Planet Yelnick

AUD Spikes - The Action is in Forex Right Now

We have been following the AUD as an indicator of coming divergences in US markets, specifically that the correlation between the S&P and the AUD breaks.

Last night the Chinese GDP report caused a spike in the AUD. The report was in line with expectations, which suggests the AUD was a bit oversold.

Technically the AUD is in a triangle, and so is the S&P. We are expecting a downtick shortly, perhaps into the election, to be followed by a sharp rally.

In the S&P it could touch the 1550 area, a triple top back to 2000 and 2007. In the AUD it could breach $1.10.

The Euro is also at an appaent cusp point. Right now the Forex side of EWI is running a free week in case you wish to click through and learn more.  Here is a taste of their perspective in this video about the AUD's triangle.

Wait For Divergences in the AUD Near the End

A few soft days and the bears clamor for P3 down or the end of a large Ending Diagonal. Instead I am watching the AUD. An interesting correlation since the Global Financial Crisis has been AUD and the S&P.

The rationale for the correlation is the Global Scramble for Yield that I first mentioned almost a decade ago - in a low return enviroment money mangers scramble anywhere they can for smidgeons of yield. The Greenspan Put exacerbated this, and so too the Bernank's QE.

The more specific correlation is that QE drives up commodities, something also predicted here, and therefore commodity currencies like the AUD. Australia, however, is now in a bind, as its currency is over-valued for its value-added industries, and its mining exports are suffering due to the Chinese slowdown that may yet turn into a hard landing. Indeed, the AUD correlation broke over the past nine months as China began to slow:

Some traders also watch the AUDJPY corelation, which also broke down. 

The bind puts pressure on the RBA to lower rates, to weaken the AUD and support the slowing failing housing sector.  

We can tell which it is (liquidity pump/optimism or rush to safety/fear) by looking at the TNX (ten year Treasury). In the final rush to safety, its rate should fall below their recent low of 1.4%, maybe down to 1.2%. Right now the TNX has gone the other way, and many pundits - including EWI in a recent bond report - says the great bond bull market is over. We'll see.  

The neoclassical economics have pushed the liquidity pump, and want it to be followed up with fiscal stimulus. Problem is, that ain't happening as tea party types around the globe have instead pushed for various forms of fiscal responsibility and austerity. This has caused many of the leading economists to get a bit hysterical, since they know that the liquidity pump sans a fiscal pump leads to a deeper drop than we saw in 2001 or 2008. Hence you see in a lot of predictions a growing sense of a disaster, a cliff the world is about to fall off of.

In the short run, such as US equities this past week, we saw a fade off the recent QE rally. Indeed, most of the QE Rally across various markes is gone, except in commodities. Does this mean we have topped? Unlikely. Neely sees us in a pattern which should soon turn north again, have a fade, then another runup. This might unfold all the way into the election, expecially if it remains close.  

Rather than call the top, watch the divergence. 

Australian Real Estate At The Brink

While Northern Australia suffers from floods of Biblical proportions, the Southern (big city) property market seems poised for a devilish fall as the Oz Tulip Mania is about to crash. The Aussie answer to David Rosenberg, Steve Keen, has been on this for two years, and last summer Jeremy Grantham weighed in as well. Now Mish piles on, noting that the purported eternal housing shortage is a myth of Biblical proportions: property listings have surged in a flood tide by 44% last year, an indication of panic listing at the peak. 

Steve Keen noted before Christmas that a large Australian bank, Westpac, had been dumbing down its lending standards to keep the bubble afloat. He commented on Mish's post, adding to his series that explains the recent bubble in simple terms:

One factor that I'm following closely in all this is what Biggs, Meyer, and Pick called "The Credit Impulse": This is the change in the change in debt.

[A]ggregate demand in a credit-driven economy is the sum of GDP plus the change in debt, [and it] follows that change in aggregate demand is the sum of the change in GDP plus the acceleration of debt.

Australia got out of the crisis in 2009 by exploiting the upside of this factor: if you can encourage people into debt, then aggregate demand grows as debt accelerates--so even slowing down the rate of deleveraging gives a positive boost to demand. ...

That's how the USA looked a bit better in recent months--you slowed down deleveraging. But since Australia went from marginal deleveraging to releveraging, the acceleration in debt was all the more extreme--and we had a apparent boom.

That appears to be ending now, since though the Credit Impulse is still positive on a yearly basis, it's turned negative in the last few months.

Mish gives the following recommendations, and expects they will also soon apply to Canda, China and the UK:

• Exit the Australian stock market
• Get out of the Australian dollar
• Pick up some popcorn
• Stay on the sidelines and watch the collapse unfold

Is the Great Recession Grinch Coming to Australia?

It has been a freaky season in Oz. First, snow fell on December 19, almost giving them a White Christmas - and December is the start of their summer. Next, a flurry of bad retail reports is putting a lump of coal into their stockings. Third, a prominent analyst recommends shorting Australia.

How did this come about? Did the luck of the Lucky Country run out?

Mish explores the implications of a retail sales slump heading into the holidays, the slowest Christmas in 20 years. Blame is tossed around from online sales to rising utility bills. Electricity costs indeed have been rising all around the world, with blame going to an excessive push towards expensive renewables (wind, solar) over cheap coal and natural gas. The New York Times ran a piece that ran like Rudolph across the blogosphere entitled Coal-Rich Australia Grapples With a Price on Carbon and China's Money, posing the dilemma Down Under: how to extract more from coal exports without driving up domestic energy costs. Advocates for a Green Christmas are raising energy prices in a country blessed with cheap coal. 

Regardless of blame, Australia has been subsidizing real estate much as the US, and now appears to be facing the Day of Reckoning. A retail slump will likely throw the over-build retail sector into the same wave of bankruptcies and empty buildings that hit the US two years ago. In some parts of OZ, residential property is already appearing to be busting. It has been a long time in the coming, with premature predictions of a bust last summer from Jeremy Grantham, and a noteworthy bet by Steven Keen in 2008. 

The play may be to short the $AUD. It closed above parity yesterday and is holding above today with markets largely closed. The logic is that the Great Re-Liquification of global stimulus, easy credit and Bernanke's QE is coming to an end. Austerity rules Europe, China is raising rates to squelch internal inflation, and the Tea Partiers are coming to Town in Washington. The Tax deal may be the last gasp of stimulus for a while, and the new Congress should be tight-fisted. 

Australia Real Estate Forecast Confusion

ZH posted this report on Australian real estate, which picks up on a theme of mine, that the Lucky Country has taken on too much debt, and is about to have their housing bubble burst. The conventional wisdom in Oz is that the housing wonderland will continue to rise. My on-the-ground contacts forwarded to me a comment by the chief economist of business forecaster BIS Shrapnel, who just said that the cooling off of the rest of the world did Australia a big favor by crimping risks. He expects a 30% rise over the next three years. What is curious about his analysis is he also expects interest rates to rise 2% and sees mortgage rates above 9% - not exactly the climate for a robust housing market. Indeed, that is usually the formula for bursting a bubble.  

My on-the-ground guy says he is simply confused over the conflicting analyses. 

The Broyhill Letter (Q2-10)

Australia is the Most Overvalued

The Economist looked at housing bubbles worldwide and found Australia the most overvalued. The basis for the conclusion is price-to-rent. 

Prices rose in Oz 20% in the year ended in Q1, faster than the prior clip of 13.5%. The RBA has been raising rates, in part to stem the frothy housing market. 

Sometimes when the central bank raises, it pops the bubble. We saw that in 1929, 2000 and 2007. 

Recent anecdotal data has led observers to say the housing bubble is bursting in the Lucky Country. 

Mish reports on similar stories in other frothy countries in this report. 

Canadian Real Estate Imploding?

Coming on the heels of weakness in Australian property markets, evidence is pouring in of a housing bust in the frozen north: Statistics Canada reports a 10.8% drop in building permits. In addition, home sales in June fell 30% in Vancouver and 42% in Calgary. These trends may be blips and reverse, but the sharpness of the drop mirrors the US experience in 2006. 

The commodity countries like Canada and Australia trade on Chinese growth. With China tightening, a fall is not surprising. Home sales in China itself were down 50% in May. More predictions are coming in of this tightening popping the Chinese housing bubble.  As Ambrose Evans-Pritchard reports:

Standard Chartered has told clients to prepare for a fall in property prices of up to 30pc in Beijing, Shanghai, Shenzen, and other large cities in China as the delayed effects of monetary tightening begin to bite.

Australian Real Estate Bubble Bursting?

The land of Oz is called the Lucky Country, and it could not have been clearer during the past two years as the Great Recession barely touched the shores down under. In the past two months, however, the real estate market has taken a sharp dip, and may be signaling the beginnings of trouble. Could there be danger lurking just below the surface?

This drop has been essentially ignored in the global business press as the travails of the Euro, the fall of stocks and the repudiation of Obamanomics by G20 have led the headlines. Softness in the Oz property market began earlier this year as the central bank raised rates, causing a slight drop in price of 2.7% in Q1. Recently home sales have dropped and a glut of homes has emerged in major cities, including Melbourne and Brisbane, although not in Perth, the center of the resource river to China. 

The tenor of these stories is still positive, and it seems the newspapers down under got more animated over a rainfall of drunken parrots than the potential drop in housing. Such should be expected in a Lucky Country - bad news needs to slap them in their faces to be taken seriously. But I have heard anecdotal evidence of sharp drops in the 15-20% range, such as from this recent comment, and the softening of the market is leading to predictions of a "record fall in house prices" in Q3 and Q4. A similar fall is also seen for the other Lucky Country, New Zealand. 

There have been warnings, such as a warning reported in early May in The Australian. The most interesting debate has been between the Roubini of Oz, Steve Keen, and plenty of glass-half-full property pundits. Keen has been very visible in Australia warning of a housing bubble as early as 2008, and has suffered the Chicken Little fate of being premature in his calls. He lost a bet on the price collapse and had to endure his Walk of Shame recently. He may now be getting ready for the last laugh, as his predictions seem to be starting to be realized. 

Keen notes how Jeremy Grantham just pricked the Oz real estate bubble, and uses the following chart to show how bubblicious Oz property has become: 

It is clear that Oz property has been on a tear, but the cause is not the Lucky Country so much as playing catch-up with US mortgage debt levels. Since 1990 Australians have increased mortgage debt as a percent of GDP three times faster than the US, and have now reached similar levels to those of the peak of the US bubble in 2006. It is clear that not all the drunks are parrots - the whole country has been on a bender:

Steve Keen attributes the rise in part to gimmickry of each new Prime Minister: first the Hawke government (Labour) in 1988 pushed an incentive for homebuyers that spiked sales; then the Howard government (Liberal) repeated this in 2001 (not, however, as a way to launch his new government since he had been in power for a while by then, but as part of post-dot-com reflation policies), and now Rudd (Labour) began his short regime with a similar giveaway to create happy voters following the change of government: 

 

The last twelve months have shown, however, an accelerating fall in loans to homeowners (vs landlords), meaning real demand is falling below actual supply. Rudd's incentive last year cleared out the buying interest, and along with those drunken parrots the sky may be beginning to fall on the Australian property owners:

Fallout From The Crash: Carry Trade and the AUD

An explanation for the crash that is gaining credence (according to Art Cashin) is a spike in the Yen before the crash caused a rapid unwinding of carry trade positions, an idea that may have first been noted by Trader's Narrative. The Yen has the most reliably low interest rate for the cary trade, and fear of a spike in the US rates could move money out of USD carry and back into Yen carry. As the bond market is an order of magnitude beyond the stock market in size, Forex dwarfs bonds. A little carry goes a long way to whipsaw stocks. 

We saw a bit of normalization of carry currencies Monday, but will this sustain? If the crash is the warning shot of a change across lots of bets that worked during the Hope Rally, a lot of positions need to be rotated, starting with the darling of the carry trade, the Australian Dollar (AUD). 

A quick comment about the AUD in a ZH post on the crash caught my eye about the AUD. The post noted how markets stopped at the same time worldwide across almost every type of market including futures, bonds, gold and forex. How could this be if it were merely a glitch in a few stocks? And how could this happen so swiftly unless a substantial majority of all trading is in the hands of a very small number of firms who made the decision to freeze over just a few minutes? The markets came back around the same time, but a few lagged, and this raises a red flag: 

Finally notice that the EURUSD and AUDUSD are slightly late to the game to recover. Although the auction resumes about the same time, they continue to print precipitously longer.  This is all the confirmation of Cluesix' AUD analysis I need.  No one is talking about it today, but after Asia tonight they will; Asia (and even China) are next.

I dug up the Cluesix Report: The Case Against the AUD. It observes that the AUD is the most overvalued currency in a developed market, too high by 30%. It is highly dependent on financials and commodities, and commodities may be in a huge bubble echo. The Lucky Country's real estate may be as much as 50% overvalued. Speculators and carry-traders are betting heavily on the AUD uptrend. 

The carry-trade may be rapidly unwinding in the wake of the crash. The AUD will suffer the most. 

Committing economic suicide won't help: a few days before the crash, the the Rudd government announced a 40% tax on profits from its mineral resources, to get a "fairer share" of the natural wealth of the country. Reaction was negative to shock at the utter foolhardiness of the blunder from down under. 

The Case Against the AUD

An Australian business man shared his thoughts on the Cluesix report with me (excerpted below the fold):

China Driving Australian RBA Policy - Sydney Housing Bubble About to Burst?

Australia was the first major economy to raise rates, and the Australian central bank (RBA) was widely expected to raise again last week. They held, and it started a parlor game of why the dog hadn't barked. The RBA's explanation was clear in its obtuseness. Today the WSJ seems to have found the answer, and reported it not once but twice, here and here, with the following explanation: 

Last month, China moved to reduce commercial bank lending and increase rates on some central bank bonds. Because a reduction of credit in China will ripple through to demand for Australia's raw materials, China essentially did Australia's tightening for it. ...

Economists completely missed the bank's intentions. All 20 economists surveyed by Dow Jones last Friday had forecast a rate increase. 

If China tightening is bursting their housing bubble, will this now ratchet back to Oz? Mish has been on this issue, and notes that the Oz Prime Minister, Rudd, had pushed through a A$14,000 first-home buyer credit. Almost half of them are already struggling to make payments. Sydney is also rated the second least affordable major city, ranked by severity of housing. Rudd made the same serious blunder Barney Frank et al. did in the US, of spawning a govt-sponosred housing bubble, driving housing prices way too high. Recent tightening of the relaxed rules on down payments should cause a sharp decrease in home sales. This type of change drove UK prices down in 2008. 

Steve Keen, one of the best economists in Australia, had forecast this drop by the end of 2009 - and lost a bet on it. Why? He hadn't anticipated how far Rudd would go to keep the party going. Mish notes that once the trend changes, the party is over for a long time (5-7 years); but attempts to prolong the fun often lead to blow-off tips. We may be at that point right now. Here is a chart of how far people are stretching to join the real estate party in Oz:

 

The View From Down Under

Al from Oz has laid out his views.  There is a robust TA community in Australia, many of whom were galvanized by Zoran Gayer's work, and continue in his vein today.  Here is his current count across several markets, starting with cricket!  (A market to watch, especially after Twenty20  revolutionized the sport.)  Financial markets as well, below the fold. 

To summarize, Al sees Jun11 as the top (Jun12 in Oz!) and 2012 as the bottom.  He expects the current wave 3 down to go at least to SP591 (61.8% of wave 1)  and maybe as low as SP372 (100% of wave 1), with a target of 27 Jan 2010 for the wave 3 bottom (1.618x wave 1 time of 294 days).  His wave 4 runs into Sep 2010 and the final wave 5 runs down to between Dec2011 to 5Aug2012. The wave 5 may break as an ending diagonal (or contracting triangle in Neely/Zoran terms). 

Australia Votes on Greenspan!

Zoran reports in from Australia on the US market opening tomorrow:

• If it goes up through the trend line there will without doubt be a short squeeze. 
• If it fails, it will dump.  At open, it will go into the third high and if (a big if) it reverses and breaks it will go!   

Zoran encourages his global readers that it would be worthwhile to stay up and watch the action. Opening after the Fed made its surprise amendment, the  Australian Index (SPI) has given a resounding thumbs down to Greenspan's last minute manipulation of the U.S. market.