Australia’s “Emergency Playbook”

There were various articles over the weekend around the Reserve Bank of Australia’s (RBA) “emergency playbook” report outlining what they would do should (when) the world faces another financial crisis or Australia’s steady decline sees pressure on an Aussie cash rate less than 1%.

Essentially the report (sourced by Bloomberg) outlined that should rates get near 1% they would unleash “unconventional monetary policy” most likely in the form of Quantitative Easing (QE) as has been deployed most notably by the US, Europe and Japan.  Unlike Europe and Japan the RBA saw buying corporate bonds and introducing negative rates brought risks that could negate or outweigh the benefits.

This report was released at an interesting juncture in global and domestic economic proceedings.  

  • On Friday the AUD jumped again on a better than expected, albeit unchanged from Q1, Chinese Q2 GDP of 6.7%.  Reaching as high as 76.76c.  Even after settling down to 76.2%, it is still now 5.5% higher than since the end of May.  Not something the RBA wants to see for our export dependent economy. 
  • As we reported in last week’s Weekly Wrap, the world now has over $13 trillion of negative yielding government debt.  Last week Germany became the first EU country to sell 10 year debt with a negative yield at an auction.  Now to be really clear, that means smart people bid and bought at an open auction the right to ensure they lose money over the life of that bond because they see that loss as better than what they think will happen in financial markets.
  • Japan is openly looking to introduce “Helicopter Money” whereby they commence the slippery slope of taking QE to the next level of the central bank (BoJ, like the RBA) bypassing banks and buying open ended government debt directly to fund stimulus, some of which could include Rudd type handouts to try and stimulate growth.

Bonds used to be favoured over gold by some because they yielded a return.  So it is again no surprise that whilst sharemarkets rally on this stimulus beyond fundamentals, gold too is holding strong despite it looking overbought. 

Over the weekend the world’s biggest fund, BlackRock had this to say in response to the RBA report:

"With 70 per cent of the JP Morgan developed world government bond index below 1 per cent, the yield in Australia stands out like a beacon for investors contemplating low or negative yields.”

i.e. the AUD is stubbornly high because everywhere else is even worse.  Most predict August will see the RBA cut our rates to 1.5% but that is still higher than the vast majority and hence money will keep seeking the higher yielding Aussie.  But as this report admits, that will not last.  Westpac today revised their AUD forecast for September to 73c and 71c by December.  That would see a 7% increase in the price of your gold and silver off this morning’s 75.9c.

And why?  BlackRock says the Aussie will "eventually respond to fundamentals of lower commodity prices, weaker growth, lower inflation and lower policy rates."

So it seems inevitable we will enter the world of ‘unconventional monetary policy' that has seen nothing but artificial inflation of financial asset bubbles, continued low (and in many cases declining) real growth, enriching the rich at the expense of the middle and lower classes, and a devastating accumulation of debt.

The theme of 2016 is a world seeing this for what it is and preparing for the inevitable outcome.  They have been buying gold and silver hand over fist.  USD spot is up 26% for gold and 46% for silver.  That 5.5% rise in the AUD has seen a lesser 21% and 40% respectively.  The falling AUD would see us outperform from here on top of where the US spot price could go as well.  Interesting times….