# Troubled waters ahead



## stefan (29 November 2004)

It is slowly starting to get bumpy. There is no end in sight for the high Aussie Dollar and I think it was about time somebody mentioned the huge deficit instead of just pointing the finger at consumer sentiments and how good we are at spending cash. Account Deficit and Foreign Debts are worse than in the US. The only thing that kept us going is now suffering under a "bad" exchange rate. Just wait until Christmas is over. There will be a massive spending spree and after that reality will start to hit.

http://sg.biz.yahoo.com/041129/15/3ow2g.html

Am I too negative? What would be the way out of this? 

Happy trading

Stefan


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## The Barbarian Investor (29 November 2004)

Hi Stefan..

What do you think of retail stocks over the festive season..it looks bright, but a friend said never to buy retail stocks over this period- his reasoning, dunno?

And if the US raises interest rates, what would be the best move here, anticipating the news?

Just speculating over these points..

The Barbarian Investor


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## wayneL (30 November 2004)

Wal-Mart casts a pall over holiday sales.

http://cbs.marketwatch.com/news/story.asp?guid={B9F5CED9-5CCD-4F49-AE4C-B5526A803435}&siteid=mktw

Troubled waters indeed. Make sure you all are carrying you life vests.


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## wayneL (30 November 2004)

More....

http://www.rumormillnews.com/cgi-bin/forum.cgi?read=60289


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## stefan (30 November 2004)

I know I have been rather negative about the Australian and world economy over the past few months. I'm more than willing to believe something different but trouble is that I can't find any indications to support a more optimistic view.

There is one thing that may help and that could be a quick fall in our currency. Some indications would point towards such an event. However, I do not believe that it will happen just now. Maybe a few cents, but that's nowhere near enough to stimulate exports. Even if a fall would happen, it would be too late and only cover one of the many problems we're facing. This country is spending so much more than what it's earning, it just can't be sustained. There is only one thing and that's a recession. People, I suggest you don't use your credit card for Christmas. It may well be that the new year will show its true face early enough and it aint gonna be pretty.




> What do you think of retail stocks over the festive season..it looks bright, but a friend said never to buy retail stocks over this period- his reasoning, dunno?



I don't know the resoning for this logic. Maybe it's because  retailers usually gain in anticipation of the Christmas run a few weeks earlier (Coles Myer has already jumped to +$10) so when you buy now, it's already too late to profit and you may get stuck when profit taking hits. Just an idea. 



> And if the US raises interest rates, what would be the best move here, anticipating the news?



That's something I wouldn't be too concerned about. I think everybody is expecting it and the markets are (for now) somehow comfortable with it. It's a different story in Australia but for the US I'm feeling more at ease with an increase. 

Others may have some ideas here. Wayne, you're active in the US markets, what's your view?

Happy trading

Stefan


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## crashy (30 November 2004)

I am heavily short the XJO (and hurting).

I had weekly trendline resistance at around 3910, which may have been broken, if so.......WHY!?

Is the XJO looking for 4k? Or maybe a 50% rally from 2700 lows giving 4050?

Is this the greatest shorting opportunity of all time? Or am I missing something?


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## crashy (30 November 2004)

from another forum:

Subject re: aussie deficit comments (dub) 
Posted 30/11/04 12:16:39 AM - 43 reads 
Posted by Grant62 
Post #83265 - in reply to msg. #83251 

Those who have read my comments on the Australian economy over the course of the past year would have noted my concerns with the economy heading into late 2004 /early 2005.

I have long argued the damage being done by a high A$ (above 70c) and the continuing structural imbalances /biases evident in the Australian economy.

I have also expressed concern over a Current Account Deficit which, on any sensible measurement, far exceeds that of the USA.

On balance, I was arguing earlier this year of the very real risk that the Australian economy could stall before slipping into recession going in 2005.

Today's Current Account Deficit (CAD) result supports that contention.

Back in June, DUB asked for my comments concerning our external debt, and high CAD. Whilst I did not directly answer DUB at the time, in many of my posts since then, I have touched on various of the matters DUB raised. In doing so, I have continued to express the view that Australia is not well equipped to handle an external shock (whether due to external imbalance, a currency run, or deteriorating global economic conditions should they eventuate).

Today's CAD figures show that Australia's deficit rose to $13.69B (seasonally adjusted) from a revised A$11.76B in the second quarter. Market consensus was for a CAD result of $12.5B.

When DUB asked his questions of me in June, the CAD was standing at 6.1% of GDP. It is now standing at somewhere between 6.25 and 6.3% of GDP (and growing).

That's well above the USA figure of 5.5% of GDP which seems to have alarmed everyone the world over.

Adding further to the dilemma, the gap in the Trade Balance has widened considerably, to $6.38B, as exports fall even further behind the rate of growth in imports.

This is reflective of the high and persistent A$ which is now trading ~12% above its long-term average (of 70c), and >20% above its comparative advantage average (of 65c).

But even worse was the net income shortfall which has widened $7.18B. This is one area of the CAD which will never reverse itself and now seems well entrenched in the $6.5-8.0B value range (ie: range bound @4% of GDP).

So, in the absence of either domestic economic reform (unlikely short term, and requires an 18-24 month lead-time), or a sudden currency reversal, Australia's Trade Balance is likely to deteriorate further to ~$7.5B during the December Quarter, and our CAD, to above $15B in the December Quarter (ie: taking us well above 6.5% of GDP).

This could well lead to a currency shock towards late February.

That said, Australia's net foreign debt also rose during the September Quarter to $406B (up $13bn from the June Quarter's $4393B).

This equates to 50% of GDP.

A Standard & Poor's said recently (August 2004):
....
"the 'chronic'' current account deficit is the main risk to Australia's AAA credit rating, with external debt among the highest for an industrialized nation. The size of the deficit is 'mitigated' by the government paying off debt and running budget surpluses". 

The trouble is, our debt is now very much hostage to the world, and worsening.

All this translates to a sharply lower GDP result for Q3, and an even lower forward outlook for GDP.

Earlier this year, I was arguing that GDP would be flat to negative coming into Q4.

Now, most economists are revising their GDP forecasts down to a flat result (with an outside possibility of a negative number on December 1st when the Q3 GDP results are announced).

In my own view, the Q3 GDP number will be negative, possibly as great as -0.5% (high end) to -0.2% (low end). This, in itself, might be enough to send shudders through the economy and the local markets on Wednesday, with a likely sharp retreat in store for the A$ (possibly by 2c or more by Wednesday evening).

It will, therefore, be inteersting to see what transpires.

For now, here are copies of the Financial Times and the Bloomberg articles.

----------------------------------------------------
FINANCIAL TIMES 29/11/2004
Australian current account deficit hits record
By Leora Moldofsky
Published: November 29 2004 05:27 | Last updated: November 29 2004 05:27

Australia’s current account deficit widened to a record level in the third quarter, putting downward pressure on the nation’s fast-growing economy and sending the country’s currency lower.


The increase in the deficit – the first of a raft of important Australian economic indicators due out this week - was due to both a fall in exports and an increase in imports as rising business investment and consumer spending boosted the demand for imported goods which have been made cheaper by the buoyant Australian dollar.

The deficit in goods, services and investment widened by 16 per cent to a seasonally adjusted A$13.69bn from a revised A$11.76bn in the second quarter, the Australian Bureau of Statistics reported on Monday, above market forecasts of A$12.5bn. 

The goods and services trade deficit increased to A$6.38bn while the net income shortfall widened to A$7.18bn, as the value of exports failed to keep pace with imports.

Net foreign debt rose A$13bn to a record A$406bn. The stronger Australian dollar, which has gained 16 per cent in the past 10 weeks, offset the increase by around A$4bn.

The bureau said the increase was likely to sap 0.8 per cent from economic growth figures, which are due out later this week for the third quarter.

Peter Costello, Australia’s treasurer, said: “The level of the Australian dollar, which is currently about 10 cents higher than its post-float average, has made things harder for Australian exporters.”

“In part, this is because of commodity prices, but largely it is because of the falling dollar,” he said.

The Australian dollar fell 1.3 per cent to US78.4c from a nine-month high of US79.47c following the release of the deficit figures.

Analysts said expectations for Australia’s growth rate were also dampened by disappointing result for business inventories, which rose by 0.3 per cent to a seasonally adjusted A$1.264bn instead of an expected 1 per cent – the smallest movement since September 2002.

UBS chief economist Scott Haslem said: “Overall, today’s data point to a negative GDP result. We are reducing our forecast to flat.” 

However company operating profits remained buoyant, rising a higher-than-expected 3.6 per cent, after a 6.2 per cent gain in the June quarter. 

Anthony Thompson, senior economist at HSBC said the deficit was “certainly well above expectations and that is something that should now start to temper the bullishness of the Australian dollar. 

“It looks like the main surprise on the deficit has come on an expanded income deficit. The real downside surprise though is inventories. That I think is going to cause the most downward revisions to GDP forecasts.” 

Michael Blythe, chief economist at the Commonwealth Bank, said, “We have that classic squeeze where exports aren’t picking up the way they should be and imports are holding at very high levels. So I suspect the big trade and current account deficits will be around for a while.”

Australia’s central bank, which has held interest rates at 5.25 per cent throughout 2004, said earlier this month there was “no pressing need” for monetary tightening. 

--------------------------------------------------
BLOOMBERG 29/11/2004

Australian Current Account Gap Widens to A$13.69 Bln (Update5) 
Nov. 29 (Bloomberg) -- Australia's current account deficit widened in the third quarter to a record, prompting JPMorgan Chase & Co. and Westpac Banking Corp. to cut their forecasts for economic growth. The nation's currency fell. 

The deficit in goods, services and investment in the three months ended Sept. 30 widened to A$13.69 billion ($10.8 billion) from a revised A$11.76 billion in the second quarter, the Australian Bureau of Statistics said in a report released in Sydney today. The median forecast in a Bloomberg News survey of 23 economists was for a A$12.5 billion shortfall. 

The Australian dollar fell for a second day and is 1.2 percent lower than a nine-month high reached on Nov. 26 after the report showed the rising currency had cut exporters earnings, while imports of consumer goods increased and higher crude oil prices boosted the cost of imported fuel. 

``Clearly the economy isn't growing as fast as forecast in the third quarter,'' Stephen Koukoulas, chief Asian strategist and economist at TD Securities Ltd., said in Sydney. 

``We're running a current account deficit that is even wider than the U.S. and that isn't good news for the currency. It's a vulnerability to the economy.'' 

The change in the trade balance, or so-called net exports, will subtract 0.8 percentage points from gross domestic product in the third quarter, the statistics bureau said today. Economists had forecast a 0.6 percentage point detraction. 

A separate report showed inventories held by non-government business rose 0.3 percent in the third quarter. Economists had forecast a 1 percent increase. 

The Australian dollar fell to 78.51 U.S. cents at 2:15 p.m. in Sydney from 78.80 U.S. cents just before the report was released. Last week, the dollar reached 79.47 U.S. cents, the highest since Feb. 18. The yield on the 6.25 percent bond maturing April 2015 rose to 5.21 percent from 5.20 percent. 

Weaker Growth 

JPMorgan Chase & Co. cut its economic growth forecast for the third quarter to 0.5 percent from 0.7 percent. Westpac, Australia's fourth-largest lender, reduce its third-quarter GDP forecast to 0.2 percent from 0.6 percent. 

``It looks like it was a fairly soft quarter,'' said Brian Redican, a senior economist at Macquarie Bank Ltd. in Sydney. 

Economists had previously forecast the economy probably expanded 0.7 percent in the third quarter from the previous three months, according to the median in a Bloomberg News survey conducted last week. The gross domestic product report will be released on Dec. 1. 

Standard & Poor's has said the ``chronic'' current account deficit is the main risk to Australia's AAA credit rating, with external debt among the highest for an industrialized nation. The size of the deficit is ``mitigated'' by the government paying off debt and running budget surpluses, S&P said in August. 

Rising Deficit 

The current account deficit is the broadest measure of international trade because it incorporates financial transactions. A rising shortfall signals Australia has to attract more funds from overseas investors to finance investment that is not covered by local savings. 

Australia's current account deficit will be about 6.25 percent of gross domestic product for 2004, compared with a U.S. deficit of 5.5 percent of GDP, TD Securities' Koukoulas forecast. 

The current account deficit reflected a wider trade shortfall in goods and services and a large net income deficit. 

The net income shortfall widened to A$7.18 billion and the goods and services trade deficit increased to A$6.38 billion. 

Rising business investment and consumer spending has boosted demand for imported goods. The dollar's 10 percent gain the past six months has eroded exporters' earnings when converted into local dollars. 

The current account deficit ``is an underlying vulnerability for Australia and large by international standards,'' said Su-Lin Ong, senior economist at RBC Capital Markets in Sydney. ``At a time when there is a renewed focus on the escalating U.S. current account deficit, we'll see if financial markets finally sit up and take note. 

``There are important differences -- higher yields in Australia, which are necessary to fund the deficit, Australia is running budget surpluses, and there's considerable demand for Australian dollar bonds.'' 

Australian 10-year bonds are yielding 5.21 percent, compared with 4.23 percent in the U.S. 

The Liberal-National coalition government has delivered six of its eight budgets in surplus and repaid more than A$70 billion in debt since winning office in 1996


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## stefan (30 November 2004)

Crashy, thanks for that article. Very interesting. I was about to post my own reply but that pretty much sums it all up nicely. 

My main concern is about consumer spending figures which are still high but based on a scam. Australians do not have money after all. The only thing they have is equity which they took out of their properties, assuming that house prices never fall. Good luck with that. 

Speaking to an economist on Sunday, I must say that this is very concerning. If we assume that property prices will decrease in 2005 due to a loomig recession and other factors, then people will be forced to sell their investment properties which they financed out of their own homes with a minimum deposit. Once the value of your property starts to decrease, the banks will jump in, asking their money back. There will be a lot of fancy boats and cars for sale in 2005 if things eventuate the way this economist thinks they will. 

If we look at how quickly things changed this quarter, then there is little doubt that worse things can happen just as easily. 

No need to go mad about it, but maybe we should change our way of thinking and actually start putting some real money aside.

Happy trading

Stefan


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## crashy (30 November 2004)

*AUSTRALIA OCT BUILDING APPROVALS FALL 2.4 PCT FROM SEPT; CONSENSUS STEADY 

*AUSTRALIA OCT RETAIL SALES FALL 0.7 PCT FROM AUG


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## markrmau (30 November 2004)

crashy said:
			
		

> from another forum:



Thanks for the interesting read - what forum is it from?


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## crashy (30 November 2004)

hotcopper

but dont waste your time. there is a ratio of 200 to 1, idiots to good posters.

this forum is breaking all the records, ratio under 1


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## markrmau (1 December 2004)

crashy said:
			
		

> I am heavily short the XJO (and hurting).



Things are starting to look better for you? Perhaps we are headed back to the low 3800's?


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## crashy (1 December 2004)

medium term shows trendline support 3725

hope we get there in a hurry


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## Mofra (1 December 2004)

Howdy,

Very interesting thread, just thought I'd add that the news this morning had an economist report stating that due to the lower then expected building approvals for the quarter ending in September, rates are likely to be put on hold until well into the new year - whilst many home owners may be cheering, I would guess this is a sign of concern by our economic leaders. 

Thank you to all posters who have provided such interesting & relevent information,

Mofra


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## clowboy (1 December 2004)

I find it very interesting.

I was reading a few articles today saying that economists now believe that rates are more likely to go down than up.

Given the trend over the last 5 years that is likely to mean they will go up next.....they seem to always do the oposite to what the "experts" say they will.

Down would be nice though, although I cant really see how that is going to relieve any presure on our hude debt.


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## stefan (2 December 2004)

> I was reading a few articles today saying that economists now believe that rates are more likely to go down than up.



As you mentioned, nothing is for sure. Anyway, predictions about interest rates change every week depending on what sort of figures are due to be released. It's a joke. 

Lowering interest rates would be contra productive. It would not be a permanent fix to bring the dollar down, just a quick and dirty patch that wouldn't hold for long. I very much doubt that the Reserve Bank would give in to that temptation. Anyway, we shall see. The Christmas period will be a very interesting quarter to watch and I'm wondering what will happen to the consumer spending figures. 

Interesting thread indeed. Thanks for all the imput.

Happy trading

Stefan


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## Dwib (2 December 2004)

Definitely no expert in economics .... but would the drop in interest rates decrease the difference between .. say Aust and US interest rates... hence overseas investors are less likely to invest in Aust as the return is not as good as they could get back in their own country????


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## stefan (6 December 2004)

> but would the drop in interest rates decrease the difference between .. say Aust and US interest rates... hence overseas investors are less likely to invest in Aust as the return is not as good as they could get back in their own country?



Correct! However, it's not the Aussie Dollar who's strong. It's the Greenback who's weak. And you can't fix another currency by manipulating your own interest rates. You can buy lots of the foreign currency to keep your own lower but at some stage you will run out of money. Which is what's currently about to unfold in Asia. They are loaded with US dollars and yet, the currency keeps falling. So their investment is losing value which creates a problem when you're holding billions of it. Whether or not this problem can be solved in a controlled way remains to be seen. There are some economists who think it will all be ok without any major dramas and there are some who think we're in for a big wakeup call. I tend to believe the second group but that's just because for me the other arguments don't add up properly. One thing's for sure. It's going to be interesting.

Happy trading

Stefan


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