about, I beseech yee too tell no lies, it is better to face the hard cold facts and ready our selves to the hard task ahead. BTW I 'll off the rangar for ya, nasty bit of Machiavellian biz that, but that what ya get for applying that mandate we gave ya....oh hell I'm feeling all magnanimous so chuck in a few mining magnates too OK.
bruce check your charts, Aust bonds down, AUD down, China looks like it could go to 3.00% loss on Shanghai.
we are at a tipping point globally imo, Aust markets rely on China right now Shanghai is down over 2%, this has been happening for mths. Everything is screwed so i would be looking at doomsday trades.
It makes sense that spending of savings will stimulate. Insurance is a form of national savings. Borrowing is hard on currencys.
The party will continue until the Aussie housing bubble bursts, IMHO this year, c'mon 8 to 9 times annual income for a house, rental yields at less than 3%.
Watch RE listings they are increasing daily, only shortage is a shortage of buyers willing to pay these crazy prices.
That, too, relies of the Chinese pulling their heads in
house prices in australia arent maintained by the workers at 9x price to income, theyre maintained by chinese investors who are desperately trying to piss away their devaluing US dollar reserves
But that will surely happen soon, too - I mean, Australian real estate is ludicrously priced from the perspective of a global investor that can snap up better deals in countries where the bubl has burst
If I read the current chart 1/16 Sunday 7:50 PST, silver is down .96. What are the thought of a buy?
For what it's (technically) worth, the daily AUD/JPY chart from April is outlining the statistically reliable, in this case bearish, 'coil-breakout-reversed' pattern, along with year plus uptrend breaks, pointing to hard-to-imagine lower targets at 77, then 70.
My view is that pictures such as these, including the recent muni patterns, are worth more than a 1000 words of attempted forecasting and analyzing the worldwide credit-collapse-stag-flation possibilities.
As some M.D.s know, the patient is trying to give you the diagnosis.
"...pointing to hard-to-imagine lower targets at 77, then 70."
I have seen these same levels and even last week had to ask 4XAddict if I should even post these forecasats because they are so insane. If you're on the right side of the trade from now to the end of the year, you'll not only make your month in a day, you may make your year in a week or your decade in a month.
It's gonna get wild!
All I know is that the AUDUSD still has a gap to close on the Daily @~ 0.9225.
:D
it's all about borrowing costs
go study the borrowing costs of australia blowing out on RMBS losses held on taxpayer books. in other words the 10x thousands of houses (damaged from floods, write offs holding mortgages are FUBAR. forget the commod bubble, gold, copper, coal. Now after the flood disaster watch the commod unwinds, esp on coal. China will tighten...
so china slowdown + commod bubble + Aust hosuing bubble x interest rate blowout x Flood costs blowout inflation = inflation depression trade.
i think both your and bruce's arguments have merit - yes there will be some permanent loss of income, much temporary interruption in income. But australia has a shortage of tradesmen, and robust building standards meaning not any ol joe can knock up repairs. The repair /reconstruction will therefore be inflationary, much of which will be borne out by insurance. The new houses built will be bigger /more valuable (at a minimum they will have improved standards of flood resistance)
Obviously, just on a basic intuitive level, such destruction has to destroy wealth. but it'll be a beacon for economic activity, and there has to be some opportunity in that
Absolutely.
1.) The AUD still has less hair on the end of its lollipop than most other currencies.
2.) The result of floods, earthquakes, etc., is always that there is a stimulus to economic activity that would not have otherwise been there in absence of such.
The destruction of capital stock, etc., is exactly that, the broken window, which detracts from the stock of net wealth but does not show in any accountings whatsoever...GDP, etc.
The replacement the broken window shows as additional GDP that would not have been there otherwise.
Most folk oft confuse the two and in fact have termed it the "Fallacy of the broken window." Doesn't matter one way or the other. The homes and bridges do not rebuild themselves.
3.) The increased pricing at the margin of select commodities due to floods in Oz will accrue to all commodity producers, including Oz once exports resume.
4.) Terms of trade are not generally deleterious to commodity producers and exporters for at the margin, there is generally little long run, sufficient supply to fill the demand. That being, the exports are not in plentiful and fungible competition.
The AUD is a buying opportunity, continuing its play upon continual commodity price increases via both fundamental demographic (them little buggers just keep muntiplyin', eh?) and monetary inflationary perspectives.
2.) were still in the mist of a huge government stimulus, cough debt and selling of public utilitys fueled , the previous surplus was either devalued or eaten away in the GFC, the global debt markets are getting expensive and signal more of the same etc.
3.) three months before any significant infrastructure rebuilding can occur, hence no reliable transport even if one can operate AG/Mining site due to Force majeure conditions, many power plants will find things increasingly difficult as stock piles are running short, no energy...no boom boom eh, rationing is a real possibility down the road, the weather controls our fate not the markets, to top it off many heavy and light industrial production facility's were located in flood affected areas due to land costs hence no insurance or at huge premiums (re-insurance cost prohibitive) etc etc.
Australia is up to its eyeballs in debt, with prolonged reduction in productivity across all sectors for months to come, china is gearing down to boot.
Skippy...I know, I know, failure is the new success buy buy buy! Disclaimer I now longer invest save a few local projects and only wish to diminish the exposure to me and mine.
PS. Knukels when were done cleaning up were gong to have a party and give what ever deity some pray to the finger...your invited...it should be a real piss up!
like I said an inflation depression trade, more so based in the state of Queensland and spilling over to the rest of the economy.
short bonds, short the AUD
as painful as it for me to say... good job Bruce!
Bruce,
Surely your business reading included "Liar's Poker" years ago...the what-ifs the traders played included 'earthquake in Japan'...go long the Yen as capital is repatriated by the insurance companies to re-build.
I think it was either Dash-Riprock or John Merriweather who nailed that one, will have to read it again.
In Oz, less than 50% of the houses have flood insurance so the expectation, despite all the can-do gumboot camaraderie, is that the government will chip in big time.
To paraphrase Homer Simpson..."Is there anything the government can't do!"
I remember in the aftermath of the New Zealand earthquake someone commented that the rebuilding process would stimulate growth and I think the same logic could certainly be applied here . Of course the strong correlation between the AUD and risk appetite in equities is another bullish factor for the Aussie . However I'm wary of going long in AUD/USD given that the pair is up at record highs .
The loss of productivity will take at least a decade to overcome, growth or clawing our way out of the pit, call it what you like but, the right hook (asset deflation) followed by an upper cut (consumables inflation) is gonna hurt a bit.
Skippy...never the less we wil move forward one step at a time and look out for each other.
Pain in the short term to be sure . Hopefully not to a large degree though .
and the morons and Deutsche Bank saying that the RBA will raise rates because of the food/inflation spike. they're just protecting their lazy trade that pays a high yield.
these floods will take out Australian bubble housing market = FUBAR
bingo...we have a winner!
Skippy...40% inflation due to hit on perishable foods.
yep inflation/depression trade. au bonds will be toast, as will the AUD when GDP gets slaughtered. all eyes back to the debt to income aust housing bubble.
investment banks and the like are just siting on the AUD with the huge yield offering.
A nice HFT flash crash knock those f****** out
Hi bruce, well were to start. 500 sq. km of Queensland are flood effected (now to include large areas of New South Wales, Victoria, Western Australia and Tasmania (contrasting bushfire south of Perth ), the road/rail between Gympie and Rockhampton is a wreck (damage still to be determined {under water}), lending costs all ready high and acerbated by 50 billion in CC debt over here...cough taped out, most of our Ag land is too sodden to even get equipment on and will remain as such for months (3 month of the rainy season to go), 20 plus mines under water and depending on the weather (see rainy season) limited amounts of productivity to ensue, towns/city's repetitively flooded hampering rebuild, etc etc.
Now factor in health related issues, infection (see toxic sludge due to AG products / industrial areas completely washed out ie fertilizers, pesticides. petroleum products, decaying plant and food and the best for last sewage, all mixed together and spread around in a fine particle sludge. Which at this time is being hosed back into the river here in Brisbane and affected areas, if this stuff gets dry then it become a flaky easily airborne inhalant, see legacy health problems, virus not see since the 74 flood is back.
Any way to make a long story short and as my friends and family involved in every conceivable enterprise going on down here say...this is a sink or swim event (pun apropos), this first year will be the cull and the next will be an exercise in treading water, its all about servicing / refinancing old debt and establishing * if * possible new debt, then servicing it and we all know the cost of that is going up and up and up.
This is no earth quake (I almost wish it was, easier to fix), this is biblical flooding with the potential for a follow up cyclone right up there.
Skippy....I wonder what all the small and medium financial fish will do for a living whence GSE predators eat them, will sacrificing the young become fashionable again...um.
PS. on a happy note, I have never seen in my worldly travels, the the unselfish response by my fellows. The amount of people with boots, gloves, brooms, buckets, high pressure gear and their backs, too help complete strangers by driving or being bussed into other areas than their own in-order to help clean up_ is_* staggering * to say the least. This effort cuts through all strata of society rich or poor, none will want to admit later on that they did not share in this coming together. Looks like I'll be changing citizenship soon.
Biggest short in FX at the moment, and overbought HFT grind. something like 4billion worth of longs sitting there
The Queensland flood disaster is a complete disaster in the sense it should create a tipping point for the Australia economy that has been running on 'assumption's that the terms of trade with china will remain constant. In the last 6mths trade has been slowing.
Any reconstruction efforts will be a drop in the ocean to offset the huge income/economic losses as income from mining exports (coal) are 'gone' from the floods + china slowdown. The government is running a 50billion deficit (population of Australia at 22million), rough estimates for insurance payouts and losses of income is at 4-5 billion. Either we see some Aust insurance companies go bust or the government backstops and goes further into deficit. Aust bonds are already paying a premium because of the housing bubble in Aust, this disaster should send yields upward when the market starts to question how Australia will cover the massive financial losses.
The GDP will be crunched, that will freak out the longs and have HFT go all short in a panic. At this point we are waiting for the 100MA to get knocked out.
If you got balls you will short the AUD, or by cheap put options.
The construction industry will get a nice boost out of the floods, and the insurance claims are already pouring in. We have builders, painters etc here already on the move to Queensland for the extra work.
You have thousands of houses, shopping malls and all sorts of buildings needing repair plus to sundry infrastructure.
Dont know if it will be on a concentrated scale enough to boost AUD.
It will however put uppward pressure on construction costs of housing and push up housing prices for a bit you would think (outside of the affected areas that is).
An interest rate rise would be a nasty risk with Australians heavy into credit cards and of course mortgage lending (you see we missed the global financial crisis so didn't change our spending habits too much).
But then again we now have near record low unemployment.
I think it is the strong AUD that have kept costs down and taken pressure of mortgage borrowers weekly budgets.
"push up housing prices for a bit you would think"
Nay, in December 320,000 new listings for houses hit the market, that's a 44% increase in the previous month...ouch.The wave of property hanging by a thread...sup prime, investment, even jumbo is huge. Many of the flood affected areas are non insurable, historical flood areas, this will required additional debt to already over burdened and razor thin margin businesses.
Skippy...the chimera of a housing shortage in Australia is about to be rubbed off. BTW the helos hovering over my flood affected area is giving me flashbacks lol.
AUD/USD is a short. I'd rather trade price action than the MM news or natural disasters.
Play the Euro/USD, up and down. Hits 1.339? Sell it. Hits 1.289? Buy it.
Sure fire. No risk.
Been doing it for a year in a practice account and with sufficient margin, it's a no-brainer.
hmmm, i like Bruce's stuff normally, but this is the wrong way to think about the floods. The analogy with Japan doesn't cut it. He's obviously never spend any time in queensland. This wasn't damage to major cities that require total rebuilding. But what it does represent is a permanent loss of income. Mines are shut. That income is gone. Buyers have placed their orders elsewhere...etc etc...
In these situations, the problem with being long of aud here, or short bonds is that you are effectively short an option 9for which you ain't getting paid) at somewhere still very close to the highs. If the ccy were at 80c then fine, but its not. It's within 4 % of the highs .. which are already proving to be a problem to almost every other area of the australian economy outside of mining.
Why be short an option when you have no idea what the devastation and flow on effects to the economy are. And anyway, so you buy aud here... where's it going to? 1.03? Dumb trade imo since it's real value is like 80c, which when china pops or fizzes is where its heading back to.
Coincidentally, it is today (in Japan) that earthquake hit Japan.
http://en.wikipedia.org/wiki/Great_Hanshin_earthquake
I did sell a little gold before New Years but I am unsure if that was smart. Anyone think silver is getting into a buy area? I think if down another dollar maybe?
Turd posts analysis pretty regular over at his site:
http://www.tfmetalsreport.blogspot.com/
Cooter
I've just loaded up at $28.1 this morning. Now at 28.2
BTFD!
Looking to possibly short the GBP/AUD post aggressive 9 day run off early Jan lows at 1.5150 to Fri close just above 1.60 and up against daily trendline resistance.......yield edge, carry, central banks' capitulation to copy the FED and reflate.
I think that might have been last years trade bud. The macro story is turning in both those economies - in the UK, high inflation will mean a move away from 'emergency' level rates, and in Australia you have the flood impact (its a real and permanent loss of income, sorry Bruce, i like your stuff, but i think these arguements are garbage, at least in this example) and you have a slow down being engineered in china.
If you are refering to the possible GBP/AUD short I don't think I said I was about to marry the fucking thing forever Huggy man.
And, if the macros are turning and inflation means coming rate increases along with austerity measures in the UK then where is the edge for the GBP and other central banks attempting to replicate the FED?
There are two counter issues:
1. China inflation and tightening are bound to spill over the AUDUSD trade.
2. How much farther has the AUDUSD to go, parity is serious business, getting far from it will be real hard (watch CADUSD).
Tough trade I say, I am as well debating this pair, short or long from here... better let it play and then move.
Don't forget to take into account the new mindset: A broken window will stimulate the economy.
If that doesn't do it, print.