During the last five months it is the Aussie dollar that has fallen. It reached a high of USD$0.98 in mid July. From there it has been all downhill. In fact, it fell by so much that by the end of October it was ‘that close’ to falling below USD$0.60.
However, since then the Aussie has held up. This is despite the outlook for commodities worsening. And especially with a hint of slower growth from China.
The USD has put in strong performances against Pound Sterling and the Euro as well. The Pound has come in for special attention thanks to the dire economic outlook for the UK economy. After reaching a rate of 2:1 a few months back, the Pound has lost 25% of its value.
There is a fear that the UK could suffer a deeper recession than the US due to the super high levels of mortgage debt.
What about the US dollar against the Japanese Yen? You know about the ‘carry trade’ – borrowing in low interest rate yen in order to buy assets elsewhere. Australia benefited from this. As did the US government with investors buying Treasuries.
Boy, would they have made a killing with bond prices bursting through the roof. The only problem is the Yen has appreciated sharply against the US dollar at the same time as the US dollar was appreciating against other currencies.
The Yen has risen from 110 to the dollar to below 92 to the dollar. The ‘carry trade’ has disintegrated. In other words, as the Yen has risen in value traders need more dollars to convert back into Yen in order to repay any borrowings.
Based on the 20% rise in the Yen, that’s a big difference. If that happened in the property market you would say you had negative equity – the value of the asset is less than the loan outstanding.
It also begs another question. Why would a Japanese investor swap low yielding Japanese Yen in favour of low yielding US dollars? Japan is the second largest holder – after China – of US Treasuries.
The short dated Treasuries are now yielding zero percent. Even the longer dated bonds are yielding less than inflation. As an investment it doesn’t make sense. And it can’t last.
Think what you would say if your broker or planner told you to buy an ‘asset’ that would give you a GUARANTEED negative return over 30 days. Go on, think about it.
We would guess you would tell him what he can do with his financial advice.
Eventually investors in Japan are going to start questioning the worth of investing overseas when returns are not significantly greater than at home.
That, we think could have major implications for the value of the Yen, the US dollar and the global economy.
We’ll have more to say on that next week.
Whatever Happened to the Skills Crisis?
What do governments do better than any other institution?
They take a long time to do anything that’s what.
The last few months has seen politicians, central bankers, economists and fair-weather capitalists jumping up and down shouting the “government must do something.”
Quite what it was they needed to do didn’t matter. Something must be done. The something has changed on a daily basis. In fact it has changed so much that it has become ‘anything.’
But as to what government and central bankers have actually done is a mystery. We should clarify that. It has done some things, all of them ill-advised.
A perfect example of how ineffectual government is in dealing with business and markets is the so-called skills shortage. For years we have been told that Australia is at a ‘crisis point.’ That we are running out of people to do the work.
The resources sector was offered up as the perfect example. All those kids that went off and did Arts degrees at University would have been better off rolling up their sleeves and getting stuck into a bit of digging and drilling.
Anyway, various government policies have been floated for creating new colleges and grants for apprenticeships and subsidies to buy tools.
Then what happens? The economy sinks into a hole and companies such as Rio Tinto announce it is getting rid of 14,000 staff. The finance sector chops staff left, right and centre. And other companies are just going straight out of business.
It’s a perfect illustration of why government doesn’t need to get involved with the micro-management of business. If the mining industry or financial services industry wants to attract more people it needs to develop its own strategy for doing so.
When government gets involved it is typically too much, too late.
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