We're from the G20 and we?re here to help
26 October 2009
Sean Russo
FOR many of us the movement of the Mighty Aussie Dollar (currently not answering to Pacific Peso) is all a bit academic unless we have a French champagne habit or we want to go overseas on holidays. It’s amusing to watch the way politicians take credit for it going up (sign of strong economic management) and then blame “traders” when it falls, but really we don’t care too much. Of course it’s a different story if you are an importer or an exporter.
Recent volatility has caused substantial heartburn for both with moves in costs and/or revenues that for some have been an order of magnitude higher than expected profit margins. Unfortunately I suspect it’s going to continue to be volatile for some time to come and business planning will continue to be difficult. Why? Politicians are taking control.
I thought I must have misheard the other day when Mr Rudd – chuffed at getting into the newly expanded cockpit of the global economy (like seven pilots wasn’t already six too many!) – said that the goal of the G-20 “…is to deliver sustainable long-term growth now and into the future, not to return simply to the fundamental instability of the boom and bust cycles of the global economy in the past”.
Is he serious? Sadly I think he is. It would be easier to hold back the tide than stop economic or market cycles, but perhaps that’s coming next as part of his global warming agenda. Of course, Mr Rudd was not on his own in Pittsburg, but someone should have warned those guys that the markets usually give those participants who show them little respect “what they least expect but most deserve”. If politicians seek to stop the cycles that are a natural part of the way markets (and countries and industries) work and evolve we should expect they will fail and the consequences of their attempts will be exactly what they were seeking to avoid and at great cost to the rest of us.
Now I am not comparing our CEO Kevin to Eddie Groves, but they are both from Queensland.
I am no great student of Soviet history but that line about doing away with “fundamental instability” sounds like something those guys would have said as they drafted their next five year plan and we all know how well that turned out. If markets are fundamentally unstable, it’s because we the market participants are fundamentally unstable (emotional/irrational, take your pick). We are driven by greed and fear. Sometimes we buy high and sell low, sometimes we buy high and sell higher; very few of us buy low and sell high very often. When we all get convinced of the inevitability of something, some trend, investing fashion or economic view point, it’s usually close to over. The problem is that politicians love to pander to the crowd, or what they believe the crowd wants so they get into fashions very late but go very hard, as only they can. They simply reflect the very worst of what we the fundamentally unstable market participants are thinking. In that sense it's one of the occasions where they truly are our representatives.
One of the best examples I can think of is the laws introduced in the US post 1929 that forbade many government and civil service pension funds from investing in equities (anymore) which were then repealed in the late 1990s: sell low buy high! Who knows what Mr Rudd and his 19 co-pilots have in store for us. I can’t imagine it will be good but it might be popular for a while.
Back to the Aussie dollar and its recent return to form, I like to try and construct simple analogies when trying to understand complex issues and understanding why currencies move as they do is about as complex a problem as you can get. There are a great many complex theories on this issue and no end of economists with a view (or two). My simple analogy to understand currencies is to think of them as the share price of a country. Trading an exchange rate is rather like a equity pairs trade where you sell one stock and buy another on the basis one will outperform the other regardless of whether the broader market goes up or down (buy Qantas, sell Virgin Blue, sell Myer buy DJs, etc.). In that sense going long Aussie Yen is really a bet on the economic out performance of company Australia (ticker AUD) over company Japan (ticker JPY) and of course it helps that AUD pays a bigger dividend than JPY - known as a carry trade.
Right now shares in AUD are trading strongly. In fact we are an international “market darling”. Like any share price rise, sustained high prices create a sense of greater value in the underlying asset which feeds on itself and implies even greater value to outside observers, attracting more buying. Inside the company management thinks they are better than they were last year because the share price is higher even if the profits aren’t. If you don’t believe me think ABC Learning a few years ago. Now of course I am not comparing our CEO Kevin to Eddie Groves, but they are both from Queensland.
AUD is a mine and a farm. Our stocks are trading up because our major customer, Company China (ticker RMB), is perceived to be on an unending upward trajectory. This view causes me great concern because in my analogy RMB is a mine and a farm and a big factory (we used to have those) whose largest customers are two companies by the tickers of USD and EUR, two companies which seemed to believe it was enough to be in services and financial services particularly. Yes RMB might need some of our products for its internal growth, but like any company they need to be profitable to continue to reinvest. From where I stand USD and EUR look like they have big problems at their very core and it seems their management don’t even know where to start. If that is true RMB without customers is not the customer the markets seem to imagine they are for AUD.
I can see why someone might have sold USD and bought AUD some time before it became the fashion but I suspect that there are increasingly more attractive better pairs trades out there and as the traders move on the fact that our client’s clients are in serious trouble will be a big part of the focus. Because despite what I read and hear I don’t think it’s different this time and I don’t get warm and fuzzies when our CEO say’s hi we’re from the G20 and we’re here to help.