Line Ball Down Under: Has the Time to Short Australian Dollar and Equities Come?

Includes: EWA, FXA, PGJ
by: Macro Man

For those of you who have been following international politics lately, Australia has managed to follow the UK's lead in getting itself into the one big mess possible in a Westminster system: a hung parliament. There are 150 seats in the House of Representatives in what the locals commonly refer to as "God's Country" and in order to form government you need 76 of them.

At this point in time the historically teamster-oriented Labor Party has about 72 and the paradoxically named conservative Liberal-National Coalition (a weird amalgam of libertarians, religious right and agrarian socialists) is on 70, with the balance of the seats held by the "land rights and emissions trading for gay whales" Greens and a bunch of other guys - yes, they are all guys. Let the horse trading begin...

Team Macro Man is not universally of the view that a hung parliament or coalition governments are a bad outcome - the UK appears to have gotten through a tough and credible budget with an odd coupling of Liberal Democrats and Conservatives, and for all intents and purposes the UK is much less of a train wreck than any of the members of TMM would have thought. Australia, however, is a different kettle of fish. Having people like Bob Katter holding the balance of power does not bode for political stability of any kind. That, combined with a predominantly Green and extreme left Senate does not bode for getting a whole lot done politically.

This might not be that much of an issue at all if it weren't for the unfortunate fact that a lot of what has made Australia a braindead trade for the last 18 months appears to be unwinding. Chinese commodity demand is coming off and all indications point to China being happy to cool off its property sector as much as it can without bankrupting the developers and the cement, steel and aluminum companies that rely on them - July bounce notwithstanding, the economics departments of most banks have been left waiting at the station for a China stimulus package that hasn't come. This does not bode well for a country whose core exports are iron ore, coal, and base metals.

To add to the problem, Australia's bizarrely overvalued property markets are getting some attention again from the likes of Morgan Stanley who are calling a top in Australian real estate. Practices such as negative gearing are getting the attention of Treasury officials as a good way to raise revenue and take the froth out of the market - pity the banks aren't even close to ready to take the kind of hit to their loan books an explosive real estate unwind would entail.

Which leads TMM to think that maybe the short AUD, short Aussie equities trade is an idea whose time has come. On almost any basis you care to mention - PPP, FEER, DEER, charts, you name it - the Aussie isn't exactly cheap and is easy to sell above 90 cents.

On the equities side, a cursory glance at the ASX will leave you with four banks leveraged to real estate and with pending offshore funding issues, a few insurers and a shedload of mining companies that are entirely leveraged to China. If we really are going all deflationary, why has this stuff held up? TMM could yet be proven wrong by global stimulus but it may not be long before Aussies are thinking of happier times.

Disclosure: No positions