Portfolio Update

I have been away in Europe for a few weeks, and it was quite interesting to see how quickly things are deteriorating, for example en France, which looks more and more like a developing country to me.

In the meantime, my stops have been hit on my EUR/USD short and my AUD/JPY short while I was away. I was stopped at about 89.00

I nonetheless managed to open a new short position on the AUD/JPY yesterday only, but at a much more favorable entry point than my original one: new entry point is 92.50 and intend to grow it larger if the AUD keeps the levitation game going.

Extreme Sentiment: The Case of JPY and AUD - And Portfolio Update

I have been following the JPY for some time, with my friend SS. He sent me last a few charts, confirming that the historically low bullishness (or high bearishness) has reached a new extreme, and that at the same time commitment of traders is showing extreme long speculative positions on the JPY, extreme long positions on the JPY by commercials, and the opposite extremes on the AUD, one of the bubble currencies to pop in the coming debacle.

Consequently, I have opened a short AUD/JPY position in addition to my short USD/JPY position and the long USD/EUR position that I had opened a few days ago. 

Peak Over-Confidence and Denial in Australia Confirms Economic Collapse Has Begun

Here are a couple of Bloomberg reports showing just how much Australian policy makers are in denial and plain incompetents (or liars?). From a contrarian perspective, this confirms to me that their bubble-economy has already began its bust is now confirmed. It will soon be time to short their equities and the infamous AUD, THE bubble currency.

Ironically, the public is not a fool, because they feel the pain in their wallets, and hence cannot believe the massaged numbers coming out of the government, nor the lies.

Finally, something I haven't picked up lately, but my forecast from about 2 years ago now, where I predicted rates would go down and not up in complete disagreement with ALL the economists, has been proven wrong.

• Australia’s Strong Economy Proves ‘Doomsayers’ Wrong, Swan Says
• Stevens Praises Australian Economy, Warns on Asset Bubbles

(Bloomberg) June 10, 2012 — Australia’s economic performance is proving the “doomsayers” wrong, Treasurer Wayne Swan said ahead of a government conference this week to address challenges including an elevated currency and uneven growth. 

[...] Public support for Gillard’s government isn’t getting a lift from one of the fastest-growing economies in the developed world, led by the resource-rich regions in the north and west. Consumer confidence is subdued and her governing Labor Party trails in opinion polls as tourism, manufacturing and retail industries across the south and east struggle with the sustained strength of the local currency.

“There are always those who are all too ready to talk down our nation’s prospects,” Swan said. “Over the past week, the doomsayers have been proved to be completely and absolutely wrong.” 

[...] Still, consumer confidence in May was near the lowest level this year
[...] Australia’s central bank cut interest rates by 50 basis points late last year and a further 75 points in the past two meetings. At 3.5 percent, the overnight cash rate target is still the highest among major developed economies.

(Bloomberg) June 10, 2012 — Reserve Bank of Australia Governor Glenn Stevens expressed optimism about the nation’s economy and cautioned against monetary policy settings that could reignite asset bubbles, the risk of which he said was low. 

[...] Stevens’s speech, titled “The Glass Half Full,” urged Australians to embrace more subdued spending and borrowing, and steadier asset prices, as a path to sustainable economic expansion and wealth. Employment growth this year and a gross domestic product report showing the economy grew 1.3 percent last quarter, more than twice the level forecast, underscore the nation’s resource-fueled strength.

Portfolio Update — Shorting AUD/USD and US Equities

I believe the market will somehow correct — mildly at least, maybe something more severe. Consequently, I've opened short positions on junk quality equities (Russell 2000) and, expecting the risk off trade to hit the bubble currencies hard, the AUD/USD (out of the money puts).

Entry points:
AUD/USD = 1.068x
IWM = $79.80

Portfolio Update — Closed Euro Shorts

Before Christmas, I posted about the Euro and wondered whether it was time to close the shorts and expect a bounce. I decided in the end to hold onto my shorts and wait for the end of the year break, in case anything serious happened during the public holidays. I was lucky on this one as the Euro kept on dropping.

Sentiment has been very negative on the Euro — for good reasons! — and the drop quite dramatic, from 1.50 to 1.26 USD. I am happy to take my profits here (closed my options at 1.2660).

Where to from here? Here's what I think about doing:

• If the Euro keeps on dropping, well, I won't short it at these levels, and I will actually consider going long the Euro.
• If the Euro stabilises at these levels, I will also consider shortly to go long, with tight stops and short term views.
• In any case, I will now consider deploying the capital freed against a short the AUD vs the USD. If anything serious and major happens, the risk-off trade should make a major blow the bubble currency of the bubble economy that is Australia.

Australia's Home Price Drop For the Third Consecutive Quarter — Central Bank Drops Rate

The Australian real estate bubble has popped and there is probably no end in sight, but here's the news about the third consecutive quarterly decline.

This is something I forecast more than a year ago, about actually 15 months ago and reiterated many times since then (including here): interest rates have peaked in Australia, and the next move is down.

Well, today, after much anticipation, I was proven right.

Nov. 1 (Bloomberg) -- Australian house prices declined in the three months through September, the third straight quarterly drop, as the developed world’s highest borrowing costs curbed demand. 

An index measuring the weighted average of prices for established houses in eight major cities dropped 1.2 percent last quarter from the previous three months, when it fell a revised 0.5 percent, the Australian Bureau of Statistics said in Sydney today. 

The median estimate of 19 economists surveyed by Bloomberg News was a 1.5 percent fall. They declined 2.2 percent from a year earlier.

Nov. 1 (Bloomberg) -- Australia’s central bank cut interest rates for the first time since 2009 and a Chinese manufacturing index slid, stoking concern that Europe’s debt crisis is weighing on Asia’s export-dependent economies. 

The Reserve Bank of Australia today reduced its key lending rate to 4.5 percent from 4.75 percent, saying Europe’s woes are starting to hit Asian trade. 

In China, a purchasing managers’ index fell to 50.4, the lowest level since February 2009, while South Korea reported the smallest gain in exports in two years. 

Nov. 1 (Bloomberg) -- The Australian dollar fell for a third day against its U.S. counterpart after the Reserve Bank cut interest rates for the first time in 2 1/2 years on signs global growth is moderating. 

The so-called Aussie declined against its 16 major peers after RBA Governor Glenn Stevens said inflation is close to the central bank’s target, adding to prospects policy makers may further reduce rates. 

Demand for the Australian and New Zealand dollars was limited after data showed manufacturing in China, the South Pacific nations’ major trading partner, slowed. “The Aussie is lower after the RBA rate cut,” said Lee Wai Tuck, a currency strategist at Forecast Pte in Singapore. 

“It seems like they have opened the door for more rate cuts because they say that inflation is likely to be close to target. I think there’s a possibility there may be another cut in December.”

With China imploding, and the end of the commodities bubble, and the collapse of the real estate bubble, Australia will face the implosion of two enormous bubbles and the only engines of their bubble economy.

From here, I think the probability for the Australian Bubble Economy to fall into the abyss is very high. So high that I wouldn't be surprised to see the AUD/USD trade at 0.50. The probability for this to happen is in my opinion much much higher than to see it at 1.50 as one of my bullish blogger states.

More Denial in Australia, One of The Bubble Economies That Just Busted

Here are quotes from a great Bloomberg report about the Great Australian Real Estate Bubble. I don't have much to add really. All the numbers and facts are there, including the final quote from Robertson, who pounds a "This Place Is Different" to explain why Australia is not in a bubble.

(Bloomberg) Sep 12, 2011 — Australia, where home prices are falling at the fastest rate in more than two years, may have a glut of properties and be set for a U.S.-style crash.  

The warning from tax-reform advocate David Collyer, commentator Kris Sayce and academic Steve Keen contrast with banks and developers that say a shortage of about 200,000 homes will underpin prices. 

The housing bears say builders and lenders are pushing flawed government data to keep prices afloat in the English-speaking world’s costliest place to buy a home. “It’s important for the government and banks to keep the myth of a shortage alive,” said Sayce, editor of Melbourne- based online newsletter Money Morning Australia. “Without it, prices drop, and negative equity results in housing repossessions and insolvent banks.” 

More than two-thirds of the government’s shortage estimate arises by including people who can’t afford housing, such as the homeless or those living in trailer parks, Sayce said. Collyer at tax-reform lobby group Prosper Australia says there’s actually a surplus of more than 250,000 dwellings after 15 years of overbuilding, while Keen argues the shortage estimate is swollen by inflated demand from handouts to property buyers of as much as A$21,000 ($21,700). 

Banks in Australia have more than A$1 trillion of housing loans outstanding, with the four-biggest lenders accounting for about 87 percent of the total. The Australian Bankers’ Association said it doesn’t have a position on the so-called housing shortage myth and declined to comment. 

Australia has the most unaffordable homes in the English- speaking world, Illinois-based consulting company Demographia said in January, with homes costing 6.1 times the average annual income. The median price of apartments and houses in Australia’s eight state capitals has declined 3.4 percent in 2011 -- the most since 2009 -- to A$455,000 in July, according to a report from Brisbane-based researcher RP Data on Aug. 31. The average full-time workers’ annual earnings is about A$70,860. The ratio of household debt to disposable income in Australia is 155 percent, higher than the 133 percent Americans accumulated at the height of the subprime mortgage boom. Demand for housing credit in Australia has plunged to the slowest annual growth pace since central bank records begin in 1977, data Aug. 31 showed. 

[...] The Housing Industry Association, a Canberra-based builders’ group, said on Sept. 1 the nation will have a shortage of about 500,900 homes by 2020 if it continues to build at the pace it has over the past 20 years. The greatest shortages will be in Brisbane, Queensland; Stirling, Western Australia; and the Gold Coast in Queensland, the group said. Recent statistics show that projection is doing little to buoy prices or lower delinquency rates in those areas. Prices in Brisbane fell 6.6 percent in July from a year ago, the biggest decline among Australia’s capital cities, according to RP Data figures. House prices in the Gold Coast dropped 5.4 percent and apartment prices plunged 7.7 percent in the year to March 2011, RP Data said in a July report. Stirling, a suburb 10 kilometers north of Perth’s city center, was among the 100 worst postcodes in Australia with mortgage repayments more than 30 days late as of March 31, according to Fitch Ratings. Across the nation, home loans more than 30 days overdue rose to a record 1.79 percent of residential mortgage-backed securities in the first quarter, while the number of riskier “low-doc” loans more than 30 days late climbed to a record 6.74 percent, Fitch said in May. Bank Research Westpac Banking Corp. (WBC), Australia’s second-biggest lender, in an October report on the nation’s housing market estimated a shortage close to 200,000. Commonwealth Bank of Australia (CBA) and Australia & New Zealand Banking Group Ltd. (ANZ) -- the largest and third-largest banks -- have also published reports in the past year that attribute the run-up in prices over the past decade in part to an undersupply of housing.[...] 

‘The Block’ — one of Australia’s top-rated television shows -- highlighted the housing market’s recent malaise. The series followed four couples as they renovated homes to attract the highest price at auction over set targets. More than 3 million watched the finale on Aug. 21 as just one of the four homes sold, for A$855,000, versus its A$840,000 asking price. Australand, Stockland (SGP) Australia had a total of 377,315 homes listed for sale online in July, a 22 percent jump from a year earlier, according to SQM Research. The percentage of successful sales at auction - - a common sales method in Australia -- in the week ended Aug. 21 was 50 percent, down from 60 percent a year earlier and 78 percent at the same time in 2009, according to RP Data. 

Developers including Australand Property Group (ALZ), Stockland and Meriton Pty, and developer-backed Urban Taskforce Australia, are among groups arguing an undersupply of homes will underpin prices.[...] 

Prosper Australia’s Collyer says there’s actually an excess of 256,324 homes, equivalent to double the housing stock in the nation’s capital, Canberra. That’s because Australia has built one new dwelling for each 2.32 new people for the past 15 years, Collyer said, more than is needed for a nation with an average 2.66 people per home. 

“When residential property prices blow into a bubble, the tragic error often made is in attributing price rises to housing shortages,” Melbourne-based Collyer said. “The U.S. experience shows this conviction is shattered as soon as price declines begin.” Prosper Australia’s documentary ‘Real Estate 4 Ransom’ is scheduled to play in cinemas in Sydney, Canberra, Melbourne and Hobart this month and next.[...] 

More than 100,000 properties lie vacant across Australia, 46,220 in metropolitan Melbourne alone, according to Karl Fitzgerald, director of Earthsharing Australia, a subsidiary of Prosper. The group’s estimate is based on the number of homes that used less than 50 liters (13.2 gallons) of water a day between July 1 and Dec. 31. Credit, Supply “When a credit bubble has been created, the only things that keep it growing are more credit and the belief that the commodity is in short supply,” Sayce, who has been warning of a collapse since late 2008, said. 

“Credit supply has grown exponentially and is starting to taper off, so all that’s left is the shortage argument.” Sayce expects home prices will fall by as much as 40 percent from their peak in the second quarter of 2010. Money Morning Australia offers commentary on financial news -- paid by advertisers -- to 87,000 subscribers. 

The government’s first-homeowner grant and a resulting spike in mortgage debt have created a false perception of under- supply, according to the University of Western Sydney’s Keen [...] 

As the global credit freeze dented Australian home prices, the government doubled the grant in October 2008 for those purchasing existing homes, and tripled it for buyers of newly constructed housing. Home prices jumped 13.6 percent in 2009. “Households simply can’t and won’t take on more debt relative to income than they already have,” said Keen, an associate professor in economics who is publishing the second edition of his book Debunking Economics in October. “So this avenue for profits for the banks has come to an end.” Keen, who said his Debtwatch blog draws an average of 200,000 hits a day, sold his Sydney apartment in the inner-ring Surrey Hills suburb in 2008, missing out on further gains over 2009 and into 2010. He walked 224 kilometers (139 miles) from Canberra to the top of Mount Kosciuszko in April 2010 after losing a bet made in November 2008 that home prices would drop 40 percent to then Macquarie Group Ltd. economist Rory Robertson. “Dr. Keen continues to bang his one-dimensional drum on the Australian housing market, still oblivious to the stark differences between the situation in Australia and what occurred in Japan and the U.S.,” Robertson, who no longer provides housing forecasts in his current role as an economic analyst at Westpac, wrote in an e-mailed response to questions. “Most economists are not so silly as to literally ‘bet the house’ on an economic forecast,” said Robertson, who has owned his own home since 1999.

 And here are quotes from another aspect of the whole Bubble Economy and Denial: the job market and the politicians.

Sept. 12 (Bloomberg) -- Australia’s rise in unemployment last month doesn’t fully reflect the demand for workers in an economy that “continues to outperform” the U.S. and Europe, Treasurer Wayne Swan said. 

“Recent jobs data has underestimated the strength of demand for labor in our economy given an increase in working hours,” Swan said yesterday in his weekly economic note. Australia’s jobless rate jumped to a 10-month high of 5.3 percent in August, the second straight monthly rise, according to a government report Sept. 8. 

Prime Minister Julia Gillard’s administration is trying to counter declines in consumer and business sentiment that last month helped lift the ranks of the jobless to 636,800, the most since October. [...] 

“On top of this, the lingering effects of the global financial crisis and continuing international uncertainty have resulted in Australian consumers being a lot more cautious in their spending,” Swan said. “This is making life harder for sectors like manufacturing, tourism and retailing.” [...] 

Swan also said a tax forum he’s convening next month will focus on ways to keep Australia’s government debt under control. “We’ve seen how important it is to maintain a strong budget position in recent months as the United States and Europe have struggled to get their public finances on a sustainable footing,” he said. “The government will not be in the cart for any measures that compromise our strict fiscal discipline.”

Denial is not going to change anything. The report also mentions

• that the AUD strength is hurting exports
• that the borrowing costs are too high.

Expect the RBA to decrease rates to support banks during a collapsing property prices cycles and to help exports. The AUD will take a major hit in consequence of these actions.

Finally, the shift in mood has occurred and things will go downward from here. Here's an example showing the negative mood in action:

Sept. 15 (Bloomberg) — Australia’s central bank, which pays its governor more than Federal Reserve Chairman Ben S. Bernanke and European Central Bank President Jean-Claude Trichet combined, will for the first time lose its sole power to set compensation for its board and executives, Treasurer Wayne Swan said. 

The salaries at the Reserve Bank of Australia will be fixed within benchmarks that exist in the Remuneration Tribunal, a body that decides how much politicians and civil servants earn, Swan said. The independent authority determines, reports on or provides advice about pay, including allowances and entitlements for federal lawmakers, judicial and non-judicial offices of federal courts and tribunals. 

[...] The move is a culmination of months of debate over central bank salaries, with lawmakers including Bob Katter of northern Queensland state saying RBA Governor Glenn Stevens’s pay increase during the global financial crisis was “outrageous.” Swan wasn’t told until almost a year after the central bank chief got a A$234,000 ($239,000) raise in October 2008.

The RBA chief’s 2010 total compensation was A$1.05 million, with an A$805,000 base salary. Trichet was paid 367,863 euros ($504,900) last year, 2 percent more than his 2009 salary, according to the ECB’s annual accounts published in March. Bernanke earned $199,700.

The savings generated are meaningless and the wasted time (paid for, by salaries) enormous. The fact is that lawmakers are attacking the Central Bankers via their salaries and they show the negative perception of the Central Bank is well entrenched. Having the Central Banks under attack is a good thing!

Perspective on the USD: Trying to Make Sense Of the Dollar

This is a long overdue post that I have been planing to write for about two weeks now. I have been mentioning at few occasions my stance on my blog and also on other blogs such as Tiho's or Tony's.

The question that puzzles me is "Why isn't the USD rallying" and also "Why is the Euro levitating?".

About the Euro, I think it can be attributed to the "HOPE strategy" which consists of buying risky assets while hoping/wishing that the central bank will save you. I don't see any other possibility here.

Our Anonymous friend has made a few points on Tiho's post (above), which are valid, but I think there's much more to it.

1. The fact that treasuries have had such a massive rally, with the dollar staying so low is also interesting. Because foreign investors need to buy USD before they can buy US treasuries, right? There has been quite a lot of money pouring into the treasuries, and yet, the USD is at rock bottom.

2. While the equity have been correction — they are still way too high, and there's still too much bullishness in the equities markets in my opinion — commodities have failed to fall meaningfully, some still making all time highs, gold being close to $2,000 and the highly speculative is still at above $42. These show that speculative mania is still unabated.

3. The real estate bubble has popped in Australia, and speculators, commentators, strategists have been in complete denial about this. When the Central Bank is forced to cut interest rates to close to zero to try to save the banks — try to, not manage to — the AUD will collapse (aim at least 30% drop before the bottom, and that's the optimistic forecast. The pessimistic one will be a 50% drop).

4. Finally, people have been piling into the JPY and the CHF, and when the price action reverses — we have extreme bullishness on both of these currencies —these trades will have to be unwound which will create a massive USD rally, which in turn should create a major leg down in risky assets.

The bottom line and short summary here, is that while many think that the fact that the USD has started a rebound is a bullish sign. And you'd have understood that to me, it's actually the exact opposite: the fact that the equity markets have managed to drop significantly without a USD rally is a very bad omen. And the next leg down will probably be occurring with the USD rising while at the same time the RISK OFF trade is on, which will decimate not only equities, but also commodities.

The current set up will be deadly, and will be available somewhere near you, very soon.

Full disclosure: I have been short the EUR/USD since 1.48 and short the AUD/USD since 1.08. I just opened new short positions on the AUD/USD at 1.07 — so as you can see, I put my money where my mouth is.

Australian Housing Bubble Popped: Still Denial

As usual at the beginning of any secular trend change — in this particular case, the popping of a major real estate and credit bubble which last for about 10 years — people's reaction will always follow these steps:

1. First is denial — it won't happen here, it's not going to happen here, etc.
2. Then is rejection — it's not happening, it's a buying opportunity!
3. Finally acceptance, admission that what is happening is real

So let's see what is happening in Australia, in the wake of their massive real estate bubble which has popped several months ago now: 'Top time to buy' as housing costs fall.

Perth homes are at their most affordable in almost two years on the back of falling prices, stable interest rates and higher wages. 

The Housing Industry Association and Commonwealth Bank measure of affordability improved 3 per cent across Perth and 0.8 per cent nationally in the June quarter. 

The required loan repayment for a median-priced house in Perth is $3325 a month. 

A year ago it was $3558. Housing affordability in Perth improved 15.6 per cent in the past year and is now better than in late 2009. 

Elsewhere in WA, affordability rose 2.5 per cent in the quarter to be 12.6 per cent better than a year go. 

HIA senior economist Andrew Harvey said it had been almost five years since homes across Australia were as affordable as they were today. 

"Improved affordability is good news for homebuyers," he said. "If we look through the global financial crisis period, which was skewed by unprecedented cuts to interest rates, we have not seen affordability reach its current level since 2006. 

"With new home building moderating and some easing in pressure on skilled trades, now is a particularly good time to consider building a new home." 

Median house prices peaked at about $505,000 early last year and have eased to $470,000. At the same time, wages continued to climb and interest rates were last increased in November. 

Together they make getting into the Perth housing market the easiest in almost 21 months. Affordability will improve even more if a survey for mortgage broker Loan Market proves accurate. 

Of those surveyed, 56 per cent said the 4.75 per cent cash rate should be lowered, with just 16 per cent arguing it should be increased. 

Twenty-two per cent believe the Reserve Bank should cut rates twice by the end of the year.  

Bank governor Glenn Stevens will face a parliamentary committee today where he is expected to be pressed on the future movement of interest rates.

We are still at the first stage: denial.
One thing that's interesting is that 22% now believe that the RBA will now be cutting rates, something I forecast long ago, when 100% were thinking rate increases were the only thing in the stash.

Unsold Housing Supply Soars In Australia — The Collapse Marches On

An interesting report about the state of the housing market in Australia was released today (courtesy of MacroBusiness) — Housing supply and unsold inventories are skyrocketing showing that the collapse in price will follow soon:

Stock on Market for the Month of July 2011

Embargoed until 12.01am Wednesday 10^th August 2011

Figures released this week by property research house SQM Research revealed that residential property listings for the month of July 2011 rose by 13,476 to 377,315 nationally. This is a 4% increase from June 2011, as well as a 22% increase when compared to the same month (July 2010).

All capital cities except for Darwin and Hobart experienced a month-on-month increase, Brisbane and Melbourne experiencing the highest surge in stock- both increasing by 6%.

This means that the banking system in Australia will soon collapse, that their central bank will have to cut the interest rates drastically, and that the AUD will collapse.

How big the collapse? Probably bigger than what we saw in 2008. And it was already quite bad back then: from 0.95 to 0.65 in a matter of 2-3 months.

Real Estate Is Different In Australia — It's not Going to Happen There — Unfortunately It's Never Different This Time

While the Australian real estate bubble seems to have popped, people are still in the first phase of the collapse, that is, denial. See Mish's post: Permanently High Plateau Theory Touted for Australia Housing.

In addition to the Australian being in denial, foreigners are, like the moth attracted to the candle's flame, attracted the high yield Australian RMDS, which obviously will make things far worse. The extent of the euphoria is yet again reaching historical records, as shown by the sentence highlighted below: Australian RMDS as a discrete asset class separate from the others.

Moreover, you can see the destructive and dangerous policies of central banks in action as well: Japanese investors are buying Samurai RMBS because the yield in Japan have been sitting at around 0% for so long.

Additionally, it looks like the market has finally realised that rates must be reduced in Australia — something I forecast almost a year ago, while 100% of the pundits were sure of the opposite:

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.

Although there has been a 0.25% rate increase since last July, I think my forecast was still pretty good. 

July 20 (Bloomberg) -- Mortgage bond sales in Australia are accelerating from the busiest half since 2007 as investors snap up higher-yielding notes while Europe’s sovereign crisis causes the market for other corporate debt to slam shut.
[...]
“Australian RMBS may be viewed as a discrete asset class that’s separate from the volatility” caused by rising sovereign risk in Europe, said David Goodman, Sydney-based Westpac Banking Corp.’s director of asset-backed securities. “It’s performed very well, so people are clearly buying.”
[...]
Bendigo and Adelaide Bank, the Australian regional lender, priced A$1 billion of notes on July 14, including 20 billion yen of securities, the first time an Australian issuer has sold mortgage bonds in the Japanese currency, according to Moody’s Investors Service. It paid 425 basis points more than the bank bill swap rate on the lowest-ranking portion of notes and a spread of 105 basis points on the main class, according to a stock exchange filing.
[...]
Sales of prime securities peaked at A$57 billion in 2006 before tumbling to A$13.4 billion in 2008, Standard Poor’s data show. The first six months of 2011 was the busiest half since 2007, according to Westpac.

The Australian government has bought A$13.6 billion of the debt since 2008 as part of a support package to help smaller lenders obtain funding, according to information on a government website. [...] 

Australian mortgage holders grappling with the highest benchmark interest rate in the developed world may get some respite as traders bet the central bank will cut the official cash rate of 4.75 percent.

There is an 84 percent chance RBA Governor Glenn Stevens will cut the benchmark rate a quarter percentage point in October, cash-rate futures showed at 5:22 p.m. in Sydney yesterday.

The central bank, which has kept the rate unchanged since November 2010, had scope to extend the pause because risks posed by Europe’s debt crisis and a slower-than-forecast domestic recovery eased inflation concerns, minutes of its July 5 meeting published yesterday show.

Australia’s economy shrank 1.2 percent in the first quarter, the biggest contraction in two decades, after flooding in Queensland state slashed export earnings. The RBA signaled this month that growth this year may be weaker than its earlier forecast of 4.25 percent.
[...]
“We’re starting to see a bigger divergence in Australian collateral performance between regional or smaller lenders and the major banks,” said Nick Bishop, a portfolio manager in Sydney at Aberdeen Asset Management Plc. “Overall though, it’s a deteriorating but still sound picture.”

The truth is, outside of the mining industry, Australia's economy is sinking, and when the Chinese bubble pops, the mining sector is also going to fall like a rock. By the way, did you know that 50% of the Australian economy was the household spending? Isn't that amazingly counterproductive and dangerous at the same time? I was told mining and agriculture were driving the economy in Australia?

July 18 (Bloomberg) -- A drop in Australian consumer demand that sparked the biggest weekly slump in retail stocks in more than two years is spilling into the nation’s credit markets.
[...]
Australian household spending, which represents about half the nation’s economy, has stalled amid natural disasters, falling home prices and increased savings. [...] 

“The weakness in the Australian retail sector has taken a further leg down, and we expect an increasing number of retailers will be requiring rent assistance or being forced to close their stores and default on leases,” said Ben Byrne, a Sydney-based credit analyst at Nomura Australia Ltd. “While this will have a greater impact on equity, it will also cause a general underperformance of the sector in credit.”

As I stated above and about a year ago, I do no think there will be any more interest rate rise in Australia, and that the next move is down. Expect to see the AUD fall like the GBP did in 2007-2008. Similar pattern, probably even more dramatic.

Congratulations to Westpac economists, which after lagging for a whole year behind me, are the first among the nation's lender to predict a rate cut.

July 15 (Bloomberg) -- Australia’s central bank may push back its next interest rate rise by three months as languishing consumer spending gives it time to assess Europe’s debt crisis and whether a mining investment boom will stoke inflation.

The Reserve Bank of Australia will raise the official cash rate a quarter of a percentage point to 5 percent in November, according to the median estimate of 21 economists surveyed by Bloomberg News this week. A survey three weeks ago showed the median estimate was for a rate increase in August. Economists at Westpac Banking Corp. went further, becoming the first among the nation’s four biggest lenders to predict a rate cut in December.

In an economy Treasurer Wayne Swan last week maintained is “the envy of the developed world,” Australian households are closing their wallets as the developed world’s highest interest rates, rising energy bills, falling home prices and global concerns sap confidence. With spending accounting for about half the nation’s economy, consumer caution is restraining growth even as the mining industry increases investment.

“The consumer is wary,” said Warren Hogan, chief economist at Australia and New Zealand Banking Group Ltd. “They’re being told that there’s this economic boom either happening or coming for Australia, but they’re not seeing it.”
[...]
Westpac, with A$279 billion ($297 billion) in home loans outstanding, today said in a statement that “interest rates are too high in Australia given the state of the non-mining sectors of the domestic economy.” The Sydney-based bank predicted the nation’s unemployment rate may rise as high as 5.75 percent next year from 4.9 percent last month, sending the local currency and bond yields lower.
[...]
This week’s “awful reports from the big retailers” are among the latest evidence that consumers are still struggling, said Helen Kevans, an economist at JPMorgan Chase which this week changed its forecast for the next RBA rate increase to November from August.

Australian Real Estate Bubble Popping — Marc Faber urged investors to short ANZ

The Australian property bubble might have finally popped, and when the drop accelerates, you can expect the same scenario as what happened in the UK in 2007-2008: a massive change in the monetary policy, with interest rates dropping to zero, and a collapse of the AUD, of epic proportions.

If you add to that a collapse in equity and commodities markets, the fall can easily reach 40% against the USD.

Here are a few quotes from the Bloomberg report:

Australian home prices slid 1.7 percent in the first quarter from three months earlier, the biggest drop since the third quarter of 2008, government data in May showed. Prices fell 0.3 percent in both April and May, according to RP Data.

Demand for mortgages, which account for about 63 percent of banks’ outstanding loans in Australia, slowed in April to the weakest annual growth rate since data began in 1977. Home loans more than 30 days late hit a record 1.79 percent in the first quarter, Fitch Ratings said on May 26, and “low-doc” loans that were more than 30 days overdue climbed to 6.74 percent.

Marc Faber, publisher of the Gloom, Boom & Doom report, last month urged investors to short-sell Australia & New Zealand Banking Group Ltd. (ANZ) shares, citing excessive household leverage and an overvalued property market. Faber, who made the call in Barron’s Mid-Year Roundtable, didn’t respond to e-mails seeking comment for this story.

Mike “Mish” Shedlock, an investment adviser at Sitka Pacific Capital Management, who publishes the Global Economic Analysis blog, says such shortage claims are “pure nonsense.”

Questions That Contrarians Should Be Asking Themselves

Here a few points that strike me to the point of being losing sometimes my sleep on them:

• That we are not running out of oil? That Peak Oil will take the price of oil to unbelievable levels? Do you know anyone who thinks oil will be a poor investment?
• Do you know anyone who thinks that Silver and Gold can decline meaningfully and stay there? Even after what happened to silver in May?
• Do you know anyone who believes that the US Dollar can have a meaningful rebound?
• That the Australian dollar and the Euro can collapse?

If you do, please email me the reports :-) 

If you don't, you know what side of the bet you should take.

Aussie Dollar Showing Signs Of A Top [Guest Post]

As discussed yesterday, we are now accepting guest posts. This post is courtesy of ForexTraders.com.
You can contribute posts as well, so please contact me (see previous link) if you are interested.

The Australian dollar has been one of the strongest currencies in the world throughout 2010 and 2011.  In fact, the Aussie has basically been on a one way tear to the upside over the last 18 months, with the brief exception of late Spring 2010, when the Greek sovereign debt fiasco reached fever pitch.

However, an interesting turn of events has begun to unravel over the last few weeks.  Equity markets began to correct to the downside, commodity markets sold off heavily, and general risk aversion began to peek its head once again, as the U.S. dollar and Japanese yen rallied versus risk currencies such as the euro, British pound, Aussie dollar, and others.  In this article, we are going to briefly discuss why the Aussie may be topping out both technically and fundamentally.

Technicals

In March 2011, market participants were heavily focused on whether the AUD USD would be able to make a sustained break above parity, 1.0000.  Of course, the AUD USD not only crashed through parity, but it made a rather sharp move straight into the 1.1000 level.  In fact, the pair moved those 1000 pips in just over 1 month.  The 1.1000 level proved to be too strong, however.

Note: Past performance is not indicative of future results.

As you can see in the chart above, the AUD USD is beginning to form a very strong topping pattern on the Daily Chart.  If you notice the blue shaded circles, we now have 3 subsequent lower HI’s on the Daily chart, which is quite indicative of a potential shift in trend bias to bearish.  What we really need to see on AUD USD to confirm heavy selling interest is a strong daily close below the 1.0500 level.  We have flirted with the level several times in the last few weeks in currency trading, but the market has quickly rebounded back up each time.  A sustained movement and close below 1.0500 would confirm that bearish momentum has strengthened.

Fundamentals

The Aussie dollar, of course, is strongly influenced by commodity prices.  The Australian economy is heavily dependent on its mining sector due to its extremely rich natural resources.  Australia has extremely rich natural gold deposits, and the extremely bullish movement in gold this year has naturally caused a sustained upward movement in Aussie dollar. 

However, gold, silver, oil, and other commodities are beginning to show signs of weakness.  The heavy sell-off in commodity markets at the end of May could very well be the beginning of a longer term top in commodity markets in general, and if this is the case, then the AUD USD will move below 1.5000, and we will see increased selling pressure in the commodity pair.

Due to its enormously rich natural resources, the Aussie dollar was pushed to all-time HI’s during 2010 and 2011 because of the incredible rally in commodity markets, but the inverse will now occur if commodities correct further to the downside.  As the Aussie rallied ferociously during the commodity boom, it will equally be exposed to severe weakness in the case of further commodity weakness.

Reserve Bank of Australia

The RBA has also been consistently raising interest rates over the last 18 months, but it has recently put its rate tightening cycle on hold.  This week, the RBA announced that it would once again keep rates unchanged.  As other central banks, including the Federal Reserve in the United States, move to begin tightening monetary policy, this decreased interest rate spread between Australia and other countries will most likely lead to Aussie weakness in the near and mid-term.

Silver Starting Another Leg Down — Bull's Euphoria Remains Unshaken

Silver is down another 5-6% today, as I suggested it would happen during the past 3-4 days.
Here are a few quotes to show how much bullishness is not impaired.

At the same time, the USD has starting to rally, as expected. This could be the start of a major top.

(Yahoo Breakout — 11th of May) — Ryan Detrick, senior technical strategist at Schaeffer's Investment Research, brought his A-game back for another session of investable ideas. With so much attention being focused on the sudden cooling of the formerly-hot commodities markets, it seemed like the perfect place to start.

"I do not think the rally in commodities is over. If anything, this sell-off could be a buying opportunity," Detrick says. His confidence seems to be a cocktail, if you will, that comes in the form of one part part technical analysis, one part economic confidence and one part contrarianism. When you sum it up, you get a pretty potent case for things like copper, coal and precious metals.

While silver appears to have put in a short-term base after shedding half its value, it's far from clear how strong that base is or if another wave of selling by the so-called hot money is still ahead. Detrick argues that everyone knew silver was ahead of itself and overbought, but that the underlying story is still intact -- only at a better price again.

And from ZeroHedge who adopt a hyper-inflationist point of view every time they get the opportunity:

(ZeroHedge — 10th of May) (Bloomberg) -- UBS AG’s gold sales to India so far this year are more than 10 percent higher than in the same period last year, the bank said today in an e-mailed report.

(Bloomberg) -- Gold could break through $1,600 an ounce in the next six months, Mark Cutifani, chief executive officer of AngloGold Ashanti Ltd., the world’s third-largest producer of the metal, said.

“We think the fundamentals are even more robust than last quarter,” he told reporters on a conference call today.

(Bloomberg) -- Silver, which plunged 27 percent last week, still is poised to climb to the “very important” price of $50 an ounce by the end of the year, according to technical analysis by Bank of America Merrill Lynch.

“You’re still in an uptrend, despite the sharp sell-off” as shown by an intermediate-term trend from the lows on Aug. 24 and Jan. 28, Mary Ann Bartels, the head of U.S. technical and market analysis at Merrill in New York, said yesterday in a telephone interview. “The uptrend was not broken.”

Note that Silver and Gold production are increasing, so whoever still believes we are running out of silver must be mad.

(Bloomberg) -- Gold output in China gained 27 percent in April from a year ago to 61.1 metric tons, according to data released today by the statistics bureau. Silver output increased 2 percent to 930.6 tons, it said.

(Bloomberg) -- [...] “I’m bullish on gold despite its current levels,” Hal Lehr, Deutsche Bank’s managing director for cross-commodity trading, said in an interview in Buenos Aires. “It could reach $2,000 an ounce in the next eight months.”

(Reuters) - [...] "Gold is generally benefiting from the return of confidence from investors," said Darren Heathcote, head of trading at Investec Australia. "They are very happy buying on the dip, as we see the same old problems hanging around."
[...]
Silver prices plunged more than 25 percent last week and gold nearly 5 percent, prompting buying in the physical market in Asia, dealers said.

"We saw buying when gold dipped below $1,500 from China, India and Indonesia, but not much scrap selling, as people are still bullish on gold," said a Hong Kong-based dealer.

Full disclosure: I bought some puts on the AUDUSD a few hours ago when the AUD was around 1.0850... Wait & Pray

Australian Dollar at Historical High Against the US Dollar [Updated]

Bloomberg reports:

March 25 (Bloomberg) -- The Australian dollar advanced to its highest level since it began trading freely in 1983 as a gain in global stocks boosted demand for assets related to economic growth.

The Aussie had its biggest weekly rally since July against its U.S. counterpart [...]

“There’s low volatility, a stable VIX index and equities are doing well, so you have to be long on the highest-yielding currency you can find,” said Tony Allen, global head of foreign-exchange trading at Australia & New Zealand Banking Group Ltd. in Sydney. A long position is a bet an asset will gain in value.

Australia’s dollar appreciated 0.7 percent to $1.0288 at 12:12 p.m. in New York, from $1.0212 yesterday, after touching the record high of $1.0294. [...]

For information, I have decided to take the other side of the trade of Tony Allen, and went short the AUD against the USD at 1.0251. I could be wrong of course, but that's why stop orders exists.
Update: stopped out. Will try again later.

March 28 (Bloomberg) -- The Australian dollar rose for a seventh day versus the U.S. currency in the longest stretch of advances this year as evidence of a global economic recovery spurred demand for higher-yielding currencies.
[...]
“In terms of the Australian dollar, investors prefer to look at the glass half full,” said Samarjit Shankar, a managing director of the foreign-exchange group in Boston at Bank of New York Mellon Corp., the world’s largest custodial bank, with more than $20 trillion in assets under administration. “Economic growth in general is not going to be derailed.”
[...]

The IMF says Australia’s house prices may be overvalued by 5 to 10 percent

Those geniuses at the IMF came up with a great report: house prices in Australia might be overpriced by 5 to 10%. Un-be-lievable.

House prices in Australia are probably somewhere close to 50 to 60 percent overvalued in AUD terms; and close to 80% in USD terms (considering the AUD is 20% overvalued against the USD).

As for the US already 4 years ago now, inventory is rising substantially (23% for LJ Hooker, 40% for luxury homes).

No expert believes prices will decline, and yet, sellers are willing to cute prices by 15%, and properties are listed or auctioned, but no buyers.

If this wouldn't qualify as keeping the head in the sand...

Let's dive into the Bloomberg report:

Dec. 22 (Bloomberg) -- Australian luxury home prices may fall in 2011 after listings of properties worth more than A$1 million rose about 40 percent more than average for this time of year, according to the Real Estate Institute of Australia.
[...]
Australia’s house prices may be overvalued by 5 percent to 10 percent, the International Monetary Fund said last week. An 11 percent advance in the Australian dollar this year, the second biggest among Group of 10 nations, is deterring foreign and expatriate buyers, while the most aggressive tightening of monetary policy in the developed world raised borrowing costs.

Prices of the most expensive 10 percent of Sydney properties dropped 7.5 percent in the six months to September, compared with an average 1.1 percent increase in the rest of the market, according to real estate researcher RP Data. Melbourne’s top end property prices fell 10.8 percent in the period, compared with an average 2.5 percent price climb for the remaining homes.
[...]
An auction of homes ranging from A$2 million to A$10 million last month, held at the Sydney Opera House by real estate broker Ray White Group, sold only two of the 11 homes on offer.

“The luxury market is certainly softer than what it was,” Dan White, a director at Brisbane-based Ray White, said in an interview. “There’s a lot of speculation about house prices, comments that they’re overvalued. And that happened at the same time that rates started to increase. Buyers are now feeling that they can search for value.”
[...]
There will be a recovery of between 5 percent and 10 percent in the top end of the market next year, primarily in the second half, as economic confidence returns, said McGrath.
[...]
More properties are selling before auction, “a sign of vendor nervousness,” Curtis said, with some sellers willing to cut prices by as much as 15 percent.
[...]
LJ Hooker, which has 695 offices across the Asia-Pacific region, had about 23 percent more listings in November compared with a year earlier, according to data from the company.
[...]
“I don’t think things will decline further, but I don’t think they’ll suddenly get better,” Jacobs said. “The market will become more firm, but the change will be gradual.”

Australian Unemployment Rate Unexpectedly Jumps

Those who have been following my posts about Australia and the AUD know that I believe that the AUD has been peaking and that the Australian bubble is also about to pop.

Nov. 11 (Bloomberg) -- Australia’s unemployment rate unexpectedly jumped in October to a six-month high as the pool of workers and job seekers swelled to a record, easing concern that a labor shortage will drive up wages.

Surprise surprise !!

The jobless rate rose to 5.4 percent last month from 5.1 percent in September, the statistics bureau said in Sydney today. That exceeded the median forecast of 5 percent in a Bloomberg News survey of 24 economists. The participation rate, which measures the workforce as a percentage of the population over 15 years old, climbed to 65.9 percent from 65.6 percent.

Not surprised that the participation rate is increasing: people need to pay for the properties they bought at bubble prices...

[...]
The hiring surge threatens to boost inflation, which the central bank aims to keep in a range of 2 percent to 3 percent. The consumer price index in the third quarter rose 2.8 percent from a year earlier, a government report showed last month. 

[...]
Stevens said last week that “growth in wages has picked up somewhat” and “some further increase is likely over the coming year.” As a result, he said in a statement after the Nov. 2 rate increase, “the moderation in inflation that has been under way for the past two years is probably now close to ending.”

Lower unemployment is not really inflationary when credit and money is unlimited... On the other hand if there's such a great boom in Australia, it would be normal that wages increase to reflect that gain in wealth, etc. right? Again silly economics...

The RBA, in a quarterly report on Nov. 5, reiterated its forecast that economic growth will strengthen to 3.75 percent by the end of 2011, climbing to 4 percent by the end of 2012. Consumer prices will rise 2.75 percent through June 2012; previously, the RBA had estimated inflation of 3.25 percent through mid-2011.

Australia’s growth is propelled by surging shipments of iron ore and coal to China that are boosting jobs in regions such as Western Australia, even as household demand elsewhere is cooling after seven interest-rate increases since October 2009.

Another major surprise! Who could have known.

[...]
Home-building approvals and retail sales were weaker than economists forecast in September, and house-price gains decelerated in the third quarter, reports published last week showed. Consumer confidence declined in November to a five-month low, according to a survey released yesterday.

Maybe it's finally popping?

Australia Raises Interest Rate to 4.75%

To my surprise – my forecast was wrong - Australia's central bank did raise their interest rates to 4.75%. While 0.25% is not much, let's hope that will do the job when it comes to pricking the real estate bubble there. Let's remember that 4.75 is the rate that Bernanke achieved before the big collapse of both US rates, and the economy in 2007 (already 3 years!).

Nov. 2 (Bloomberg) -- The Reserve Bank of Australia unexpectedly increased its benchmark interest rate on concern stronger growth will cause inflation to accelerate, driving the nation’s currency toward parity with the U.S. dollar.

Governor Glenn Stevens raised the overnight cash rate target a quarter point to 4.75 percent in Sydney, saying the economy has “relatively modest amounts of spare capacity” and citing risk of “inflation rising again over the medium term.” It was the RBA’s first move in six months.

Central planners are at it again...

[...]“They’re trying to nip inflation in the bud,” Matthew Circosta, an economist at Moody’s Analytics in Sydney, said on Bloomberg Television. “Back in 2007 they were behind the curve” in raising rates and “I don’t think they want to make the same mistake this time around.”

As usual, the same entity which creates inflation is pretending to fight it.

Debunking bubble economies - Australia pt6

Oct. 5 (Bloomberg) -- Australia’s central bank unexpectedly left its benchmark interest rate unchanged for a fifth straight month, triggering the biggest drop in the local dollar in six weeks amid signs of cooling domestic demand.

Reserve Bank of Australia Governor Glenn Stevens kept the overnight cash rate target at 4.5 percent, as forecast by only six of 25 economists surveyed by Bloomberg News, the RBA’s statement showed in Sydney today. Stevens added that it’s likely that higher borrowing costs will be needed “at some point.”

Unexpected, as usual. What a surprise! Fortunately, my dear readers can't enjoy the same surprises, since I stated, more than 2 months ago:

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.

Unfortunately, you can be right about everything, but still get hammered by the market: