EYE-BALL Guru on – The Continuing Cost of the High Value A$ …

February 12, 2012
The  Continuing Cost of the High Value A$ …
The 2012 New Year has started with Politician’s talking about the high value of the A$.  Bob Katter has called for a full 2% cut to the RBA’s ‘cash rate’ to bolster his new Party’s QLD election campaign.

Industry sectors across the Nation are screaming ‘lost jobs’ – and the cost of the continued ‘high value’ of the A$ is sending small business’s to the wall in thousands.  This will be a big issue this year and into the future.Greg Combet on the ABC’s “Insiders” this morning talked about the high value of the $A being here to stay and the Government’s need to make the adjustments necessary to allow for its impact on the Australian economy.  He talked about the future $450 billion of infrastructure investment which will keep the A$ high and possibly higher.

The EYE-BALL Guru raised this matter repeatedly all last year and attacked the Government for its high interest rate policy – all the while allowing overseas investors to park their investment funds in the A$ and earn massive returns in both Interest rates relative to our major trading partners – and the capital appreciation caused by the rising A$.

This is an issue that has already cost the Tourism, Manufacturing, and Retail industries many thousands of jobs.   Everybody has overlooked the $100’s of billions in agriculture and resource export revenues lost – gone forever over the last five years – i.e. selling our goods to overseas buyers at ‘firesale’ prices due to the ‘high value’ of the A$ – and all set to continue for years to come.

There is a complete lack of accounting on the cost of the ‘high value’ of the A$ in the public debate.   Exporters are filthy at their diminished revenues – yet the Australian Government boasts about the turnaround in the Balance of Trade numbers.  This is a complex debate – take a tonne of ore – the price we sell it to our overseas clients is generally fixed in US$ terms – so when the A$ appreciates against the US$ – as has been the case against the mean average of the A$ v US$ value of A0.$75c since it was floated in 1983 – that means less A$ receipts to the exporter – that means less A$ to spend back in Australia … hence the lost $100’s billions never to be seen again.

To off-set the rising A$ costs – the US$ contract price can sometimes be re-negotiated – but at the current levels of the A$ – any importer would be looking elsewhere to import their needs.

Yes – the volume of tonnage is up – and our resources and agriculture are in high demand – but for how long?

Brazil and Africa are also rich in resources – as are many other Nations – and with the A$ value so high – it is only a matter of time before the other resource rich Nations replace our order fill.

Say you’re an importer – and you have to pay a 30-40% higher costs for the same goods you purchased from Australia 10 years ago or so … you would be looking for the first opportunity to take your business elsewhere.

This Government is planning for the A$ to remain at the current levels and higher for years to come – yes it will change the face of Australian industry and commerce.  Are we ready for that – do we even want it?   This is the political debate that nobody wants to talk about because neither side has an answer.

It suits the Government to talk up the economy and confidence in terms of the $450 billion infrastructure spend forecast – but if you were a global  mine developer – and you had cheaper options – wouldn’t you think before you leaped?

Those infrastructure numbers are insurance – and they won’t happen while the A$ stays near current levels.  These investors are smart enough not to buy a currency at its peak – and all it will take is for the resource or ‘risk trade’ to repeat what happened in 2008-09 – and the A$ will collapse.

That spectacular fall saw the A$ v US$ fall from above parity to A$0.60c in a matter of weeks.   ‘Hot money’ deserting the A$ … nothing will hold it here unless the Government puts a cap on the exodus …

After the collapse – that is when you will see the offshore investors step back into the market – but before then – the massive exodus of ‘hot’ capital exiting the A$ will have caused a crisis of confidence in the Government and the populace.

So all this present talk about a robust economy is ‘hot-air’ – a ‘beat-up’ – we are only as strong as our weakest link – and Australia’s industry outside the resources sector is on the scrap heap and happy to be left there by this Government.  The Opposition have no policy on this matter that is any different – in fact it was under Howard that the A$ began to rise  …

Japan intervened in their markets last year to weaken their currency – so did the Swiss … Japan had success for a period and the Swiss is still holding above its benchmark value targets – all the while Mr Swan sat back polishing his ‘Treasurer of the World’ trophy thinking he had done something special.   With no interventionist action by the RBA to give the markets some doubt about our currency value – the ‘robber barrons’ of world money flow have no reason to fear for their A$ investments.

Believe me when I tell you – our economy only looks OK for the moment because the wealth of the world has parked their ‘hot’ cash in our currency for safe keeping.  One slip and its gone – it does not even have to be our slip – a change in China’s inflation targeting – a pick up in US economic numbers to strengthen the US$ and it’s gone … and then the A$ is no longer flavour of the month and our economy has to survive without the excess’ of the resource sector.  Mind you the Mining Rent Resource Tax plans to take $40 billion a year off the miners – will they be able to pay it if the A$ stays at these level.

The Australian Treasurer is playing a game of russian roulette with the markets – he is ‘all-in’ on a very weak hand … the RBA have gone all-in with him on the same hand – the thing is that as an observer seeing both hands –  they just don’t know they’re already beaten … and the cost of this bet is Australia’s future prosperity.

All the while – Mr Swan’s hedge bet is having the Australian mortgage holders paying a 2-3% interest cost above our major trading partners.

Bob Katter was right calling for an interest rate reduction of 2% – he is just a few years too late and has obviously picked the high value of the A$ for his own political gain … another reason to never believe a politician – there creditability is suspect at best when motives are so obvious.


The EYE-BALL Guru …

  1. Herman
    February 13, 2012 at 8:34 am

    This morning at the dog park I was talking with a total stranger. I raised this article and how our currency is killing industry. More than that our sovereign rating (by the debt ratings agencies) mean that we can finance ridiculous levels of Australian Government debt. A real two edged sword. We have a great rating, but if we abuse it, we will loose that rating like Italy and their banking system (their banks are not investment grade).

    This total stranger was born in Scotland and migrated here 30 years ago. He now resides in St Andrews and would not buy any of the tripe that comes from our government. In short he is upset that Australia is simply not over Julia Gillard, and her carbon tax and so on.

    Bob Katter wants to protect his electorate and their economic interests. After 30 years of investment in tourism and higher education, it seems ridiculous that we now destroy it with an over inflated currency. Food production is different. Australia has too many technical barriers to free trade regarding food. In the higher education sector we compete with Canada, NZ and USA for trade from Asia. China and India too have emerging educations sectors. China has 1,000,000 university graduates per annum, where a small % want advanced degrees from Western countries. (Their home grown degrees are often not recognised internationally). I have a friend from Shanghai, with undergraduate Electrical Engineering (Computer Sciences) from Shanghai and Accounting at Macquarie Uni, and Post Grad at SGSM in Finance. The Accounting got him an Australian resident visa. Similar arguments exist in tourism. The cost of a holiday in Qld compared to the Pacific islands is hurt by terms of trade.

    The over inflated currency, (advantageous terms of trade) started through base metals and gold and energy. It is exascerbated by high real interest rates. That is where the group think is hurting us. RBA, Economic schools and economists all believe that managing inflation is OK despite the repercussions in manufacturing sector jobs. Before the Governor of the RBA was told to fight inflation first his mandate was to manage the medium term economic growth.

    We really are all mad. This blog site exposes this nonsense. Keep it up.

  2. david the pragmatist
    February 13, 2012 at 10:39 am

    I hate knocking my country but unfortunately everything being said is correct.

    I know that the Reserve Bank can be “dum” when it comes to markets, but I find it hard to believe that they cannot understand these issues. I also know the Reserve Bank are besotted by inflation, this is one economy from now on, along with the rest of the world where inflation can be forgotten for the time being.

    An answer could be to change the Reserve Bank mandate to be responsible for the currency and our manufacturing and tourism industries. This may be a balance because I suspect they are saying, these things aren’t our worry, inflation is our mandate.

    Change the mandate!

  3. February 13, 2012 at 11:59 am

    Hi Herman –

    On your topic of the Debt Ratings – is it that Australia’s Rating has survived and others have fallen – i.e. US, France, etc …

    These Debt Ratings agencies got it horribly wrong pre 2008-09 – they were involved in teh Sub-Prime rating scandle and found to have accepted ‘bribes’ – to put it in a crude way – for the ‘AAA’ rating given.

    Just how much due-diligience do they do? I for one am not convinced that our Banking sector is immuned – with so much of the Bank asset 9Loan) book invested in residential real estate – at high loan to equity ratios – a shift in real estate of 5-10% would see asset values fall to where teh home value does not cover the debt owed … it is only a matter of servicability at that point and that comed down to unemployment numbers …

    Any spike in the Australian unemployment rate by 1-2% points would result in mortgage stress’ that will force Banks to declare already stressed loans as ‘bad debts’ … and from there it’s anyone’s guess where it will all end … look to the US real estate market for some guidance …

    GURU …

  4. February 13, 2012 at 12:10 pm

    Hi David the Pragmatist –

    Change the MANDATE you say – the MANDATE is favoured by both sides of Politics so a change of Government won’t get it done –

    As you have so often reminded – people are fools – is that also relevant to the people in charge of this RBA policy?

    Just as the 2008-9 crash proved that nobody has control over the markets – this mixed bowl of ‘nuts’ fresh from the asylum factory and in charge of the World’s finances – is no more than a like movie script from a ‘Fawlty Towers’ episode …

    None have an answer to appease the Greek protesters – but then if those very same protesters were to look at the spend they all undertook in the previous 15 odd years – including the Olympics in 2000 – you get a very good idea as to why they are where they are – and soon to be followed by the USA, Spain, Portugal, Ireland, Iceland, Italy, France, and under that avalanche – the rest of the World will inevitably collapse as well …

    A MANDATE – hell the RBA operates under a MANDATE attached to inflaction targeting – and that is the stupidist and blinkered thing – and the World thinks our Treasurer is the best on offer – what does that say about the rest of the World’s financial leaders …

    Call it for what it is … lunacy … the cookcoo’s nest …

    GURU …

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