The Bear Hunters and the Trigger Event for the Aussie Dollar

‘Sometimes you eat the bear and sometimes, well…he eats you.’

That’s what Sam Elliott’s character says to the Dude in The Big Lebowski. He didn’t say anything about those times when the bear climbs up a tree, is tranquilised, and then falls gracefully to the ground. They don’t ring a bell at the top. Do they shoot a bear at the bottom?


A tranquilised black bear falls from a tree in Boulder, Colorado

Reports of the bear’s demise may be greatly exaggerated, to paraphrase Samuel Langhorne Clemens. The Australian stock market has opened up in the red. It follows Friday’s loss on the Dow Jones Industrials. The Dow had been trading near a four-year high.

It’s going to be a tough week for Aussie assets. The financial crisis in Europe has become political. The results of weekend elections in France and Greece make it hard to figure out what the end-game for Europe’s debt crisis is. This kind of uncertainty makes ‘risk’ assets like the Aussie dollar less attractive.

Speaking of the Australian dollar, does it look like a ‘safe haven’ currency to you? We made the argument over the weekend that the Aussie dollar is anything but a ‘safe haven’. It’s a proxy for commodities, it’s a proxy for China, and it’s a proxy for risk. All of those things make it a dangerous currency at the moment.


The argument we made over the weekend is that the next ‘crisis’ could trigger a major correction in the Australian dollar. We’ll get to the trigger event in a moment. But what could a major correction entail?

Well, Slipstream Trader Editor Murray Dawes showed us a long-term chart of the Aussie dollar this morning. The crucial item on the chart was that the short-term moving average has moved below the long-term moving average. Murray says this is long-term bearish. He reckons if the Aussie dollar breaches a certain level, look out below.

Of course the point of such a warning/forecast isn’t to abandon hope and panic. For Murray, it’s to prepare and trade. He has several shorts trades on at the moment. Individual stocks can often track the performance of a currency or index. Such is the case with the Australian dollar. If Murray is right and the Aussie dollar falls, then so too should some of the stocks he’s short.

It all depends on the ‘trigger’ event. There are several candidates in Europe. Take the French and Greek elections, for example. The French have elected their first socialist President since Francois Mitterrand. Francois Hollande is in, Nickolas Sarkozy is out.

If the election results are a rejection of the current austerity measures imposed by the European Union and the European Central Bank, it’s not going to make things better in Europe. Mind you, the austerity isn’t making things better either. You can’t blame the French for rejecting a system which makes taxpayers foot the bill for the ongoing bailout of the European banking system.

But if the socialist answer is bigger government and more spending, well then that’s hardly a solution to the debt problem either, is it?

While the French turn left, the Greeks turn right. Actually they seem to have turned away from the centre, more than anything. The anti-bailout Left Coalition is on track to win 16.1% of the vote in Parliamentary elections. The centre-right New Democracy party came in first at 20%. The socialist Pasok party came in third.

Both elections see a rejection of the status quo in Europe. For example, both Pasok and New Democracy – supposedly on opposite sides of the political spectrum – supported the austerity measures imposed on Greece by the ‘troika’ from the EU, the ECB, and the IMF. If you ask us, it looks like voters are rejecting political elites who do the bidding of banking elites. If they had their way, they’d probably throw the whole Euro baby out with all the European Union bathwater.

But then again, it’s hard to know what the Greeks and the French want. Do they want something for nothing? Or are they rejecting elites? Do they want less pain and more free money? Or do they want a decentralised Europe free from the micro-managing bureaucratic tyranny of the EU? Are they headed down the path of more debt, more spending, and bigger government…or the total breakup of the European Union and the Euro currency?

Or maybe none of the extremes are likely. Maybe the ‘elite’ strategy is to paper over the financial crisis with debt refinancing and money printing. If so, that strategy has just run headlong into the buzz saw of righteous democracy. Maybe, in time, when confronted with the realities of the situation, the new elites will be compromised just like the old elites. In the meantime, it’s not a good environment for ‘risk assets’.

You don’t have tell that to Albert Edwards. Dylan Grice’s colleague at Societe Generale told clients last week that in Australia, ‘We see a credit bubble built on a commodity bull market based on a much bigger Chinese credit bubble…Of all the bubbles I have seen over the last 30 years in this industry, this one is even more obvious.’

We feel partly to blame for Edwards’ conclusion. Dylan wrote a piece on Australia a few weeks ago. That piece was derived from his trip down here for our After America conference in March. He concluded that there were some pretty obvious signs of a bubble, including a household debt-to-GDP ratio of 150%.

Incidentally, the After America DVD ships later this week. It includes six discs from the three days of presentations in Sydney. We reviewed a lot of it last week and found the analysis to still be timely. Many of the presentations look at the long-term case for and against different Australian assets.

There isn’t a better time to be thinking about this, either. The government debt bubble in Europe grows more unstable by the day. The situation is not much better in America, nor in Japan’s economy. If these bubbles pop or even just deflate as they did in 2008, it could be devastating for growth stocks and growth assets. That puts Aussie assets right in the crosshairs, just where the bear wants them.

More on how to avoid being tranquilised tomorrow.


Dan Denning
for Markets and Money

From the Archives…

Markets and the Aurelius Vision
2012-05-04 – Greg Canavan

How the RBA’s Interest Rate Cuts Cause a Housing Bubble
2012-05-03 – Nick Hubble

How a Cashless Society Promotes Tyranny
2012-05-02 – Dan Denning

2012-05-01 – Dan Denning

Risky Investments in a Market Full of Conmen
2012-04-30 – Bill Bonner

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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Hi Dan, a week ago on another post “Another Quick Fix For Credit Junkies” I said this ……. “” Interesting read, however on the relative worth of the Aust$ it largely misses the point. The plain reality is the Aust$ is a global proxy for the value of the rocks we sell – Keep the rocks coming and the Aust$ will look Ok – Reduce the price of rocks, and the Aust$ will follow – And when the rocks are gone, as they will be in a few decades from now, then the Aust$ should settle to about the right… Read more »
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