15/10/2009 - 00:00

If something seems too good to be true ...

15/10/2009 - 00:00


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The strength of the Australian dollar is good news for international speculators, but not for exporters.

If something seems too good to be true ...

BLOWING bubbles is fun when you're a child. It becomes serious later in life, especially when you discover that you are living in a bubble, and that the fate of all bubbles is the same - they pop.

Curious as it might seem, since it is little more than a year since the world peered into the economic abyss, the biggest worry today is not the global financial crisis (GFC), or unemployment, it is the formation of several spectacularly-inflated asset bubbles.

If proof is required look no further than your wallet and imagine it swelling by a balloon-like 40 per cent, because that's what has happened to the Australian dollar over the past 12 months as it has risen from US65 cents to roughly US91 cents.

It is true to say that the rise and rise of the Australian dollar is more a case of the US dollar shrinking, but the effect is the same because Australia sells most of its exports in US dollars and exporters are starting to struggle.

Pricking the Australian-dollar bubble will become a priority next year, but it will not be easy because for some strange reason the Australian government appears to believe its own propaganda and thinks we can defy the rest of the world and chart our own course.

Raising interest rates last week, while the rest of the world stays low, was an example of our bold, go-it-alone, approach, though it is reasonable to argue that offering investors (foreign and domestic) around 4 per cent on their cash while New York and London are paying 1 per cent, and less, has prompted a rush into Australian dollars - and further hurt exporters.

Later this year, Australia proposes to go it alone again with a "stronger-than-you" carbon emissions scheme, which will go further than anyone else (to show the world just how green we are), a move that will drive industries offshore in the same way the high dollar is doing today.

The dollar/interest rate bubble is proving to be a winner for international speculators indulging in a spot of gambling known as the 'carry trade'. This is a beautifully simple way to make money. You borrow money at 1 per cent in the US or Britain and invest those borrowed funds at 4 per cent in Australia - and pocket the 3 per cent difference. Neat.

Here are a few more financial bubbles to consider.

• Gold is being inflated into the stratosphere as speculators place bets on the continued decline of the US dollar. Unless gold really is to become the world's new reserve currency (which represents a 100-year trip back in time) then the gold bubble will burst.

• Australian house prices, force fed by government handing out borrowed money, must fall as the economy wilts under the damage being done to exports, and the costs to be imposed by a carbon emissions trading scheme.

• China itself, our fastest growing export market, is an enormous bubble with too much money chasing too few opportunities. China might not pop, but the steam will go out, if only because it is carrying a massive loss on its US dollar reserves which have plunged in value, possibly triggering the biggest financial loss in world history, if it dares crystallise the loss and sell its US dollar assets.

• Most 'hard' commodities as investors, speculators and industrial users rush to buy anything with their rapidly depreciating US dollars. Better today, goes the theory, to have a shed full of copper (or zinc, or anything) than a fistful of dollars.

If Queensland wasn't using a similar slogan to marker its Barrier Reef holiday resorts Bystander might be inclined to say of bubbles: "Beautiful one day, deadly the next".


WESTERN Australia's relatively smooth sailing through the GFC has made the first 12 months of our accidental premier, Colin Barnett, a pain-free affair.

However, lurking in the background are a few big business issues over which he has zero control, but which might make future years less of a lark for a man who was not only close to retirement, but had already sounded out 'ghosts' for his memoirs.

The high value of the dollar is one issue about which WA can do nothing. Mega-mergers at the top of the global resources tree are another, and right now there are two possible deals pending.

Xstrata, which owns the old Jubilee nickel assets and a few other bits and pieces in WA, has until next week (October 20 to be precise) to decide whether it will launch a takeover bid for Anglo American, a company with little here.

However, if Xstrata does move on Anglo it could re-start the clock on the biggest deal of all, BHP Billiton's continued stalking of Rio Tinto, a possible merger with profound implications for the WA economy, employment, and the flow of royalties to government.

Officially, BHP Billiton and Rio Tinto are engaged in a "friendly" merger of their iron ore assets, presenting a minor headache for Mr Barnett.

Unofficially, the improving world economy has caused Rio Tinto to drag its feet on the iron ore deal, and start a process of wriggling free from BHP Billiton, which might revert to the nuclear option and lob a fresh all-or-nothing takeover bid into the Rio Tinto camp.

If that happens, WA could emerge with a single company controlling most of the its resources, enjoying annual revenue bigger than the government, and making retirement look like a less stressful option for Premier Barnett.

Ravensthorpe options

AN example of what it would be like to have WA (or most of it) owned by one company is the mothballed Ravensthorpe nickel mine, which government hopes will be sold as a going concern.

This might happen if someone offers a price beyond what BHP Billiton will gain by scrapping the mine and its $3 billion processing plant.

There are two aspects to how BHP Billiton values Ravensthorpe. One is the scrap value (not much), and the other is preventing a rival from re-starting a nickel-making plant, bought at a bargain-basement price, and then dumping cheap nickel on the market and undercutting BHP Billiton's other nickel assets.

Tricky as this sounds there are two possible solutions. No sale, a real possibility, or BHP Billiton sells its entire nickel division, perhaps to a Chinese metal producer, abandoning nickel as a metal too hard.


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