Full Speed Ahead For ASX; Led By Private Equity, Resources

Fly away, Mr. Market! We have donned our aviator’s goggles here at the Old Factory, more in excitement than anything else, to watch the stock market fly into the stratosphere. Full speed ahead, corrections be damned.

Is this the big melt up we’ve been expecting? Yes, at least stage one of it. The resource boom makes the Aussie market attractive. This is stage one. And it’s largely what took the ASX the ASX/200 up to 6,000 earlier this year. The flow of Private Equity money into Aussie shares didn’t hurt. And neither did the surge in merger and acquisition activity.

Stage two-the one we’re in now-is the bull market in the Aussie dollar, driven by demand for a high-yielding currency from a fast growing economy. Consider the interest rate differential between Japan and Australia, currently around 5.75%. When you can borrow in Japan, carry your stack of yen several thousand miles, past Guam and the Caroline Island and PNG, and earn 5.75% in Australia (before transaction costs), well, if you have a strong back and a good set of water wings, why wouldn’t you do it?

Every incentive is there for foreign speculators to load up on Australian assets. It doesn’t hurt that relatively speaking, the U.S. dollar is sucking some serious rotten eggs. As the demand for U.S. dollar-denominated stocks and bonds falls, global capital flows change. Liquidity starts lapping these luck shores. And stock prices rise.

This doesn’t mean that stock prices are divorced from valuations. But it does mean that the single-biggest influence on Australian stock prices today is liquidity and not, say, fundamental value. After all, more than one research body has predicted that the top of the resource boom-at least in terms of export profits-is less than three years away. And after that, the Federal and State governments will begin coping with another kind of wave, the age wave of retiring Baby Boomers.

So, the good times won’t last forever. But they will probably last for the rest of the week. The “Melt Up” continues. And truthfully, it will probably get even hotter. The battle between Paladin and Summit is hotting up again, with uranium prices soaring. And don’t forget foreign countries and foreign companies who have cast a keen eye on Aussie natural gas, gold, uranium, and other mineral assets.

That’s right. Stage three of the Melt Up is still ahead of us. That is the irrational, let’s-all-go-collectively-insane phase when investors pay any price for any asset on the belief that it can’t do anything but go higher. We haven’t gotten to that point, yet. But we will.

In that kind of general asset wildfire, everything goes up, gold included. Gold, which is both dense and heavy, may lag other, higher-flying assets. But the recent trading action suggests gold is not just for doom and gloomers anymore. With the shine coming off the U.S. dollar, gold is benefiting itself from global liquidity flows, as are Australian gold shares. It won’t be long before the yellow metal soars past last year’s high of $725.

Dan Denning
Markets and Money

Dan Denning
Dan Denning examines the geopolitical and economic events that can affect your investments domestically. He raises the questions you need to answer, in order to survive financially in these turbulent times.

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