Pascometer Alert!

If you frequent the excellent blog at Macrobusiness, you will be aware of perhaps the most wonderful contrarian indicator known to man - The Pascometer. 

The Pascometer is a contrarian indicator that I first came across after chuckling at this article some time ago. Contributors and commenters alike at Macrobusiness have followed subsequent articles with greater scrutiny than I, however many of Pascoe's predictions have played out in the exact opposite manner to the way he anticipated. See here.

So you can imagine my alarm when I came across this article today!

SPARE me stories about a weak Australian dollar: it's not. Trading around US98¢, the Aussie is 3 per cent higher than it was a year ago and 63 per cent higher than when the GFC smashed it in 2008.

So we're off 11 per cent from our brief August high of US$1.10 - big deal. The Reserve Bank's trade-weighted index at 72.3 is exactly the same as September 23, 2010, and down just 6.8 per cent from its peak. With any sort of perspective on the Aussie's journey, trading a few cents either side of parity is strong. Doing it when most of the developed world is having conniptions about the possibility of the financial equivalent of a nuclear winter is absolutely amazing.

Headlines about a ''weak'' or crashing Aussie just demonstrate that it's human nature to have the attention span of a gnat. Or do gnats accuse each other of having the attention span of a human?

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Also, as usual, we tend to think it's all about us. Part of the Aussie's rally came from our economic credentials - our terms of trade, status as a China proxy, a strong, growing economy with relatively high interest rates. But a large part was just the flip side of the US dollar's weakness - a faltering economy, very low interest rates, massive and growing government debt, the government wanting a weaker currency, the Federal Reserve printing money, political paralysis and a bleak decade or so ahead.

None of those fundamentals has changed, so before thinking the Aussie has gone flaccid, consider that maybe the greenback has slipped a half tab of Viagra.

The headline alone made me want to charge off and buy as many out of the money puts on the AUDUSD as I could!


Here are my own personal views on the Aussie. If I'm wrong, so be it. In any case I think it would be a bit average to pass comment on Pascoe without putting my own opinion up for scrutiny.

• The so called fundamental strength of the Australian economy is not as great as it would seem. Make no mistake, we are in a relatively wonderful position, vis-a-vis many of our global counterparts. I am grateful to be an Australian, to have a job I enjoy that puts a nice roof over my head and nice food on the table. I am surprised however that unemployment has not ticked up more quickly to date, given the concentration of our workforce in the retail and construction sectors, both of which are struggling immensely.

• Australian consumers are short of confidence and are not spending as much as our "experts" have become accustomed to. Having borrowed uncontrollably in the good times, consumers have now chosen saving over spending, amongst considerable political & economic uncertainty. (I would also add fears over job security.) Such an environment (rising unemployment, restricted spending) may well to lead to a reduction in final demand across the economy and an easing of inflationary pressures. With an economy constrained by the burden of private debt, that by many measures, is comparable to - if not worse than - the United States at the height of the boom, I can see considerable cuts to interest rates as the RBA attempts to engineer some sort of rebound in economic activity.*

• I have no idea whether China will continue to grow at 9%, 15%, 3% or -5% per annum for the next 10 years. But I would suggest that three months of contraction in leading economic indicators whilst struggling to contain inflation may not be a great sign. Recent moves in commodities, especially copper, may signal rough seas ahead as global economic growth falls off a cliff. Heck the CEO of Rio Tinto himself even noted customers have been delaying orders of late. 

If I'm on the money, interest rates here are coming down and they are coming down a long way. As the yield differential relative to other currencies narrows, and China ends up being as much a part of the global economic malaise as I believe it is, then the AUD has every chance of going much much lower from here. I don't see it at 60 cents, but it wouldn't completely surprise me. I do not see it rallying strongly though as the USD's "viagra" wears off.

NJH

*As an aside whilst people see their super account being decimated and property falling (it's able to fall? Dear God!) in nominal terms, I am not sure how effective these measures would be. At least we are not at the zero bound as far as monetary policy is concerned. Yet. 

**Secondly, a random thought I just had. Wayne Swan the best treasurer in the world? Please.