As Canadians, we cannot help but shiver a little bit when Stanley Druckenmiller, the man that “broke the bank of England,” with George Soros, calls for an end to the commodities supercycle. In doing so he also added to this call by suggesting shorting the Australian dollar. A bold prediction for a country that hasn’t had a real recession since beginning of the 1990’s, but if the tides are turning for a natural resource and export based economy like Australia, then one could only fathom what the implications could be for us here in Canada.
It’s no secret that the TSX is one of the worst performing global indices since the beginning of this year. That largely can be attributed to the decline in the price of commodities, but if that’s paired with the slump in demand for natural resources—the slide continues. So as the bears come out for the Aussie dollar, the ones for the Canadian dollar follow. Just this week TD revised their forecast for a 90 cent loonie for the fourth quarter of this year. And despite the stability of our economy, and the fact we resembled what might be the least dirty shirt in a laundry basket, the tides have definitely turned in the global outlook.
The focus right now is continuing to surround the United States and their equity markets. “Smart money,” labeled after the endowment funds for a lot of the major American Universities like Stanford, Princeton, and Yale are reported to have dumped their exposure to US debt. Three years ago would have been a different story when approximately 30 percent of those particular funds exposure would have been to US treasuries; that allocation is no around 5 percent. The bull run in the bond market thanks to the US Fed has definitely served them well, but the looming threat of inflation risk in bonds is getting more and more prevalent, which causes these funds to reach for yield elsewhere.
It’s not inflation risk, however, that is the fear of the US Federal Reserve Chairman Ben Bernanke. When speaking Friday at a lunch in Chicago he addressed the potential danger of asset bubbles. The chairman hinted at reckless speculation triggered from low interest rates and there is no question that has been the concern of many bond market vigilantes since the onset of this quantitative easing program. But as the Bank of Japan has made clear following the actions of the US Fed, it’s not in an investor’s best interest to bet against a central bank. As the Japanese yen surpassed 100 yen to the US dollar earlier this week, Japanese investors are even fleeing their own currency.
As the FT says, Abenomics is kicking in, and for the first time since the BoJ’s ultra-loose monetary policy change Japanese investors became net buyers of foreign debt. They are opting for dollar or euro denominated bonds in lieu of their own. Simply stated, a depreciating currency onset by inflationary policies is a tax on savings. That said, we are definitely in the middle of a shift in the global market place, and whether it’s a secular bear in a long term bull market for commodities, or central banks really are our savors, the tides have turned.