Debunking bubble economies - Australia pt4

It's pretty much given that the Australian bubble is getting tired and that the fall has started. I think we've seen the top of the AUD, specially against the EUR — for full disclosure, I am short and intend to grow the size of the position even it's already sizeable.

There is a potential for perfect storm in Australia:

  1. Australia housing bubble is the biggest of modern history after Japan in the 1980 and China currently
  2. Australia's economy is very much dependent on the Chinese import of commodities. China is probably on the verge of a massive real estate collapse as well, and will take most of the global economies with it, but Australia is so much more exposed to China than most other countries...
  3. Australia's interest rates are among the highest, which means the currency has been supported by massive inflows of 'carry-trade' money. Once the risk reversal happens and that rates start falling in the country, the AUD will fall like a rock. Probably 30-40% against the USD and the EUR.

You can believe whatever you want, but please, never believe analysts, economists and the consensus they provide. 

I'm about as sure as anybody can be that rates have topped in Australia and that the next move is going to be down. They are following the US steps with a 3 year lag. It's almost a certainty that the RAB will cut rates almost to zero to save their banks, and in doing so, will create a massive collapse of the AUD.

One thing that makes so confident is that it's going against all the experts, analysts and economists projection, as you can see in this Bloomberg report:

July 28 (Bloomberg) -- Australian consumer-price growth unexpectedly slowed in the second quarter, giving the central bank scope to extend a pause in interest-rate increases.

The consumer price index rose 0.6 percent from the first quarter, less than the median forecast in a Bloomberg News survey for a 1 percent advance, a Bureau of Statistics report showed in Sydney. Prices gained 3.1 percent from a year earlier. Recreation, food and communications costs fell, the data showed.

The Australian dollar slid the most in a week as traders abandoned forecasts that Governor Glenn Stevens will next week add to what’s been the most aggressive round of rate increases in the Group of 20. With Chinese demand for natural resources stoking an Australian mining boom that’s pulled down unemployment, price pressures may reemerge later in the year.

“There will be no interest-rate hike next week,” said Rory Robertson, an economist at Macquarie Group Ltd. in Sydney. “The Reserve Bank of Australia will remain on hold for at least the next three months and probably into 2011.”
Speculation increased last week that Governor Stevens will resume raising rates as early as Aug. 3, potentially hurting Labor Prime Minister Julia Gillard’s bid to win the federal election on Aug. 21.

Gillard, who ousted former leader Kevin Rudd last month, is relying on holding seats in areas of western Sydney and Queensland that have large numbers of households with mortgages.

Stevens kept borrowing costs unchanged this month and in June, after boosting the benchmark lending rate by 150 basis points between early October and May from a half-century low of 3 percent, adding about A$3,600 ($3,200) a year to loan repayments on an average A$300,000 mortgage.
I’m not quite ready yet to accept that Australia can grow this well and be this fully employed and not have inflationary pressures,” said Annette Beacher, an economist at TD Securities Ltd. in Singapore. “The RBA’s got time to sit for a few months yet.”

A report published since the bank’s July meeting showed strengthening Chinese demand for raw materials helped stoke a mining boom that has pushed the unemployment rate down to 5.1 percent, below Japan’s level and almost half that of the U.S.


Leith van Onselen said...

Hi there. I just came across your blog. Regarding the Australian housing bubble, I have posted a number of detailed articles on this subject on my blog www.unconventionaleconomist.com. In particular, please consider the following articles:






I hope that you find these useful.

Cheers Leith

pej said...

Hi Leith,

Thanks a lot for stopping by and sending me those links.

I just subscribed to your RSS feed.

Would you allow me to use sections of your posts in my series dedicated to Australia — with due credits of course.

Let me know what you think about my blog as well.