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Cross currents hit

22 September 2014  |  Economics

Cross windGlobal financial markets do not act in a linear way. When the world economy is in trouble, which usually means that the US economy is in trouble, then investors rush to buy $US. In theory, they should do the opposite.

The same kind of contrarianness is evident in offshore buying of Australian shares. When the Australian dollar rises foreign investors get more keen. In theory, it should be the opposite because foreign currencies buy less Australian shares. What SMSF investors need to interpret, is how they are going to respond to such contrarianness.

We now appear to be in a world of cross currents. The Australian dollar is falling, supposedly on "China fears". In reality, it is probably just returning to a more sensible level:

 

"The Australian dollar has cracked through to US88¢ to its lowest level in nearly eight months, as investors continued to snap up US dollars after China all but ruled out further stimulus, leading to a fall in iron ore, and US economic data on existing homes sales disappointed.

The local currency is currently buying US88.72¢ early on Tuesday morning, down from US89.02¢ in late afternoon trading on Monday.

The fall of 0.55 per cent during the New York session takes the Aussie to its lowest level since early February.

Westpac Banking Group New Zealand’s senior market strategist Imre Speizer said the surge in the US dollar, which is experiencing a “multi-month rally” reflects a four year high for the greenback and “demonstrates its safe-haven identity.”"

 

The Australian share market is also close to wiping out this year's gains, once again reinforcing how much the stock market is a dividend play and not a capital gains play. This will be at least in part because of the falling currency. Foreign investors will be selling off, trying to get out before their holdings are worth less.

But all is not so rosy in the US, either, as the AFR reports:

 

"One of the founding fathers of the hedge fund industry, Julian Robertson, says global stock and bond markets are in a double bubble that will end in a “very bad way”.

Mr Robertson, who earned billions betting against the American subprime housing market before it collapsed in 2008, is worried that ultra low interest rates from central banks have pushed investors into riskier assets and pumped up prices to unsustainable levels.

There are two bubbles that will “bite us”, he said at a conference in New York.

“The first bubble is that bonds are at ridiculous levels,” the billionaire investor said. “The small saver has no place to put his money except stocks. I think that the situation is serious on that score. No one seems to be concerned about that.”

Mr Robertson founded US hedge Tiger Management in 1980 with $US8 million in capital that grew to as much as $US22 billion over two decades. Now retired, the 82-year old has an estimated net worth of $US3.3 billion and still manages his own trading book, according to Forbes.

He drew comparisons between the frenzied state of the financial markets today to the lead up to the Black Monday stock market crash in October 1987 that came “out of the blue”.

“There was a bubble and it was pricked and then boom!” he said."

 

Pundits regularly make predictions like this and they are just as regularly wrong. But if they are wrong everyone forgets. And if they are right some will remember. It is a form of quacking that has no moral hazard, as it were.

But it does underline just how distorted global markets have become because interest rates have been close to zero. Australia has been seen, rightly, as an exception to that. But Australia's status as a safe haven may be about to fade.

 

 

 

 



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