The Valor Blog.
Investment News and Views, Direct from Our Team.

Question: When does Australia’s currency gets so painful that debt must be issued in USD?

If Australia loses its AAA rating in the coming year, at what point in our currency depreciation and debt increase does the rest of the world lose faith in lending to us in Australian Dollars?

With falling bond and interest rates, there are far less reason to lend to Australia than in previous years. As the US slowly raises interest rates, our measly margin above US rates becomes thinner. The risk for reward becomes marginal.

Those that believe we have endless access to borrowed money from overseas so that our property market can continue to grow unbounded are assuming that the generosity of strangers continues regardless of our economic situation.

If I were a foreign country, pension fund or insurance company that had bond rating restrictions for their holdings, the loss of a AAA rating, the fall in the largest export by very large percentages (still a long way to go before the long-term average) and the highest household debt in the world would be enough red flags to insist on debt being issued with no currency risk. Is there a point in time that we can’t issue debt in AUD and must issue in USD?

At this point in time, Australia’s debt reliance sends us closer to a developing nation than a developed one.

Financial markets are based on trust. When that trust evaporates, so too does the liquidity. As Australia continues down the wrong path, we are running out of trust coupons.

Debt for productive growth is fine. Debt for unproductive assets such as second hand housing is not. Australia is riddled with this cancerous debt and it continues to grow.

Australia continues to head in the wrong direction. We have the current leadership shuffling deck chairs on the Titanic looking to protect their derrieres. The opposing leadership are offering to reduce our reliance on cancerous unproductive debt by limiting negative gearing, however are yet to formulate a plan to get us out of this quagmire. As a truly swinging voter who has no affiliation to either party due to their focus on re-election rather than rational policy implementation, I am concerned for Australia’s future.

At Valor, we invest in the worlds best businesses and look to avoid places to lose money. We are not perfect and every investor makes mistakes. What we are very confident about is avoiding very obvious bubbles. The Australian housing bubble appears to be the largest the world has ever seen at $6.4 trillion in housing “assets” versus around $1.6 trillion economy. This proportion has never been reached, even by enormous bubbles such as Japan, Ireland and Hong Kong. Our household debt is the highest in the world.

As Charlie Munger, Warren Buffett’s business partner always says:

“I want to know where I am going to die, so I don’t go there”

We want to know where we could lose money, so we don’t go there. Australian property, banking and associated industries are where we think investors money will die in the coming years. We have guesses on how bad it will get, however we will not air these publicly because the likely truth is difficult for most to comprehend. Have a look at what happened to every other property bubble and it becomes glaringly obvious what is a very high probability for Australia in the coming years.