High Tide for Liquidity

Yesterday we discussed the prospect of the US dollar no longer benefiting from ‘safe-haven’ inflows in times of turmoil. Soon after we read that 78-year-old US hedge fund manager Julian Robertson, who runs the Tiger Funds, wasn’t too impressed with the greenback either.

‘It’s not my refuge’, he said.

Robertson was in Sydney yesterday trying to get a slice of the superannuation market for his Tiger Management Group. He told the audience that authorities were obsessed with not wanting to do anything about the US debt burden.

There’s a bull market in opinions at the moment. But not all opinions have the weight of money behind them like Robertson, a veteran of the hedge fund industry.

His negative view on the US dollar, and interest in Australia, is just one reason why the Aussie dollar seems to be defying gravity. When the world’s biggest fund managers begin to lose faith in the once mighty dollar, they look around for alternatives.

In a world of atrociously managed fiat currencies, the Aussie stands out as a paragon of virtue. We’re not fans of central bankers of any stripe, but compared with Bernanke, Glenn Stevens comes across as a hard money, gold standard loving curmudgeon.

Capital goes to where it is treated well and right now big money has respect for Australia’s central bankers.

As the SMH recently reported:

‘The Australian dollar’s latest surge against the greenback despite jitters in the global economy has experts pondering whether the currency may have entered an extended period of strength.

The dollar has long had a reputation as a risk currency – an asset bought in times of economic optimism and sold during times of fear.

But since November, the dollar has traded at or near parity with the greenback despite a steady stream of uncertainty in global and local markets.’

The strong Aussie is a weak US dollar story. And it’s also a way for global money to gain exposure to the Asian growth story in a low-risk political climate.

How long that will last though depends on China. We like to pat ourselves on the back a fair bit here in Australia but the fact is we have been very, very lucky to escape the global crisis. China’s bank credit boom came at just the right time. The oceans of newly created credit flooded the shores of WA and QLD, boosting iron ore and coal prices and rescuing our economy from recession.

The combination of China’s bank credit boom and Bernanke’s trashing of the US dollar has produced the perfect (good) storm for commodity prices. How long should you expect this to last?

The mainstream media might talk about the boom lasting ‘for decades’, but there will be busts along the way. Don’t forget, the long 20th century boom in the US was marred by the Great Depression…an event caused by the preceding years of easy credit.

With Libya and the Middle East in the headlines the spotlight has gone off China. But if you care to look, the economy is showing signs of a slowdown.

Yesterday saw the release of the HSBC Services sector index, which fell from 54.6 to 51.9, just above the growth threshold of 50. The accompanying headline was hardly encouraging:

‘Chinese private sector activity growth slows markedly in February, but price pressures intensify.’

Two days earlier, HSBC released their manufacturing index. It showed a fall in China’s manufacturing activity to a seven-month low of 51.7. Again, the headline wasn’t too upbeat:

‘Output rises only modestly in February, as new order growth slows. Price pressures remain substantial.’

Hang on, isn’t China trying to tighten monetary policy to contain inflation? But both surveys suggest price pressures remain a concern…while at the same time growth is slowing. Sounds a bit like stagflation.

China will need to tighten more to contain inflation. But authorities don’t want to kill the boom so they’ll err on the side of…what is the opposite of caution? Incaution?

This will prolong the boom, keep the Aussie dollar well supported and also provide the illusion that the Aussie property market is just ‘taking a breather’.

Warwick McKibbin doesn’t think so. In an interview with The Australian earlier this week, McKibbin, who has been a member of the RBA board since 2001, told The Australian that the current global liquidity bubble ‘is shaping to be much bigger than 2004 to 2007.’

He reckons the inevitable bursting of the bubble will reverse the terms of trade and send the Aussie dollar tumbling. His time on the RBA board is coming to an end (his term is not expected to be renewed by Wayne Swan in July) so he’s out saying what he really thinks.

There should be more of it.

So what’s going to burst the bubble?

Well, attempts to take the liquidity away could be a start. The ECB is beginning to limber the market up for an increase in interest rates as soon as next month. According to the Financial Times:

‘The European Central Bank has jolted financial markets by signalling that interest rates will almost certainly rise in April, taking a markedly more aggressive stance on inflation than the Bank of England and US Federal Reserve.’

Equity markets that have risen on a tide of liquidity will inevitably fall when the tide reverses. Inflation is now the number one concern and there will be increased pressure to turn off the liquidity taps over the next few months.

There’s a fair chance Bernanke will hold out for as long as he can. Generating a widespread inflation tax for society to pay for the sins of the bankers is his strategy and raising rates anytime soon is not a part of that strategy. But before raising rates you must stop printing money so let’s see what happens when QEII ends.

This current period reminds us of early 2010. All the talk was about ‘exit strategies’…how to get interest rates back to ‘normal’. But in a post-credit-bubble world, there is no return to normal.

Bad debts haven’t been written off. The system hasn’t been purged. In fact, there is more debt in the system now than before the crisis started. Just how will equity markets handle an increase in interest rates in such an environment?

Our guess is, they won’t.


Greg Canavan
for Markets and Money Australia

Greg Canavan
Greg Canavan is a contributing Editor of Markets and Money and is the foremost authority for retail investors on value investing in Australia. He is a former head of Australasian Research for an Australian asset-management group and has been a regular guest on CNBC, Sky Business’s The Perrett Report and Lateline Business. Greg is also the editor of Crisis & Opportunity, an investment publication designed to help investors profit from companies and stocks that are undervalued on the market. To follow Greg's financial world view more closely you can subscribe to Markets and Money for free here. If you’re already a Markets and Money subscriber, then we recommend you also join him on Google+. It's where he shares investment research, commentary and ideas that he can't always fit into his regular Markets and Money emails. For more on Greg go here.

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3 Comments on "High Tide for Liquidity"

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A central planner’s work of beauty brought to us by Worley Parsons. Now we know where our market players learnt about convergence by design. ie: our 4 pillar and union owned super underwritten market investment gurus.

Chinese foreign investment 2005-2010 in billion:

Australia 58
North America 59
Europe 53
Mid East 50
Africa 62


At over 1.37 NZD to the AUD at least Westpac’s $3 billion bill in financing required to take out their NZ branch office bank and establish a subsidiary got cheaper! Too bad the asset value also dived, but hey APRA and Australian b/s accounting standards and extend and pretend will accommodate that, well as long as all the shell companies that hold the swap liabilities don’t get their calls based on that accounting fiction tick off anyway.


Here is a beauty for the times. During 70’s stagflation we had Rex Connor and The Ord River dam white elephant and the Khemlani loans affair. And look how the worm is turing again (Watcher will be watching) :


And note how they roll out Lizard Abeles & George Rocky’s knee chum (Bob Hawke) mate Sir Rod “cut and paste” Eddington in his position as head of Infrastructure Australia. Isn’t it about time some astute journalist asked Rod how that Melbourne urban rail project he applied his internet and return multiplier skills to is going.

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