Tuesday, April 24, 2012
Well, today is a very important day for markets, as the largest
religion company in the World reports earnings. Despite the strength of the earnings season so far, names have found themselves lower just a couple of days later as profit taking has come in. In the short term, that seems reasonable, but does not detract from the trend that the economy looks pretty good with companies making money - that seems pretty "normal" to TMM. Of course, against that, it seems that everyone TMM speak to expect AAPL to sell off post earnings, regardless of the actual top or bottom lines. Make of that what you will. TMM will most definitely NOT be watching the AAPL release, and will instead be getting pissed down the pub.
Anyway, we digress. In amongst the usual bollox arriving in their inboxes this morning about Europe and concern that a certain Shampoo brand (how do we know the girl in JAWS had dandruff?) was going to portent the end of the world , TMM were asked why, despite Oil prices having rebounded from their recessionary depths, Canada was running a Current Account deficit of close to 3%. Given we're fed up to the eyeballs of anything Europe, we thought we'd have a look.
It's kind of interesting actually, that this particular subject has been brought up given that on that long list of supposedly great macro trades that has so far refused to perform is that old chestnut "Short AUD/CAD". Now please forgive TMM for their snarkiness but, in our opinion, this is one of those trades dreamed up by a group of punters we shall now term as the "Off The Cuff Macro Numpties". This particular group are known for their use of a little knowledge, a few good charts and their favourite hobby "Bubble Hunting", which essentially consists of looking for something that has increased in price by 10-20% and yelling "Bubble!". Oh yes, and telling TMM that we are clueless in the comments section below.
But back to Canada. Looking at the Trade Balance (see chart below), indexed such that Q4 2006 equals 1, it is interesting to note that while post-crisis, both import growth and export growth don't actually look that different, the level of exports fell far more sharply and has not really recovered particularly well. Well, to TMM that exports have not recovered tremendously is not that much of a surprise given that the US recovery (Canada's largest trading partner) has so far been rather tepid. That imports have re-accelerated is perhaps more interesting, particularly in the light of the strength of retail sales in Canada since the recovery began.
Now TMM are unconvinced, as discussed before, by the idea that there exists a housing bubble in either Australia or in the UK. This is primarily because of the balance between housing construction, housing supply and household formation. It is not obvious to TMM that valuations are out of line when the above conditions are either in balance or in deficit (not enough housing supply) when many can be explained by structural falls in interest rates (and interest rate volatility) amongst other things. A full discussion of this is well beyond today's post, but TMM do think that these factors are significant in explain why the US and Spain experienced a spectacular crash in house prices, whereas the UK and Australia (at least so far), have not, despite - well, specifically in the case of the UK rather than Oz - very similar macro outcomes and policy responses.
So why do we bring this up? Because TMM do actually reckon that Canada *may* be a candidate for a housing bubble, given the dramatic run up in house prices, interest rates have arguably been kept too loose post-crisis (understandably so, given the external risks), TMM have received plenty of anecdotes and adverts that evoke déjà vu of 2005 in the US. But most importantly, housing construction has been widespread, it is a big country with not too large a population and housing starts (~215k) have been running above household formation (~170k) for a few years now. TMM haven't looked in enough detail to come to any firm conclusions as to whether Canada's housing boom is a bubble or not, they do reckon that it is different enough from Australia's to matter.
So Canada has clearly had something of a consumption and investment boom. What about Australia? The trade dynamics in Australia look almost the mirror image of Canada's, with imports having recovered to around the pre-crisis, while exports (to China in particular) have roofed it So is this perhaps a case of the real trade *not* actually being a case of long commodity currencies etc, but a case of being long the stuff that people actually want. Because the above evidence suggests that there isn't, y'know, that much demand for Canadian oil and other stuffs.
But that's not the end of the differences. A little observed portion of the Current Account balance is the Current Transfers balance, usually confined to those of us bean-counting remittance flows to Mexico or the Philippines. And it is notable for two similar sized economies that over the past few years that Canada has built up a sizable transfers deficit (white line, chart below) while Australia hasn't (orange line). Now that could mean one of many things, but the most likely explanation is US construction workers having found work in Canada's tight labour market sending their earnings back home.
So given all the above, it would appear to TMM that perhaps the confidence with which punters keep trying to sell AUD/CAD may be misplaced. Because it appears to us that Australia is selling stuff people want, while not experiencing a domestic consumption boom, while Canada appears to be precisely the opposite. Canada also appears a more legitimate prospect (though this is far from certain) for a housing bubble than Australia, and increasingly, migrant labourers are sending their earnings home adding an additional headwind to the currency. Combine that with the popularity of the short, the rather tepid response to the soft CPI print over night, a market now looking for a 50bp RBA rate cut next week (after
famous idiot well-followed Aussie Journo McCrann has started predicting it) and a soothsayer "Buy" signal on Friday, and TMM reckon it could be time to squeeze some gonads and scoop up some AUD/CAD.