The Australian Dollar Flys Higher While Investors Look to Get High

‘Hey mate, long time. You look good. You still on the drugs?’

‘Still on the drugs, but gave up the booze.’

The things you hear in St Kilda. We caught that snippet between two long-lost friends on the way into the office this morning. Both looked haggard but determined. There didn’t appear to be many secrets between them. Friends don’t have to lie about their flaws to one another.

The conversation about drugs – we’re not sure if they were performance enhancing or not – got us to thinking about the Australian dollar. It’s exhibiting all the signs of ‘roid rage – an out of control currency whose strength can’t be contained. It will smash everything in its path!

Well, maybe not everything. But the Aussie dollar did go up to $1.05 against the anaemic US dollar. Remember, all this is after the Reserve Bank of Australia cut interest rates last week. The Australian dollar now seems to be moving up on any news at all, which is generally what happens in a very strong bull market.

What’s happening here? Well, the simplest explanation is that currency markets are expecting the Federal Reserve to unleash a torrent of dollars tomorrow. The Fed will tell the world how it plans to replace the expiring Operation Twist. The plan: crank up the presses, baby!

In other words, the Fed is still dealing drugs and investors are still high. It’s been this way, more or less, since 2009. Just when the monetary stimulus wears off and asset prices begin falling, withdrawal symptoms kick in. Then the world’s biggest crack dealer, Ben Bernanke, steps in to provide more crank.

The All Ordinaries are flying high, too. The last time the index breached and held the 4600 level, it was August of 2011, nearly 18 months ago. In the vanguard of this latest assault on new highs are the banking stocks, as we mentioned yesterday. Our technical analyst Murray Dawes chimes in on the subject below.

Let’ see then…soaring dollar…soaring stock market…entire world heading toward recession…global money printing run rampant. Does that about cover it? When you connect the dots, do you have a defendable stock rally? Or does Australia find itself surfing a huge wave of capital generated by scared investors and a monetary system having seizures?

To survive in this market, the bears are going to have to learn to fly. Let us consult the investment wisdom of the great Tom Petty. It pretty much sums up the emotional disposition of bears in a world of funny money gone amok:

‘Well some say life will beat you down
Break your heart, steal your crown
So I’ve started out, for God knows where
I guess I’ll know when I get there

‘I’m learning to fly, around the clouds,
But what goes up must come down

‘I’m learning to fly, but I ain’t got wings
Coming down is the hardest thing’

Coming down from a credit boom IS the hardest thing. That’s why the Fed and its global accessories have been fighting it for three years. But gravity is not just for birds and airplanes. It’s for stocks and bonds too.

Assets have to generate income that pays off what you borrowed to buy them. Stocks aren’t trading on that logic right now, though. They’re trading on the expectation of more liquidity, lower yields, and the need to make any kind of return at all.

However, we’ve gone over that ground many times. There’s no point in doing it again. We’re not contributing anything useful to your understanding of markets. So let’s not go there.
Instead, let’s go bowling!

Your editor is knocking off early today to take the cast and crew of Port Phillip Publishing lawn bowling. It’s our annual Christmas Party. And sometimes a change of scenery, with the odd frothy beverage or too, can improve your insight into things, or at least change your outlook.

If we had to hazard a prediction, we’d say all this monetary madness is going to backfire. Specifically, the belief that it will work, or that buying stocks is the best way to front run the Fed. This has become such common knowledge that it can’t possibly be true.

But for Australia, there is the practical matter of the dollar. It is stubbornly refusing to do what your editor has predicted all year and correct with the terms of trade. Should we throw in the towel and conform to everyone else’s reality? Or is the Point of Maximum Exasperation (PME) the exact moment you should go short the market? We’ll be back tomorrow with a full report. Until then.


Dan Denning
for Markets and Money

From the Archives…

Will Lower Interest Rates Impact Australia in 2013?
7-12-2012 – Greg Canavan

Is the Australian Economy in Recession?
6-12-2012 – Greg Canavan

US Debt: Why America May Need a Bail Out by the IMF
5-12-2012 – Bill Bonner

If Profits are Falling Why are Stocks Rising?
4-12-2012 – Dan Denning

The Frontier Way
3-12-2012 – Dan Denning

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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What is so special about the Australian dollar that you give it all this attention? Since 15 January 2012 the USD has depreciated as follows: AUD -2.0% MYR -2.5% EUR -2.5% GBP -5.0% SGD -5.6% KRW -6.5% Why don’t you write a story titled, “The British Pound Flies Higher ..” or the “Korean Won Flies Higher …..” etc. The real ‘no surprise’ story here is the tanking of the USD against most other currencies, with exceptions such as the Japanese Yen and the Indonesian Rupiah. Now if you wrote a story about why the Japanese Yen or the Indonesian Rupiah… Read more »
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