–If you happen to see the punch-drunk Australian dollar today, tell it to get its act together. This is no way for a would-be reserve currency to behave. The Aussie has been stumbling about all year long like a drunken sailor. We need to know if it takes itself seriously or not.
–Of course, what the Aussie thinks of itself is not that important. That might come as a shock to some people. Self-esteem is pretty important in the modern world. The modern world encourages us to believe that how we feel about something matters more than anything else. But it’s what other people think of the Aussie that will matter more in the coming days.
–And why does it matter at all? Well, here we are in the midst of a financial storm. The weekend has given us all the relaxing illusion that the crisis is off the boil. Unfortunately it’s not. The behaviour of the Aussie could give some advance warning of where the stock market is headed too. Take a look at the chart below.
–The Aussie is a proxy for growth and risk. When it’s on the up, you’ll find investors keen to buy stocks. A strong Aussie means foreign money is hunting for higher yielding Australian assets. And if foreign money is out and about in Australia, it means foreign investors feel like it’s safe to be out and about.
–Conversely, when 10-year US Treasury yields reach record lows (as they did last) week, it means everyone is terrified and prefers cash or liquidity to stocks and risk. So what’s it going to be this week? Will investors shrug off the collapse of Europe’s banking system and have one last roll of the dice in the stock market?
–We don’t mean to be flippant about it. And to contradict ourselves, self-esteem DOES matter in today’s market. It matters in the sense that how people feel about things affects their behaviour. For the longest time, no one felt worried about Europe’s debt problems because no one thought about them.
–But once people began to think about what a credit depression really means, they began to feel a lot worse about it. And feeling worse, they acted accordingly and began to fear the worst. Fear breeds panic. Panic breeds selling.
–A nervous system can only stand so much high-tension, adrenalin pumping fear before it must relax or collapse in exhaustion. This week could be one of those weeks where investors lay down on the floor and grab a nap. You wouldn’t blame them.
–They’d still be lazy, though. The liquidation of the world’s Greatest Ever credit bubble is going to grind a lot of people down. If you want a bigger-picture understanding of what that means for the Australian stock market, check out Murray’s Slipstream Trader video update from last week. Leave a comment, and if you like, subscribe to his channel – it doesn’t cost anything – and you’ll automatically be updated when a new video is posted.
–The best part of these quiet spells in the market is that they allow you to think more clearly about what you want to buy and what you want to sell. You don’t want to be making your strategy up on the fly, when you’re at your most emotional. You want to know exactly what you’re going to do if prices go lower or higher.
–For example, the Aussie gold price is up nearly $300 in the last 30 days. That’s a 20% rise in less than a month. There was a lot of panic buying. And of course, the drunken behaviour of the Aussie dollar had something to do with that.
–Aussie gold has had a kind of Great Awakening, as you can see from the chart below. It made an all-time high about $1500/oz in 2009, had a crack at that level in 2010, failed, and then did a whole lot of nothing for the next year and a half. Then, all of sudden, bang. The Aussie gold price got religion and off it went.
–It would be nice to buy gold at cheaper prices. Most ordinary investors don’t give much thought to the idea that we’re in a bear market for paper money. Most of them wouldn’t even know what that means. But that’s okay. It means gold’s march higher is punctuated with quick tactical retreats. These are the best times to buy.
–While we wait for the next such retreat, we’ve worked with Diggers and Drillers editor Alex Cowie to have a look at gold and silver stocks in Australia. Alex has jumped on a plane again to make a site visit. This time he’s headed east, to an undisclosed location in the American West. Details to follow.
–Meanwhile, on a sun-drenched Sunday morning a friend asked us the following question over bacon and eggs on Fitzroy Street, “Name me one single thing that could send the Aussie market 10% higher in the next month. I bet you can’t. The end is near, my friend.”
–This caught your editor by surprise. This particular friend, an Australian, is never really bothered by anything. The fact that he’s bearish had us worried and reexamining our position.
–“Well,” we answered, “This prostitution and credit card scandal with a Labor MP in New South Wales could do it.”
–“You’re the Australian. You should know. If the guy is forced to resign and the government loses the by-election, that’s it.”
–“This government. This carbon tax. This mining tax. It’s all up in the air and out the door and dead on the floor and all that. The market might love that. You’d trade the uncertainty of political leadership for the certainty that nothing would be done on any of those issues this year. That might just do the trick.”
–“Yeah. It could go both ways. With no mining tax and no carbon tax you get a much bigger Federal deficit. That might scare the market. But even that is mixed. The bigger deficit is negative for the Aussie dollar. But a weaker Aussie dollar is just what exporters need. It’s their last best hope to avoid more layoffs.”
–“If all that could happen because one guy resigns his seat, there’s no way he’ll resign!”
–“You never know. The government has been using the public’s credit card for years to basically do the same thing. And I mean governments of both parties. They borrow money. They spend it on the things they personally favour. They enrich their friends. They bribe the people who vote for them. They punish their enemies. It’s the Middle Ages all over. Different oligarchs.
Different serfs. Same basic system.”
–“Yes, exactly. People don’t mind that. They don’t even realise it. Or if they do, they’re for it. We’re all happy voting ourselves other people’s money. Why would people get upset now?”
–“Well, people expect fraud from ‘the system’. In an abstract sense, most people expect life to be unfair and government to be corrupt. It’s just the way things are. There’s nothing we can do about it. We just live with it. But that’s only in the abstract sense.”
–“It’s different when it’s just one guy blatantly doing it. When you see one guy lording it over the common people and abusing his privileges and living like in regal entitlement, that upsets people. A system? You can’t do anything about that. But one guy allegedly using the company credit card to pay for hookers and champagne? If something can’t be done about that kind of unfairness, people begin to lose confidence in the whole system.”
–“And then you’d have London.”
–“Yeah. But that’s London. You have a permanent underclass. A financial oligarchy that’s sent all the jobs packing and tried to bribe the population with benefits instead. You don’t think that could happen here do you?”
for Markets and Money