Australia Disaster Meme Goes Viral

May 4, 2012

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“The trend is your friend, except at the end when it bends.” ~ Ed Seykota

Socgen’s Dylan Grice and Albert Edwards, kindred Minksy spirits, have further spread the Australia disaster meme. Australia is levered on leverage.

“Capital city prices have quadrupled and household indebtedness tripled in the last twenty years,” says Moody’s when it downgraded Australian mortgage insurers late last year. image

Australia is dependent on China’s thirst for its industrial commodities, who have been using these materials  to engineer their own house of cards.

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Source: DFAT (PDF)

This has failed to stop industrial miners from extrapolating this growth to infinity. Copper supply is to increase 8.5% per year through 2014, after a 1.5% rise this year, notes UBS. The Financial Times relayed this chart on expected iron ore production.

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Source: businessinsider

Brazilian mining magnate Eike Batista plans to become the richest man in the world on the back of this growth, while Australian mining magnate Clive Palmer plans to build a replica of the Titanic.

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Jim Chanos has been short industrial miners on this theme for quite some time. Early last year, he made his case on Brazilian iron ore miner VALE.

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It’s a little late, with the stock down by one third over the last year (FD: I’ve been short VALE the last year, and other miners and metals off an on).

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Global Finance Magazine puts out a list of the World’s Safest Banks. Their 2007 list lost a few members following the housing crises. They currently have four Australian Banks in the top 25.

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Australian house prices are down for five straight quarters. The government has responded by cutting rates. Interest rate swaps show another 75bps by October, according to BusinessWeek. However, the country’s largest mortgage issuers, the Commonwealth Bank of Australia and Westpac Banking Corp, have left mortgage rates unchanged, citing rising delinquencies. These banks have held up well, so far.

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The ongoing competitive devaluation in developed markets are likely to get more members. The currency has been choppy, and held strong. Straight FX positions are prone to whipsaws and false starts.

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Despite the risks, volatility premium is priced quite cheaply in Australian Dollar Options.

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With creativity and access, more attractive risk reward trade ideas can be constructed.

Australia’s Housing Market

Steve Keen on Risks in Australia’s Banking System

Australian Housing Market Starts to Turn

Australia’s Strength Questioned by Philip Bowring

 

 

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