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  #76111  
Old Sep 30, 2010 11:56pm
joelcf's Avatar
My gun control is a steady hand.
 
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Quote:
Originally Posted by Dan Gilbert View Post
well if the Australian real estate market tops out anytime in the near future, I think we might be able to see some dramatic shifts in the currency market with it....

only time will tell.... maybe there is no limit to how high real estate can get in Australia (not serious)
You have no idea how many people actually think like that here. Well, you probably do... and that's the scary part. Every day, there is another news article about how 'housing is different', 'Australia is different', 'China xyz', etc.

Hence: Friday's massively offtopic essay on The Trainwreck that is Australia.

Residential housing here is a HUGE issue politically, even moreso than in the US or UK.

The demographics of Australia come strongly into play. 49% of the population is over 40, and 25% is retired or about to (>55). And for both these groups, who had no compulsory superannuation for all or most of their lives, the large majority of their wealth is tied up in residential housing. And so there is a huge vested interest in supporting prices.

But even moreso, for a bunch of (mostly stupid) reasons, house prices are a national obsession. Australians have a massive complex when it comes to 'owning' your own home and not renting, which is derided as 'paying someone elses mortgage' and 'rent money is dead money'. 'Investing' in property is constantly touted as the best way to wealth, and I would actually bet money that if you took a survey, the majority of people would say that house prices always go up.

(the funny part about that being that you are paying 'rent' to the bank, rather than a landlord. And so while you arent paying someone's mortgage, you are paying my bar tab - but apparently, that kind of 'dead money' is different. which is fine with me )

One of the side effects of these dumbass beliefs, when combined with the full recourse nature of mortgage loans and the amount of time/money/effort (ie, transaction/search costs) that it takes to sell and move, is that house prices have an inherent stickiness. When you (poorly) decide to go long EURCHF, you can dump the position once it starts moving against you. Click, done, time for the pub. But if 'the market' for housing starts falling, it takes alot more time and effort to sell, and many people will hold on for as long as they can, hoping for a reversal.

Politicians know this, and they pander to mortgage holders at every turn - colloquially known here as 'working families' *gag* or 'battlers'. They have, and will continue, to do everything in their power to support real estate prices. Every Australian is all too familiar with the first home owners grant/boost which should really be renamed the home sellers grant/boost . Then we have favourable taxation treatments (both capital gains tax exemptions and non-quarantining of taxation which effectively encourages people to make a loss renting their property in the hope of future gains). Add in the huge increase in middleclass welfare and you basically have a government shovelling all the money it can at mortgage holders in an attempt to support 'the market'.

Despite what the spruikers claim, there is very little fundamental basis to expect continuing capital gains. The recent 'burst' was largely driven by two main things; the shift from single income to dual income households, and the shift in bank lending criteria and thus credit creation (largely driven by BASEL I & II). The first is pretty self explanatory, but the latter is a bit more subtle. And got way too long, so see *1 if you are bored.

Without the boring part, borrowing power effectively quadrupled over a short timespan. It wasnt all at once (the income shift was gradual, the power of bank lending was more rapid - hence the 'boom').. so to many, it looked like 'sustainable growth'. It wasnt.

The funny part is the way things played out was so familiar. People started ignoring the income : price ratio (ie, the amount of rent) because they were now investing solely for capital gains. People claiming the Australian market is different to every other because of various reasons (including 'NINJA loans' being a US only phenomenon, or a magic 'supply shortage' that no one has ever proven, etc). People arguing that real estate cant be valued with traditional valuation techniques.

ITS A NEW PARADIGM! THE OLD RULES DONT APPLY! INCOME DOESNT COUNT! BUY NOW BEFORE YOU GET LEFT BEHIND!

Sound familiar?

The shift to dual income families is largely played out, so you cant expect that to drive a change in prices (but it will act to support them, in some manner).

Like most western countries, we also have a declining birth rate, and so we import all the foreign citizens we can to prop up our economy and make it look like GDP is growing. Unfortunately, a large part of the Australian population are racist rednecks, and so to pander to those votes at the last election, the gub-ment decided to slash immigration wherever it could... which means less money flowing into the country (both capital and income from the foreign education sector, a very large part of Australian exports). Which is going to effecively mean less money flowing into housing.

On top of that, banks are now reducing LVRs (previously, 100% loans were around. These days, most banks wont lend over 90%, and many wont even lend over 85%... and even that is tightening), and the homebuyers grant has halved, which means people have alot less borrowing power now.

As we see played out on the charts every day, when there is suddenly less money chasing the same amount of stuff, prices cant magically keep increasing.

The point, which I swear i am getting to, is that a sharp correction seems pretty unlikely because it is so policially unpalatable. As we see in every market, when prices are bid up beyond sustainable levels, we can either get a correction through price or time (or, generally, a combination of both). I think the latter is what we will see - a small price correction, but a long sideways consolidation.

What does that mean for AUDUSD? Well, that's even trickier.

The government that lets house prices fall will get voted out. Simple as that. So how do you support them? You can give tax incentives (which they have done, but could expand). You can shove money at people to encourage investment (which they have done multiple times, and would probably try again). Or you can pressure the RBA to lower rates - how effective that pressuring might be isnt really clear, but you can manipulate things like government revenue/expenditure to encourage the kind of rate movements you want. Or, given enough political pressure, just start rewriting the rules, which has become increasingly more common of late.

If the last were to happen, and Australian cash rates fell, the impact on the carry trade would be huge. At one point, the Japan:Australia IR spread was like 8%. It's headed back in that direction, which the markets have been expecting. A reversal at this point would see alot of money flying out of AUD pretty damn quickly.

And, given the importance of our mineral export sector, imagine what that would do to national income.

On the other hand, should you just have a protracted consolidation through time, people wont 'feel' poorer, so there is less necessity for extreme measures. Eventually, inflation is going to necessitate higher interest rates. But, in my opinion, there is going to be a cap on them for some time. Which is going to serve to limit the upside to AUD, especially when you throw in the recent rumblings out of Japan for a new approach to monetary policy.


Summary: I'm stocking up now on foreign currency for my trip next year. Regardless of what actually happens (which we obviously dont know), the potential upside is limited, while the potential downside is much larger.

----
*1 - huge simplification follows

Without boring people to death, banks have capital adequecy requirements, which outline the value of capital reserves banks have to hold vs their risk-weighted exposure. You have two main parts: the capital requirement (was 8%), and the risk weighting of assets.

For assets like cash or government securities, the risk weighting is 0%. For higher risk stuff like corp loans, it could be up to 100%. Residential mortgages were 50% risk weighted (with mortgage insurance, which was required for loans over 80% of the value). The end result is that a bank which only held mortgage loans would need to hold 8% of the riskweighted value in capital. Which means 4% of the total value, since they are 50% risk weighted. So a billion dollar bank could write $25bn in mortgages.

Under BASEL II, a few things changed. Loans of up to 80% value were shifted to a 35% risk weighting. With mortgage insurance, loans up to 90% of the value also got the 35% weighting. Loans between 90 and 100% value, with insurance, got 50% weighting.

So that had two big effects. Firstly, the bank from above ($1bn in assets who could lend $25bn) could now lend $35.7bn against the same amount of capital, a 43% increase. Which means the banks suddenly had a huge amount of extra money to throw at people.

Secondly, with mortgage insurance (which the borrower pays), loans from 80.1% to 90% of value get the same treatment as those with under 80%... and so banks were now motivated to shift their deposit requirements to match. Which means, instead of needing a 20% deposit for a $300k loan, people now only needed 10%.

So the person who had saved $50k for a deposit used to only be able to borrow $200k, and so could pay $250k for a house. But with a 10% deposit requirement, they could now borrow $450k, which lets them pay $500k for a house. Ruh roh.
......

And, on top of that, the government gave a free $14k to people to buy a house. Awesome.

...
So, combining all these fun and games means that your average family had its income doubled (from one working person to two), had the amount it could borrow doubled, and then got another $14k to throw into the mix (which, at 10% deposit, adds another $126k people could borrow - so your $50k deposit which used to buy a $250k house now lets you pay $640k). Double the deposit, and you suddenly get a household going from being able to afford $250k to now getting their hands on $1.02m.

And that isnt even the extreme. 95% loans were not a rare thing a few years ago. With so much extra money to lend, and the new requirements making 90-100% (and even 105%) loans a realistic proposition, they started appearing, then got more and more commonplace as all the 'prime' borrowers dried up.

double ruh roh.
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Last edited by joelcf, Oct 1, 2010 2:00am
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  #76114  
Old Oct 1, 2010 12:52am
joelcf's Avatar
My gun control is a steady hand.
 
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Quote:
Originally Posted by Imphilomath View Post
Quote:
Originally Posted by mbqb11 View Post
LOLOL, as the batman "J" flashes into the air
Quote:
Originally Posted by jarroo View Post
haha. You guys are hilarious.

That's a really well written summary about a complex problem. Devaluation is kind of like two petrol stations trying to undercut each other - it only really works if one of you does it... otherwise you get into a price war where the side effects damage you more than the actual benefit.

Someone raised an interesting point the other day in the thread about the Japanese economy. It's rare for a central bank to only use market operations to try and devalue a currency; they generally combine it with some 'jawboning'/'megaphoning' to get the most from their investment. Unless you back it up, you end up being the boy who cried wolf (or its contemporary equivalent, selling wolf tickets for all you youngins ).

What has happened of late, though, is that the market quickly discounts both the threats and the action. It's no longer a matter of not believing that there is a wolf out there... it's just that people arent scared of it anymore.

What do you scare people with when the wolf no longer works? Duh.

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Someone raised the idea that instead of a central bank threating people and so on, you have the entire government feign weakness. Weak economic output means interest rate cuts, quantitative easing, increased potential of credit rerating, etc.

Markets are a discounting mechanism. They dont really care about today, they essentially discount future expectations. That's why a news release can be really bad (like a big drop in NFP), yet have very little effect on the markets... but if that big drop is a suprise, well - we've all seen that.

And so if money expects future weakness, today's price will shift to reflect that.

Much like Russian roulette or sleeping with Lindsay Lohan, it is a dangerous game to play - it might work out well, but there is a huge potential for the plan to go terribly, terribly wrong. Spooking your domestic sector into running on their banks, stashing cash under the mattress and not behaving like good little consumers can kill an entire economy stone dead.

I guess the other important takeaway, though, is what happens after your economy hits the point where growth is self sustaining. When you no longer need to stimulate it by hitting every lever in sight, do you get a single sided recovery? Or does your recovery support that of the other guy as well (as in the US:AU scenario), and so you end up in pretty much the same position? That's the area where you can see big moves in cross currencies while the majors only react weakly.

Quote:
Originally Posted by mbqb11 View Post
awesome Joel, I don't read much stuff like that so that was nicely done. Thanks for taking the time
That's what happens when you are sitting at the back in the world's most boring presentation
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  #76128  
Old Oct 1, 2010 2:01am
joelcf's Avatar
My gun control is a steady hand.
 
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Quote:
Originally Posted by supremeChaos View Post
wow, this post was lengthier than i expected.
That makes two of us

These hands have a mind of their own sometimes (or at least, that's what I claim when a girl tries to slap me)
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  #76136  
Old Oct 1, 2010 2:31am
joelcf's Avatar
My gun control is a steady hand.
 
Member Since Jun 2009
More than 10 Vouchers  726 Posts
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Quote:
Originally Posted by supremeChaos View Post
u slap a girl back? or u catch her hand in mid-air?
lol. I meant they get me in trouble in the first place

Quote:
Originally Posted by supremeChaos View Post
(your hands are smarter than your brains.. that sounds dangerous)
heh. that's no big achievement

All that stuff is pretty easy, once you get past the basic concepts.

It's just a matter of distilling things down the their essence - sort out which parts are accelerator/gearbox/brakes (and therefore important), and which ones are foglights, radio and aircon (that you can ignore). After that, its just a bunch of nested 'what if' scenarios.

And its all geared towards one thing - trying to determine the drivers behind particular currencies and how they affect the value, then determining what moves the drivers so you can have your positions in place before the market reacts to new information. On a long timeframe, your edge is going to largely come from picking the most probable direction, rather than trying to call specific levels and whatever.

As timeframes shorten and the signal:noise drops, so its about reading the market, since any fundamental movements are going to be shrouded in a bunch of crap.

That's the way I see it, anyways. Everyone has a different approach, and most of them work... as long as they have an approach and use it


Quote:
Originally Posted by jarroo View Post
I know when I post this, it (Eur/Gbp) will probably start heading back down .. lol
e/g is a tricky one at the moment, those long tails can sting you...

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  #76142  
Old Oct 1, 2010 3:18am
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My gun control is a steady hand.
 
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Quote:
Originally Posted by Cyrus View Post
(you might like this book if you like fin history like I do btw, A Short History of Financial Euphoria, John Kenneth Galbraith)
Look good - I find stuff like that entertains me way more than finding out who Alex Cross has to catch this time around... especially stuff in the vein of Extrodinary Popular Delusions and the Madness of Crowds and Manias, Panics, Crashes... something fascinating about how people, as a crowd, can just act a fool time and time again - all while insisting that this time is so different.

Also, the whole tulip bulb story is just hilarious. TULIPS. What the hell. At least have a bubble in something cool.

Quote:
Originally Posted by Cyrus View Post
When it (Aus housing) begins to hit the headlines, THEN I think we'll begin to see AUD begin to weaken. In the mean time though, the prevailing sentiment seems to be AUD's ties to the Chinese economy.

I have to say, that from my (rather cursory) reading, that AUD's economy seems very very very much slanted towards it's mining (IE: west aussie) and it's mainly that portion that is benefiting from the whole "tied to China" thingo...
It's almost entirely that portion.

Surprisingly, while they get all the press (and credit), mining and agriculture are only a very small part of our GDP. They are 80% of our exports, but only about 11% of our GDP. We are largely a service economy, about 70%ish.

As a result, much like the US (who are also huge mineral and agri exporters), if consumer spending takes a dive, the service sector does, and unemployment follows.

It's one of the reasons the Australian arrogance with regard to 'our house prices wont fall because we are a hardworkin country and make money from China - not like those lazy yanks and their ninja loans who all work in services!' is so misplaced.

It does lead to a strange dynamic though, where any 'bad news' story about mining, the AUD or anything to do with China (recently: Beijing property prices) has the potential to cause a disproportionate amount of fear.

Quote:
Originally Posted by Cyrus View Post
BUT, unless the Aussie's housing thingo implodes with a bubble like magnitude, we probably will see AUD head higher during this business cycle... which from economic data, looks like it's actually improving... and the c/banks - minus aussie and asia... the main beneficiaries from this run - have not even begun to hike rates yet.
The reason I dont see much upside for AUD is that I dont see anything to drive greater inward money flow. Unless we see some reason for rates to increase ahead of expectations, that is - a huge increase in BRIC demand, for instance, that drives inflation as cashed-up bogans spend their minebucks on shiny new utes.

While we have a stable economy, Australia isnt exactly about to become a safe haven country, so we are going to remain a beneficiary of a yield play. Once other countries (mostly Japan and the US, but a bit of Swiss as well) start raising their rates, the yield from an uncovered IR arb will fall.

Of course, counteracting that is going to be a greater flow out of bonds and into risk assets, but the magnitude of that is likely to be limited.

An interesting problem is going to emerge with Aussie debt instruments in the near future as a flowon from BASEL III, which - depending on how it is handled - could definitely impact the currency. But that's a whole different story.

Quote:
Originally Posted by Cyrus View Post
This is an emerging market-asia run, of which Aussie's managed to hitch a ride from China to tag along (despite being majority racist rednecks? lol).
That's a gross simplification on my part. It would be more accurate to say that the marginal electorates are stacked with ignorant redneck voters, and those are the electorates that politicians try and appeal to since they are largely swinging voters (and easily bought, scared or fooled it seems).

Quote:
Originally Posted by Cyrus View Post
That's just my perception from where I'm standing. I must say though. you probably might have one of those "shit's gonna happen, but the market has not seen it yet" wrt this situation.
To see a US/UK/Spain style implosion in the sector, it would take either a massive liquidity freeze from the banks, a spike in unemployment or - most likely - a combination of the two.

And as long as mining keeps bringing in taxes and overseas money so the gubment can keep shovelling money at households, so households can keep paying their mortgages and buying crap, so people stay employed, so banks can keep lending, so people can keep buying.

Quote:
Originally Posted by Cyrus View Post
Open to more views as always
Same. I dont mind being wrong
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  #76156  
Old Oct 1, 2010 3:59am
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Originally Posted by james16 View Post
Im feeling old.

Hit 50 on nov 8.
Buffett is 80 and has coke and candy for lunch.
Clint Eastwood is 80 and still kickin ass.
And Ali is almost 70 and could still knock out everyone in this thread

You are practically a spring chicken
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  #76164  
Old Oct 1, 2010 4:36am
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Originally Posted by james16 View Post
eastwood is one of my heroes.

your a great asset to this thread.

dont know if ive ever told you that.

jim
Thanks Jim.

You guys opened my eyes and dragged me (kicking and screaming) out of the wilderness... otherwise I would still be taking random entries or trying to 'time' them with some retarded method that doesnt work. It's the least I can do
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  #76451  
Old Oct 5, 2010 12:37am
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Originally Posted by fxtsun View Post
Mission accomplished.
I wouldnt read too much into that. You were lucky enough to be on the right side of some surprise news.

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  #76456  
Old Oct 5, 2010 12:59am
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My gun control is a steady hand.
 
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Originally Posted by Donkey View Post
Curious, what's the news? I've got a pending demo trade on the 4H BEOB.
Aussie OCR held at 450bps.

From the 30d futures pricing, the implied probability of a 25bps increase was around 73% this morning. So the news came as a surprise, hence the sharp reaction.

Quote:
Originally Posted by mbqb11 View Post
still nice to watch even less then stellar PA get to the First trouble areas though ( I would never trade that pin)
Agreed. It's a killer location.
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Last edited by joelcf, Oct 5, 2010 1:06am Reason: ALERT: terrible run-on sentence
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