Aussie Dollar is Crushing Long-time Rivals Like the Pound and the U.S. Dollar

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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.

Dan Denning
for The Daily Reckoning Australia

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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Comments

  1. Sort of correct on the trading comments.

    For me it is all about risk management and planning. I never risk more than 1% on my account on any trade…risk meaning loss.. not position size.

    I don’t care about being right… it is all about winning (overall)

    I know with the correct risk management in place I can win only 50% of the time and still be in total 2.5% in profit.

    Doesn’t sound like much money… and that is the whole point…. but if you turn over your account 3-4 times per month then it starts to look more like 10% return per month…

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  2. Isn’t this all about the new US dollar carry trade? The Fed prints money which can be borrowed for virtually zero. Those dollars go offshore and re-inflate bubbles around the world.

    The Fed seems to want a weak dollar. At some stage holders of large amounts of US dollars, eg. China, are presumably going to get jack of seeing their holdings dwindle in value. It is all very well to meet with others and talk about trading in different denominations, if that actually happened, but that isn’t going to eventuate any time soon. In the meantime their US dollar holdings are freefalling in value. Surely these countries will have to step up and start buying dollars to try and put a floor under this and continue to do so until they can divest themselves.

    Meanwhile the rest of the world are like junkies who have just gotten a fresh supply of heroin after a dry spell. Blissfully unconcerned about the further damage to their health. No structural problems have been fixed, but the liquidity (heroin) is flowing again so we all feel fine.

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  3. Sorry Dan but to suggest that the stock market is a casino is an ignorant and brash statement. I’d expect better from someone of your intellect. What do you call buying gold?

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  4. Maybe articles such as this: http://www.nytimes.com/2006/11/24/business/24trading.html might bring one to the conclusion that for the average punter to walk into the market and start trading is as good as walking into the Mahogany Room and taking on the poker-face fat men in dark glasses. Not as ignorant as it sounds, John.

    Gold is a long term play, and as much as I’m not a fan of it, gold bullion is tangible wealth. Buying gold is not buying casino chips which are mere tokens of value.

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  5. Shares are not tokens of value but an interest in an underlying business and assets. Some people may treat the stock market as a casino but that does not make it one.

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  6. You can attach anything to gambling – two flies up a wall, horses, dogs, flashing lights, the next death in the Royal Family, a ball on a wheel, cards, or company performance, whatever. All are a mixture of art and science, but ultimately you make or lose money in an activity that produces no work. Call it speculation, if you like. I agree, though, insofar as you can collect dividends you actually participate in the ownership of a company, and that’s not gambling. But what a hopeless way to invest if you look at PE ratios today!

    The thing that strikes me, though, is how those who win at the stocks walk around and tell everyone how great it is (just like winners at the Casino), but the losers hide their failure.

    People gamble all the time, informally, but this frequently gets out of hand, especially when a form of gambling is not recognized for what it is. Sensible investing for individuals should consist of shying away from stocks except from the point of view of earning dividends and perhaps a belief in the worth of a particular company and its projects, which ties into dividends. This is where DR is really on the mark, as they (particularly Bill) judge the share market on its earnings potential, and use this to point out how inflated it all is right now.

    People ought to invest in real things they can see and understand, and ideally participate in.

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  7. John

    I think that everyone here (including DD.. [although he can speak for himself]) agrees that the stock market is not a casino. The market does, however, behave like a casino on occasions. When the market does so, gains and losses have more to do with mob behaviour than the underlying value of businesses.

    Cheers

    Coffee Addict
    October 12, 2009
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  8. I completely agree that the share market should be for investors (and investing for its earning potential). I don’t strictly agree that dividends are necessary (it is underlying earnings that are more important). However, in my mind by calling it a casino people are more likely to treat it like one – rather than a (relatively) efficient way of allocating capital. This is my problem with the statement. It would be better in my opinion to restrict people from selling shares for at least (say) 3 months from when they are first purchased. Obviously this is extremely unlikely to happen. Rest of your article was excellent by the way. Particularly agree re investing in assets vs cash savings and impact of interest rates.

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  9. John Smith, Goldman Sachs has noted your comment and already has had their State Dept on the dog & bone, they already have your IP address and they have a party of seals out looking for you! But just as the little red light appears on your forehead maybe you could explain to them that you don’t categorise the omnipotent Goldman as people, their front running as illegal, or their ability to trade 40% of the volume of the NYSE in a day with their merchant banking cohort and nett it out with a zero end of day settlement as a significant obstacle to the operation of your idea of an efficient securities market.

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  10. looks to me like a load of ignorant comments from people who do not and can not comprehend trading.

    The most important thing about any asset is PRICE.

    Trading concentrates the majority of the focus on the most important piece of information.

    Do I know that the S&P 500 currently looks signifcantly overbought when compared to earnings? Of course.

    Do I care. NO.

    This overvalued opinion / feeling by the market is communicated significantly in price action that is occuring.

    Those concentrating on fundamentals and trusting the information being placed in the market would have lost a bucket load since august 2007. Those who concentrate on price and using correct risk management would have made a bucket load.

    Who is the gambler?

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  11. buy and hold
    buy and hold
    dollar cost averaging
    average down

    all mantras brought to the market by fund managers and other people peddling their wares making a living off management fees or subscription fees.

    I should know. I used to be one.

    Now I make an honest living.

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  12. prozak: the person who bets on a horse because he _knows_ which horse will win is not a gambler – he’s a few other things, but no gambler. I’ve met such people, and they always win (except if they are caught). The person who bets on a horse because he is studying the form guide, watching the races on the television, and going on tips from mates, is a gambler. Even if he manages his risk and doesn’t put his life savings down, hedges bets, and never bets when drunk, he’s still a gambler – whether he wins or loses.

    So, shares and stocks are less of a gamble if you have better information than the competition. For most people this never happens, or is not a reasonable way to spend their time. Most people are better off investing in themselves and the things they are good at.

    You’re right, I probably don’t understand it as well as you, but I came to my conclusions after reading about technical analysis and looking into the products used, getting live feeds, all that stuff, plus the other end of the spectrum: numerous lengthy discussions with friends who are actuaries, accountants, etc. I decided, as I often say, to invest in job, family, house(s) and businesses which relate to my work. I win because I am the one with more knowledge than the competition. Not much gambling in it at all.

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  13. Dan,
    No offence.
    But you are right.
    You don’t understand it.

    I have to chuckle at your discussions with actuaries and accountants. Why did you talk to them about TA / Trading? They are as clueless as the next person.

    Trading is like anything else. You have to do a lot of hard work to succeed. Just reading some books and looking into it is not enough. You made the right choice. You would have been one of the MANY (supposedly 90%) who blow their accounts and are forever bitter about it…. and call it gambling.

    Yes Dan. For you it would have been gambling.

    That does not mean it is gambling.

    Most people who fail at trading either:

    1. Didn’t put in the hard work and think it is going to be easy money
    2. Just don’t have the mental/emotional disposition for it

    Nothing wrong with that. I’m not a good engineer either. But it doesn’t mean engineering is gambling.

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  14. Dan despite Prozak’s quest to keep you from losing your cash in a world where they wear their narcissism as a lifejacket and it helps when they blow up despite themselves, there is a long market where the Buffet’s of this world have their opinions on the intellectual capabilities of day traders too. But it is interesting that the shorter Buffet and team’s positions get, the worse they perform.

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  15. On the topic of trading and gambling I recommend this article: http://www.financial-spread-betting.com/trading-or-gambling.html – share trading is good if you make a living out of it, bad if you don’t. Some people shouldn’t drink, most people shouldn’t gamble (except when they have to) and a similar or greater proportion shouldn’t trade. Sorry if that ruins your business model.

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  16. I know a trader who consistently make profits with technical analysis but he is very organised and dedicated. Risk is consistently calculated and used to determine whether to trade or not to. Not a gambler in my opinion. Hard work does pay off I think it just comes down to whether you like doing that sort of thing for a living (part of full time). I have not been able to duplicate what he is doing though I am improving. At first I looked at it and thought what an easy way to make money. Now I realise its just another job ….time in return for $. I will keep going soley because I enjoy it and it gives me a form of income which doesnt require wearing my body into the ground like other jobs I do.
    Ross if you’re there, when this USD does finally reverse and rally what is the possible target in your opinion? Guenuinely interested in your ideas.

    Lachlan Scanlan
    October 14, 2009
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  17. Lachlan, I don’t think that vision of a USD spike is calculable other than by looking at events of Oct/Nov 08 as a baseline, if it happens I wouldn’t be jumping into long USD positions during or after the event. Talking about longs v trading, I don’t think anything changes on opportunities in relation to a deflation event to what was proved in the great depression ie: buy widely in the penny market sectors with any sniff of survivability (even if you have to sell all your gold & ammo and eat crackers while you hold). It worked for my long portfolio built last year anyway and in spite of the banking gerrymander forced equity raising dilutions.

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  18. Thanks for your reply Ross. Im still not sure whether we are differing in opinion that much. But people with the same opinions cant teach you so much.
    Anyhow just on the state of this rally…I have been waiting for the USD to break down through 76 (major support…not that the theory of chart histories always repeating is bankable IMO). However it looked a few weeks ago like a reversal on USDX but got sold down again. Now with commodity charts saying breakout (up) ahead and this breakdown in USDX (currently 75.5) and importantly gold showing no sign of topping, well as insane as it seems and as much as fundamentals say short rally now, I see more upside …maybe oil to $100/barrel once more and gold 1200plus. I just cant see why oil would be needing higher pricing in this current climate but then much of this rally has nothing to do with Mum and Dad investor. We’re way into hot money bubble territory.
    I see DR raising the crash flag but and thats understandable too. But I’ll just stick with the charts for now and like you cut and run if the show starts getting the wobbles. Trade of the year will be shorting this show when it topples though.
    Im selecting gold to be a USD rally survivor though even if it gets an initial knock. Buying the product of that move is on my wish list too.

    Lachlan Scanlan
    October 14, 2009
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