A large earthquake had hit Japan. Damage all over the south. Infrastructure, utilities and manufacturing facilities were hard hit. Lots of residential damage. No trains. Roads closed. Ports closed. Airports closed. Communications down all over.
My conclusion? This has to be deflationary. It would hurt growth. Bonds would go up and the currency would weaken as a result. Wrong, wrong wrong. It is actually the other way around. At least that is the case for most industrialized countries.
Insurance companies pay claims. That money is immediately put to work making repairs and replacement construction. The state, city or national governments pull out the stops. Charity comes into play in a big way. Industry is also insured for most of the losses. Reserves/savings are dipped into at every level from consumer to central government. Utilities spend what they must to make repairs knowing they will recoup losses with future rate increases.
The good thing about a market misread that costs you is you don’t forget it. I have seen the growth trade play out a number of times since getting hit on the head. South Florida, NO, Indonesia, lower Manhattan come to mind. There might be another one in the making.
Looking at the chart of the AUDUSD since year-end I am wondering if there is not a bit of “sell on the flood” in the current price. If so, that would be a misread based on my experience. There will be a surge in domestic demand. For the AUD strong domestic demand means higher interest rates and foreign capital flows. It means a stronger AUDUSD.
There are always many factors that influence FX rates. Natural disasters are just one. These headlines suggest that weather is playing an out sized role. We shall see.
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I like your idea Bruce, even though most of the drop from Dec 31, 2010 in AUD wasn't due to the flooding but due to 'normal' corrective fx action. This is confirmed by the NZD which also peaked on Dec 31, 2010 and dropped in lock-step with AUD until the rains began, but firmed and rallied since, unlike the AUD. If you wanted a hedge of some kind, buy the AUDNZD cross.
ReplyDeleteI normally like your stuff Bruce. But i think this is umm... rubbish. :-)
ReplyDeleteFirstly, you are simply getting short an option when you buy aud here (or short rates). This is not a japanese situation where masses of roads, houses, utilites etc have to be replaces. These are rural areas, where in some cases there might only be a few roads. An anyway, the repairs will take years. The immediate impact is the permanent loss of income (not only from the mines, but from all other industry also). And that impact, on an economy that is outside of mining rather fragile, is the real story imo. Even before these floods the tourist area of Cairns, gateway to the great barrier reef, had an unemployment rate close to 14%.
Why be short an option here? Its a dumb trade imo. What are you going to make? Will it go to 1.03? big deal. With china trying to take some steam out i'd be more worried about the aud trading down to a more reasonable level of like 80c, where the rest of the economy can function. And also, i think Redford might be right - its not clear that this move down from the highs really is related to teh floods... its not been an outsized move.
As i said, i otherwise really like your stuff :-)
regards
H
Bruce,
ReplyDeleteLike H, I give you an A for effort here.
However, the driving factor in AUD is risk on/ risk off, and the floods have little to do with it. Yes, AUD is off a couple of cents in the last 2 weeks, but still near all-time highs. If AUD had been falling for the past 2 years,I would agree that the flooding would have applied the final blow and I might be in there buying.
No, what will drive the AUD will be what has been driving it for the past 2 years - booming China, generally higher worldwide equities, higher commoditites, ...
I'd rather buy June 75 puts on the AUD than go long. Keep up the good work.