1/3/19: Australia is the New Ireland: How Property Hype Inflates Financial Bubbles

Australia - a country with the biggest property bubble of all times and of all countries - is retracing the exact mis-governance steps as its predecessor claimant of the title, Ireland. Just as in Ireland pre-2008 bust, Australian central and regional Government figures are adding to the hype of 'real estate investment', whipping up households' enthusiasm for property spending, just as the market is starting to crate:

Source: https://wolfstreet.com/2019/02/28/home-prices-sydney-melbourne-australia-spiral-down-bust-spreads-imf-to-regulators-reinforce-financial-crisis-management/.

While Australian property investors should be heading for the hills, Australian voters should consider actively advocating that the country (regional, etc) Government should adopt a more responsible approach to managing the risks of a massive bubble collapse. One suggestion - suitable not only to Australia, but to all economies around the world - would be to force politicians to be legally liable for what amounts to selling pitches and investment advice they so eagerly dish out.

How about a new way of thinking about accountability in politics? Your politician says 'A' and 'B' happens, you charge your politician for any damages that their call to action on the claim 'A' has produced. At least with such a system of 'incentives' in place, we might see politicians taking some time to reflect on the opportunistic garbage they push into public domain before speaking.

8/2/15: Carry Trades Returns: More Pressure for Ruble & CBR

Carry trades involve borrowing in one currency at lower interest rates (say in Euro or Japanese Yen) and 'carrying' borrowed funds into investment or lending in another currency, bearing higher interest rates (e.g. into Australia or New Zealand, or Russia or Brazil). The risk involved in such trades is that while you hold carry asset (loan to, say, an Australian company), the currency underlying this asset (in this case AUD) devalues against the currency you borrowed in (e.g. Yen). In this case, your returns in AUD converted into Yen (funds available for the repayment of the loan) become smaller.

With this in mind, carry trades represent significant risks for the recipient economies: if exchange rates move in the direction of devaluing host economy currency, there can be fast unwinding of the carry trades and capital outflow from the host economy.

Now, let's define, per BIS, the Carry-to-Risk Ratio as "the attractiveness of carry trades" measured by "the ...risk-adjusted profitability of a carry trade position [e.g. the one-month interest rate differential]... divided by the implied volatility of one-month at-the-money exchange rate options".  In simple terms, this ratio measures risk-adjusted returns to carry trades - the higher the ratio, the higher the implied risk-adjusted returns.

Here is a BIS chart mapping the risk-adjusted ratios for carry trades for six major carry trade targets:

Massive devaluation of the Russian Ruble means that carry trades into Russia (borrowing, say in low interest rate euros and buying Russian assets) have fallen off the cliff in terms of expected risk-adjusted returns. There are couple of things this chart suggests:

1. Dramatically higher interest rates in Russia under the CBR policy are not enough to compensate for the decline in Ruble valuations;
2. Forward expectations are consistent with two things: Ruble devaluing further and Russian interest rates declining from their current levels.

Still, three countries with massive asset bubbles: New Zealand, Australia and Mexico are all suffering from far worse risk-adjusted carry trade performance expectations than Russia.

The Russian performance above pretty much confirms my expectations for continued weakness in Ruble and more accommodative gradual re-positioning of the CBR.

1/1/2013: Recovery in Asia? Well... not so fast, folks

The Year is only 1 day old (almost) and the trigger-happy Bulls' headlines are all around. Forget the 'Fiscal Cliff' non-solution in the US (it kicked the can of excessive deficits by about 1 month out, before uncertainty about the longer term outlook returns with renewed 'negotiations' and it failed completely and spectacularly in even approaching any workable solution to the US debt overhang). The chirpy sound of 'optimism at any cost' is now coming out of Asia.

Today, we saw Korean and Taiwanese PMIs released. Here are the facts:

• HSBC South Korea PMI for manufacturing sector rose from 48.2 in November (outright recessionary levels) to 50.1 in December. Now, 50.1 sounds like being above 50 (the 50 points mark identifying level of activity consistent with zero growth on previous month), statistically it is not significantly distinct from 50.0 or, for that matter, from 49.9. In other words, since May 2012, PMI registered continuous consecutive contractions in the manufacturing sector, compounded over time. In December, there was effectively zero growth from the bottom levels of November. And this some media heralded as the 'return' to growth. Worse, new export orders - the staple of Korean economy, continued to contract in December for the seventh consecutive monthly period.
• Taiwanese PMI did pretty much the same, rising from an outright contraction of 47.4 in November to 50.6 in December. Taiwanese level of activity (at 50.6) was probably statistically significantly above 50, but hardly anywhere near the levels consistent with a definitive growth trend. This was the first above-50 reading in 7 months and was underpinned (positively) by expansions in both new orders and exports orders. Importantly, input prices rose in Taiwanese manufacturing sector, while output prices shrunk - profit margins, therefore, have dropped - a trend established for at least 3 months now.

Meanwhile, unreported by the Bulls:

• Vietnam manufacturing PMI sunk to 49.3 in December from 50.5 in November, with 8 out of last 9 months posting contracting activity.
• Indonesia's manufacturing PMI remained above the 50.0 line at 50.7 in December, but growth fell from 51.5 in November.
• Earlier report from China showed December manufacturing PMI at 51.5 up from 50.5 in November, "signalling a modest improvement of operating conditions in the Chinese manufacturing sector. Moreover, it was the highest index reading since May 2011." But new export orders actually fell in December after a 'modest increase in November', which implies that China's manufacturing 'revival' is driven most likely by state spending boost, not by any 'resurgence in global economic activity'.
• And Australian manufacturing PMI was continuing to tank in December: "Manufacturing activity contracted for a 10th consecutive month in December, with the seasonally adjusted Australian Industry Group Australian Performance of Manufacturing Index recording a level of 44.3, unchanged from a slightly upwardly revised reading of 44.3 one month ago. The slump in manufacturing new orders also extended into the 10th month albeit at a slower rate, reflecting weak global demand and a softening Australian economy. The new orders sub-index rose 1.6 points to 45.7 in December."

So, pardon me, but what 'resurgence in Asia'?