If there’s any advantage to this new currency world order it’s that the Aussie dollar is absolutely crushing long-time rivals like the pound and the U.S. dollar. Of course this is not a sporting event. A rising Aussie dollar is good for tourists and bad for exporters, who incur their costs in a strong currency and receive export earnings in currencies that are relatively weaker.
But a strong currency can also be a sign of economic strength. One way to view a currency, we read somewhere recently, is as a national obligation secured by national assets. Those “assets” are loosely defined as economic growth (GDP) or the tax revenues a government can generate. A growing economy generates royalties and income taxes and demonstrates to international bond investors Australia’s ability to service interest and principal on debt.
At least that’s the theory. We hope the strong news from the Aussie labour market yesterday doesn’t encourage the government to borrow even more (not that government’s ever need an excuse in the era of perpetual debt).
In fact, as our friend Dr. Steve Kates explains in his latest contribution, the Reserve Bank’s interest rate rise earlier this week is a clear warning to the government to cut it out already with spending other people’s money. Dr. Kates has the details on how the public sector borrowing is driving down the national net savings rate.
And the underlying psychological issue is whether this apparent recovery causes Australians to throw caution to the wind and resume “asset based saving.” You remember what that is, right?
It means you stop real saving from your income (which is declining in real terms anyway) and instead take on debt to pile into assets like shares and houses. You lever up again. As long as those assets are going up, having a negative real savings rate doesn’t seem like a big deal. It just means you have a “preference” for asset based saving.
But as we’ve said many times before, the stock market is not a savings account. It’s a casino. But for now, it sure looks like there is plenty of trading opportunities. The joint is jumpin’! And as long as you think of them as trades and realise its money you could lose, it’s actually pretty exciting.
For example, we’ve just reviewed an alert to Slipstream Trader subscribers from analyst Murray Dawes taking a small profit on a very short-term trade in a major financial stock. Not that we’re agnostic on financial stocks. We hate them.
But traders are market neutral. It’s all about the signals and the risk/reward ratios on each discrete opportunity. Murray also outlined what he thinks is the weakest of the Big Four banks and the weakest of the regional banks. But don’t go shorting them just het. He says all the momentum indicators in the market are up and now is not the time to go short.
for The Daily Reckoning Australia