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US Fund

Discussion in 'Managed Funds & Index Funds' started by Alan, 4th May, 2006.

  1. Alan

    Alan Well-Known Member

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    A useful graph for seeing the impact of the AUD/USD Exchange Rate on the US Fund can be seen at the following Oz Forex Site:

    http://www.ozforex.com.au/cgi-bin/chartsInteractive.asp


    From the following NavraInvest Performance Chart, it can also be seen how closely the performance has mirrored the exchange rate:

    http://www.navrainvest.com.au/index.asp?content=fund_perf_retail


    If you normally just watch the movements of the Australian Stockmarket to monitor your performance, here is another important variable to consider.
     
  2. TryHard

    TryHard Well-Known Member

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    Nice one Alan. I've been considering switching half my NI funds into the US fund, but the whole Forex fluctuation thing makes me a bit antsy as its yet another thing I don't fully comprehend :) Wonder what level of currency fluctuation is 'reasonably expected' for the US Fund to perform to its full potential ?

    I know the high level of volatility in the Dow was meant to suit NavTrade system better than the long period of gains in ASX, but other than another interest rate hike, is there anything that would cause reasonable chance of major fluctuations against the USD ?

    So many question marks, so little time ;-)

    Cheers
    Carl
     
  3. MichaelWhyte

    MichaelWhyte Well-Known Member

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    Carl,

    It all depends on the direction the cross rate is going to head as to whether an unhedged fund is a good idea or not. If the AUD was to fall then the value of your holdings in the US fund would go up in value and you would make a forex gain above and beyond any DCT trading gains.

    However, if the AUD were to firm against the USD then you'd see the sort of thing Alan is outlining above.

    Here's some food for thought then... Alan Kohler presented an interesting chart a few nights back which showed the historic correlation between the AUD/USD crosss-rate and the commodities index. It showed a nice neat correlation back through time but a divergence recently as commodity prices have bolted. Had that correlation held then the AUD would now be on parity with the USD! Parity!!

    i.e. One AUD = one USD. If the cross rate keeps tracking in that direction then it would single-handedly destroy manufacturing in Australia (my industry) as well as kill any unhedged investments you had in USD.

    Just a thought, and why I've decided to keep my DCT exposure in the ASX via NavTrade Aus Retail. I'm not into currency speculation.

    Cheers,
    Michael.
     
  4. TryHard

    TryHard Well-Known Member

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    Hey Michael

    Thanks loads for that. Wow !

    I wonder if Sim could entice you to do an article on the impact of the exchange rate on investments overseas - that's so interesting.

    I guess by the time you pay the extra to hedge you might be undoing a some of the gains you would make in the fund ? Meaning the retail fund is a safe option for some of us newbies. I guess :p

    This sort of makes we wonder though :
    a) isn't the dollar on a bit of a high at the moment ?
    b) Is that the main reason the American fund is so low (ie. a large part of its drop in value is currency fluctuation not results of performance of the stocks held ?
    c) Won't demand for our resources from China etc mean the commodity prices continue to save us ?

    So if that's vaguely on track (which it might not be) couldn't the US fund be a bit of a bargain buy at present ? Sorry for my vagueness ...

    Thanks for the previous info mate
    Happy weekends
    Carl
     
  5. MichaelWhyte

    MichaelWhyte Well-Known Member

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    Carl,

    I think the point Alan Kohler was making is sort of as follows in answer to your questions:

    a) Yes, the AUD is at a bit of a high at the moment. This was largely as a result of the interest rate premium in Australia versus the US, but the Fed has been inching away at that premium by raising their rates in the US. The rate hike in Oz this month widened that gap a bit again and caused the AUD to bounce back from 70c to 77c.

    b) Yes, I think a large part of its drop in value in AUD could be attributed to the forex movements from 70c to 77c over the last month or two.

    c) Yes, commodity prices are likely to continue to bouy our economy. What this also means is that if commodity prices hold at current levels we can expect to see the AUD rally even higher than its current point and potentially run to parity. I'm not sure anyone is bold enough to suggest we'll see parity or that commodites will hold at current prices indefinately, but it is certainly possible that the AUD will trend higher against the greenback.

    Have a great weekend mate,
    Michael.
     
  6. Tropo

    Tropo Well-Known Member

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    It's still long way to the parity (AUD/USD).
    Latest weakening of the $ US moved AUD up.
    The next possibly stop (resistance) it's at 0.8003 and 0.8210(AUD/USD) - long term.
    :cool:
     
  7. TryHard

    TryHard Well-Known Member

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    I happened to catch Alan Kohler interviewing Marc Faber - that was pretty interesting !

    http://www.abc.net.au/insidebusiness/content/2006/s1632456.htm

    from the interview :

    ... in real terms, commodities are still relatively low compared to equities and therefore, also given the length of the cycle - the cycle for commodities lasts usually 45 to 60 years peak to peak or trough to trough - in other words the upward wave in commodities lasts around 22 to 30 years and we are now in year 2006. The bull market started in 2001 so we are five years into the bull market

    ... The US dollar is a doomed currency. ... Will be worthless. Actually each one of your listeners should buy one US Treasury bond and frame it - put it on the wall so they can show their grandchildren how the US dollar and how US dollar bonds became worthless as a result of monetary inflation.

    ... Now that we're in a commodities boom - which you now say is going to go for a long time - do you think that we're in for a period of rising political tension as well?
     
  8. Tropo

    Tropo Well-Known Member

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    "The US dollar is a doomed currency. ... Will be worthless"

    I would take it with a bit of salt, paper, chillies and ground cinnamon :rolleyes:
     
  9. TryHard

    TryHard Well-Known Member

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    Heh - can I have that without the chillies ?

    That came from his comments about :

    "...we are in a global boom but it doesn't change the fact that it is an imbalanced boom and it's driven largely by credit creation in the US, leading to overconsumption, leading to a growing trade deficit, current account deficit, the accumulation of reserves in Asia and a global boom. But it is nevertheless an imbalanced boom and one day there will be a problem, certainly with the US dollar."

    Its all a bit too complex for me :)

    I've decided the Retail fund is all the confusion I'm prepared to handle for now though ... :p
     
  10. Tropo

    Tropo Well-Known Member

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    Do not worry...We deal all the time with the trade deficit, account deficit, balanced or imbalance boom, gloom ect..
    I guess that he is more confused than you are. After all he is trying to make living selling his comments.
    O.K.....Take it without chillies :D
     
  11. Gonzo

    Gonzo Well-Known Member

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    What are the thoughts here on whether we'll continue to measure the AUD against the USD ? If the USD does tumble, which is being predicted a bit these days, would we start benchmarking ours against a more stable currency ? Be it Euro, Yen, or whatever ?

    I guess while Oil and Gold are still benchmarked against the USD we don't have to worry too much, but if it collapses, I can see more momentum to pricing oil against the Euro.
     
  12. Tropo

    Tropo Well-Known Member

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    The $US became the leading currency in the end of the Second World War and was at the center of the Bretton Woods Accord, as the other currencies were virtually pegged against it. The breakdown of the Bretton Woods system in 1971 and the introduction of the Euro in 1999 reduced the dollar's importance only marginally.
    The currency was devaluated by approx. 60% between 1985 and 1995 in a relief effort for American exporters and in attempt to re balance the trade deficit.The US dollar is no longer backed by gold but by sheer size of the US economy, and still is the world's financial standard - so collapse of the $ US is a wishfull thinking for some gloomers.

    "If the USD does tumble, which is being predicted a bit these days, would we start benchmarking ours against a more stable currency ? Be it Euro, Yen, or whatever ?"

    It may well be GBP.... (currently 1GBP= 2.41AUD).
    :cool:
     
  13. Tropo

    Tropo Well-Known Member

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    Try Hard,

    Below it's just another point of view (found in the cyber space) about A.Kohler&M.Faber interview. Enjoy the reading


    It would seem that Dr Faber is being cited, as providing the argument for "the death of the greenback" and the long term potential of gold in particular, and commodities in general.

    My first issue would be in his listing cash as an asset class Cash is a medium of transaction, as such it is a commodity, and open to price fluctuation based on supply and demand dynamics. Hence, as he argues, money in the form of a fiat currency that exceeds the growth of GDP will devalue.

    It would also seem that he is quite happy to embrace the theory of equilibrium, and the law of large numbers.

    Into that philosophy, he interjects the phenomenon of speculation.

    Therefore, under equilibrium theory we have the central value or intrinsic value, that is distorted to the upside and the downside by speculation.

    The key therefore must be in either "timing" or "pricing" or of course just roll 'em and hope for the best.

    His argument regarding the purchasing power of the US$ would seemingly hinge upon the expansion of the money supply, exceeding that of the GDP, causing a massive devaluation, or more accurately a loss of purchasing power.

    His argument for gold is based on this assumption. That the US$ loses so much purchasing power as to become in essence worthless, therefore, prudent investors & speculators will migrate to gold, or possibly silver to protect themselves from this imminent disaster.

    Let's examine the numbers;

    CPI from 1921 to 2006 = 2.8% inflation rate
    CPI from 2000 to 2006 = 2.8% inflation rate
    CPI from 1980 to 1999 = 4.1% inflation rate

    PPI from 1921 to 2006 = 2.4% inflation rate
    PPI from 2000 to 2006 = 4.5% inflation rate
    PPI from 1980 to 1999 = 2.1% inflation rate

    Gold from 1921 to 2006 = 3.5% inflation rate
    Gold from 2000 to 2006 = 16.1% inflation rate
    Gold from 1980 to 1999 = (-4.5%) deflation rate

    DJIA from 1921 to 2006 = 6.32 inflation rate
    DJIA from 2000 to 2006 = 0.0% inflation rate
    DJIA from 1980 to 1999 = 14.5% inflation rate

    GDP from 1947 to 2005 = 7.11% inflation rate
    GDP from 1999 to 2005 = 7.08 inflation rate
    GDP from 1980 to 1999 = 6.8% inflation rate

    M1 from 1959 to 2006 = 4.8% inflation rate
    M1 from 2000 to 2006 = 3.6% inflation rate
    M1 from 1980 to 2006 = 5.8% inflation rate

    The long term series best illustrate the central value, or intrinsic value of the asset class.
    Under equilibrium theory, fluctuations above and below will over a long enough period of time return, due to the law of large numbers and equilibrium theory thus returning to the central value.

    We as investors, obviously cannot invest in 85yr time horizons if we plan to reap the reward.
    Therefore, 10yr to 20yr horizons may be closer to the norm.

    Speculators are operating in shorter again time frames, and thus lose the benefits of time to a certain degree (the degree of accuracy)

    We can see that currently;

    Gold is far above it's central value, after falling far below it's central value in 1980 to 1999. Obviously speculation is rife. Investment value is non-existant at these valuations.

    We can also see that the argument of buying gold in times of inflation, are just nonsense.

    In the 1980 to 1999 time series;

    CPI was above the central value....inflationary
    PPI was slightly below.
    M1 money supply was expansionary....inflationary
    GDP was below central value,....stagnant

    Gold.......dived into the grave.

    Currently,

    CPI is on it's central value, the fear being that it will fluctuate above this value.

    PPI is far above it's central value, and should be inflationary to the economy, but currently it is not. This point I believe is central to the explanation of the current environment. The increase in the PPI should drive an increase to the CPI thus offsetting the price increase to the producer to the consumer.

    If the PPI increases are not passed to the consumer via the CPI, then profitability of industry must fall, as profit margins are by definition contracting

    Currently through the reporting of Q1, the earnings have increased on aggregate in the US by 13%

    The increase in PPI (commodity prices) has not impacted profit margins. That is simply because the US is operating a monopsony, and China is absorbing the increases in PPI, but is unable to pass them forward into the CPI.

    The result is a reallocation of capital from low margin commodity manufacturing in the US to China, with an increase in high margin products and services to the US.

    This switch from manufacturing to a service based economy has been underway for some time, but until it becomes fully integrated, may run deficits, hence the Current account deficit.

    GDP is pretty much on target.

    Interestingly, M1 money supply is actually below central value. Therefore the arguments put forward regarding the Fed printing money to devalue the currency are incorrect.

    The large increase in world M1 originates in large part from Japan, and is responsible for the asset class speculation prevalent particularly in gold and currency.

    The US$ as the world reserve currency, will always be on one side of speculative operations, and thus will fluctuate quite violently.
    ;)
     
  14. TryHard

    TryHard Well-Known Member

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    Damn Tropo - can you please attach some brain cells to the next post so I can add them to the few I have left :p

    Thanks for the balancing viewpoint in that post - I guess I need to actively try to get more widely read before I start delving into areas that have the potential to turn me into a gibbering mess ;-)

    Still unsure whether I should put some money in the US fund ... seems to be so many more influencers than the good ol' vanilla retail Aussie fund.
     
  15. Tropo

    Tropo Well-Known Member

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    Carl,

    Well .... I learnt long time ago, that it's always good to know different view on the same subject.
    No matter what you are going to read try to be selective if possible - and if some comments luck logic and common sense apply salt, pepper and sweet chillies ;)

    Whether you put some money in the US fund or not, it's up to you. But collapse of the $US would be my last worry.
    Keep $miling.
    :cool:
     
  16. Alan

    Alan Well-Known Member

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  17. gad

    gad Well-Known Member

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    I increased my margin loan on 06/04/06 to invest in the American fund (bringing it back up to 50% LVR).
    Taking into account the buy/sell margin & the capitalised interest,
    the fund has performed at -4.315% since with another interest period just about upon us.
    In hind sight, wishing I'd just stuck to the Aussie fund.
    Just bad timing I guess.
     
  18. Alan

    Alan Well-Known Member

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    I guess currency risk is just another variable. Whether you want another variable to contend with is up to the individual.:confused:

    At the beginning of trading, the currency movement gave the US Fund a real 'shot in the arm'. At the moment it's giving it a 'kick up the butt'. :eek:

    Next month it may get another 'shot in the arm'. Who knows?

    I invested some in the US Fund but have kept most in the Oz Fund.......
     
  19. Simon Hampel

    Simon Hampel Co-founder Staff Member

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    Way too early to be making a judgement gad ... I wouldn't be disappointed yet.

    The early days of any new fund is always rather volatile ... so much new money pouring in can have a wierd effect on the short term performance.

    I say give your money 18 months and then decide whether you would have been better off leaving your money in the Aussie fund.

    FWIW, I haven't invested in the US fund yet (mostly because I'm not up to that stage in my plan yet ... but also because I knew it would be so volatile in the first few months) ... but I do intend to do so - and I'm not that fussed about the effects the currency may have on the fund ... I'm in it for the long haul.

    ... although if we hit parity with the USD ... I'll have to rethink my approach to a few things.
     
  20. Nigel Ward

    Nigel Ward Team InvestEd

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