End nears for dollar’s dazzler days

IT’S easy to get excited about what’s happening in the fast-moving world of currency values but it’s wrong to describe what’s happening as a ‘war’, because it’s not; what’s going on is simply economics at work, and it’s telling a story of changes in the wealth of nations.

In a nutshell, the US and other countries are growing richer and Australia is growing poorer.

The man in the street might not feel the switch, yet, unless he’s recently lost his job on a mine site or in a bank, but there is an unmistakable trend under way which will flip the way we live over the next five-to-10 years.

Most noticeable will be changes to travel and shopping habits, because as the Australian dollar retreats to lower levels against most other currencies, including the euro and the British pound, imports will become more expensive, as will overseas holidays and luxury European cars.

Exporters will win, which will be a relief to hard-pressed farmers and miners who have been whacked around the ears by falling commodity prices.

The most unpleasant effect of these currency movements will be the pain inflicted on Australia’s debt repayment commitments; because as the country’s budget implodes and debt rises, the lower value of the dollar means we will have to find more of them (dollars) to repay those who loaned the money to fund our decade of extravagance.

The current trend provides a guide to the future, with the dollar falling from $US1.05 five weeks ago to about parity ($US1 for $A1) today. Then project that trend as it slides towards a target of US95c and then back to around US85c, before stopping at investment bank Goldman Sachs’ long-term forecast of US74c.

The precise timeframe for that prediction may be missing, but there’s widespread confidence that the trend is down; and never forget that in business the trend is your friend (if you go with it and don’t stand in the way).

There is little point dwelling on the wasted decade of Australia’s boom years except to observe that a good national government would not have let it happen, and that one of the country’s most successful businessmen, self-made philosopher Len Buckeridge, has said many times that he hates booms because “they cause more trouble than busts”.

He’s right, but he does have the advantage of having seen more booms and bust than most of us, and he’s generally made correct decisions whatever the turn of the cycle.

And if you don’t believe the cycle is turning at an economic and political level then you’re simply living in a fool’s paradise. Australia’s terms of trade have been deteriorating for the past year even if the trend is not yet reflected in the exchange rate.

Since early 2012 a gap has grown between what were once closely aligned price graphs, one tracking industrial minerals such as coal and iron ore, and the other tracking the value of the Australian dollar against the US dollar, with mineral prices sliding by around 40 per cent and the Aussie currency barely moving.

International investors are awake to what’s happening even if the locals are not, which is why master currency speculator George Soros (the man who trousered a $US1.8 billion profit in a 1992 deal which famously ‘broke’ the bank of England) has been short-selling the Australian dollar and making even more money that he doesn’t need.

With mineral prices against Australia, the budget in tatters, government debt rising rather than falling (as it should be after a 10-year resources boom), and the uncertainty of an election in September, the dollar has just one way to go. And go it will, whatever some of the so-called experts forecast – they being the same people who missed the sub-prime crisis and the revival under way in the US.

What’s driving the US up and Australia down is a combination of factors, not least being that energy costs in America have plunged, thanks largely to the shale-gas revolution, and industry is reacting accordingly.

Australia, as it tinkers with a variety of social experiments and a doomed attempt to change the global climate, or set a lead for the rest of the world to follow (as if anyone in the rest of the world cares), is now on the cusp of a big currency correction that will, over time, feel like a crash.

For investors not attuned to what’s happening, now is a good time wake up, trim exposure to domestically exposed stocks, and load up on exporters exposed to the US dollar.

Size standout

PURELY as an intellectual exercise, it’s interesting to think about what you could buy if there was a spare $3 billion sloshing around in the petty cash component of your bank account; a bit like the position in which iron ore heiress Gina Rinehart currently finds herself.

You could, of course, build a new iron ore mine, which she is doing, or you could buy yourself a series of iron ore mines, and mines-in-waiting – or do both.

To wrap some numbers around that proposition, consider the current stock market values of eight iron ore companies in various stages of evolution, from production to exploration.

Atlas Iron is valued at $932 million, Mt Gibson $580 million, Brockman Resources $426 million, BC Iron $403 million, Gindalbie Metals $253 million, Grange Resources $196 million, Iron Ore Holdings $122 million, and Australasian Resources $22 million.

There you go, for $2.93 billion, the cash reportedly in Mrs Rinehart’s bank accounts as at June 30 last year (and undoubtedly a lot more today) she could buy eight iron ore companies … and still proceed with the Roy Hill development from ongoing royalty and production cash flows.

It is, of course, a meaningless exercise, except to put the lady and her swelling fortune into the perspective of the local iron ore industry.