Goldman Sachs (GS) has a 4 year floating rate bond denominated in Australian dollars, which resets its coupon rate quarterly at the Australian Bank Bill Swap Reference Rate plus 0.51%, and currently carries a yield to maturity of over 7%. The high yield and short maturity of this Kangaroo bond, when considered with Goldman's solid A- rating and enviable reputation within the financial sector, compares extremely favorably in relationship to other high yield instruments in our Foreign and World Fixed Income holdings.
We think Australia's recent weaker than expected economic report and the Aussie dollar's ebb from its resurgence presents a great opportunity for increasing our exposure to the Australian currency in our basket of foreign fixed income holdings. We believe the U.S. dollar's longer term weakening trend against many world currencies remains a major concern for investors seeking protection against its devaluation and a further erosion of its buying power, and we share the concern of our clients in protecting existing wealth by utilizing the higher yields of sound issuers in many the world's strongest currencies and economies.
Wealth Preservation Concerns
As an array of mixed signals across the economic landscape continue to cajole global equity markets higher, wealth preservation and risk aversion remain top priorities for many people. Declining equity and property prices, ultra-low interest rates, minimal pay raises, elevated inflation, ineffective politicians, potentially increased taxes, and the Fed's constant printing of more money in what may be an effort to not only backstop the U.S. economy but also that of Europe, have all precipitated into a widespread erosion of wealth that will likely continue until the aforementioned conditions begin to change.
Meanwhile, the currency war - a term coined by Brazilian Finance Minister Guido Mantega - appears to be escalating. China has slashed its foreign currency reserves in U.S. dollars to a record low and, along with Japan, Russia, India, and others, is making moves to shift away from the dollar to use their own currency for settling bilateral trades. According to the Chinese rating agency Dagong Global Credit, the QE scheme has substantially eroded the legitimacy of the U.S. dollar as the global reserve currency. The Chinese policy of small steps signals the increasing intention to turn the renminbi into a freely convertible currency and to gradually liberalize the capital market. By 2020, China wants to have turned Shanghai into an international finance center. China is preparing for the post-USD era at full speed. Within the framework of their new five-year plan, China wants to settle almost 50% of foreign trade in yuan by 2016. It wants to invoice in yuan in the bilateral trade transactions with African or Latin American countries that are rich in resources. Iran for example is said to supply oil for yuan. In addition, the People's Bank of China has allowed almost 70,000 companies to invoice its foreign business worth almost USD 70bn in yuan. Numerous other examples illustrate the fact that the dollar skepticism is growing.
As governments around the world lower their exchange rates in efforts to bolster competitiveness, it will cause a chain reaction in which all countries involved in trade will need to weaken their own currency to bring it into a ratio of exchange that is acceptable to their perceived valuation. Interestingly, the increase in U.S. money supply has recently been accelerating. Up over 60% in less than 4 years (over 12% per year), the more recent trends indicates a year over year increase of the M1 money supply of 19.3%, a 26 week rate of 22.4%, and a 13 week rate indicating of 16.8%. Many governments (including the Congressional Budget Office of the United States) believe that the dollar will weaken over the longer term and want alternatives, other than the tarnished euro, to use for trade and investment.
We have undertaken the effort to protect our client's assets against the persistent destruction associated with an ever increasing supply of federal dollars, by scouring the globe in search of sound investments in the strongest global economies, and it is why we have chosen Goldman Sachs floating yield, short term Aussie bond as This Week's Best Bond.
Australia's abundant and diverse natural resources include extensive reserves of coal, iron ore, copper, gold, natural gas, uranium, and renewable energy sources. It also has a large services sector and is a significant exporter of natural resources, energy, and food. Key tenets of Australia's trade policy include support for open trade and the successful culmination of the Doha Round of multilateral trade negotiations, particularly for agriculture and services.
While many large advanced economies have been struggling with growing debt burdens that result from years of heavy government spending, Australia's gross public debt stands at less than 25 percent of GDP. Unemployment, originally expected to reach 8-10%, peaked at 5.7% in late 2009 and fell to 5.0% in 2011. Budget deficits have been under control owing to prudent public finance management that recognizes limits on government. As a result of an improved economy (growing 2.7% in 2010 and 3% in 2011,) the budget deficit is expected to peak below 4.2% of GDP and the government could return to budget surpluses as early as 2015.
Earlier last month, the Reserve Bank of Australia trimmed the economy's growth forecast to 3.5 percent for the year ending June 2012 from the previous forecast of 4 percent. The annual rate of inflation in Australian appears to have recently fallen to about 2%, but is projected to rise by 0.7 percent. With inflation under control, the latest batch of data keeps the door open to further rate cuts. China's weaker-than-anticipated exports, as well as industrial production and retail sales data released last week, was generating uncertainty about the near-term outlook for Australian resource stocks, but offshore investors continue to see Australia as a safe haven with a stable growth outlook on the back of the strengthening resource boom.
Public debt to GDP
Australia in A$
A$ 20.3 billion
United States in USD
|102.8%||US$ 1.29 Trillion||1.474 Trillion||2.239 Trillion|
Stanford University has rated the Australian economy number #1 on its global Sovereign Fiscal Responsibility Index. This recognition helped highlight how much stronger Australia's financial condition is compared to #28 ranked (out of 34) United States, which came in only four points above a defaulted Iceland.
Australian dollars (AUD) per U.S. dollar -
About Goldman Sachs
The Goldman Sachs Group, Inc. is a global leader in investment banking and securities who engages in investment banking, buying and selling securities, asset management and many other financial services focusing on institutional clientele and high net worth individuals. Goldman Sachs' headquarters is located at 200 West Street, New York, and was founded in 1869. Former employees include Robert Rubin and Henry Paulson, who both served as the United States Secretary of the Treasury after resigning from Goldman Sachs, thus the nickname "Government Sachs".
Liquidity is of critical importance to companies in the financial services sector, and most failures of financial institutions have occurred in large part due to insufficient liquidity. Accordingly, Goldman Sachs has in place a comprehensive set of liquidity and funding policies that are intended to maintain significant flexibility to address both Goldman Sachs-specific and broader industry or market liquidity events. Management stated principal objective is to be able to fund Goldman Sachs and to enable their core businesses to continue to generate revenues, even under adverse circumstances.
To finance the firm's business, Goldman Sachs issues various types of short and long term securities, including promissory notes, commercial paper, medium term notes and global bonds. It currently has about $825Bn in cash, $491Bn in debt, and its International bonds are solid Investment grade quality, being A- rated by S&P.
|Goldman Sachs domiciled bond||Yield||Maturity||Rated|
|US dollar||3.62 %||02/07/2016||A-|
|Australia dollar||7.11 %||04/12/2016||A-|
The default risk is Goldman Sachs' ability to perform. Given their strong cash position, financial strength and evidently close political connections, it is our opinion that the default risk for this short to medium term bond is minimal relative to the currency risk of the Aussie dollar.
The currency risk of the Aussie dollar could and will affect the returns of these bonds and possibly in a negative way as it exposes investors to the Australian economy. In this respect we believe that it carries similar risks to Bank of America's (BAC) and JP Morgan's (JPM) Kangaroo bonds.
Accessibility and Liquidity
Aside from owning various emerging market funds and ETFs that blend together various winners and losers into a mixed yield cocktail, the question arises as to how a retail investor might own or acquire individual Goldman Sachs Australian dollar denominated bonds. Many times broker/dealers require an institutional-sized single bond purchase. However, it is also possible for a number of smaller retail clients to be combined together in order to make a larger institutional sized purchase. Previously, we have been able to facilitate purchases as low as $10,000 U.S. dollars.
We continue to search for individual corporate instruments denominated in the currencies of growing economies that yield higher than average returns to help protect our clients against the erosion of wealth that results from a constant devaluation of the U.S. dollar. We acknowledge that a stronger U.S. dollar would directly reduce the total returns of this Aussie bond. Conversely, if the U.S. dollar continues on the longer term path of relative weakness to the Australian dollar that it has been on, this alone would add significantly to the already highly positive accruing returns of this bond.
Considering Australia's long term position as a stable economy and political system with shrew fiscal management will likely correlate with a stable and possible strengthening of the commodity based Australian dollar relative to the U.S. dollar, we view the gaining of nearly twice the yield from such a reputable issuer as Goldman Sachs as an incredibly compelling reason for choosing their Kangaroo bond over their similar length U.S. dollar bond. The combination of offering a remarkably high yield, some protection against a further loss of wealth with a continuation of the U.S. dollar's weakness against the Aussie dollar, and a diversification away from heavily overweight U.S. dollar based assets into one of the world's top tier fiscally conservative countries is why we are adding it at this time to our Foreign and World Fixed Income holdings.
Yield to Maturity: 7.11%
Disclosure: Some Durig Capital clients may currently own these bonds. I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.