On Position Sizing: The Australian Dollar

Fellow AUD-short traveller, Crispin Odey, has been hit hard by the rebound in the AUD which appreciated sharply in April driven by a recovery in iron ore and on the backdrop of a much better than expected Jobs report. From the FT,

Odey Asset Management founder Crispin Odey’s flagship hedge fund slumped 19.3 per cent last month, after it was caught out when the Australian dollar strengthened against the US dollar.

A drop of 19 percent in one month in this market is remarkable. Given that the AUD appreciated a “mere” 5-6 percent, it follows that Odey must be hugely short the AUD – something like twice his AUM.

Since I have been short the AUD for more than two years, I have read the article with interest. Whereas I do believe Odey’s position is way too large, it has made me think on whether my own position is too small and if I should take the rebound as an opportunity to increase my short.

Meanwhile Down Under

To be honest: I have no clue why the job data for February came in much better than expected. Macro data are backward looking anyway and do not help much in assessing future outcomes. Interestingly, the RBA also doesn’t believe that this is sustainable, since they did cut the benchmark rate further.

Via FT-Alphaville I get this interesting piece which refers to an analysis by the RBA about the housing market. For starters, as is true for most countries in the Anglosphere, Australia’s housing market looks frothy and private debt levels are mind-boggling, leading many to speculate there is a veritable bubble going on down under.

Now the RBA has come out with a study of the Aussie housing market where it contrasts the economics homeownership with those of renting. In their own words,

(…)if real house prices were to continue to grow at the average rate of the past six decades [around 2.4 per cent, after inflation], then buying a house now would be about as costly as renting.” On the other hand, if future house price growth is closer to the average of the past ten years, then Australian homes are about 20 per cent overvalued(…) (I think there is a typo in the last paragraph: it should read undervalued, given that appreciation over the past ten years was even higher)

Of course, the 2.4 percent annual REAL increase in house prices over the past decades has NOTHING to do with the secular drop in interest rates and thus can be reasonably extrapolated into the future!

I had to rub my eyes several times: are these guys serious?

How else can you get a real increase in average house prices, but for a significant fall in funding costs? It is not even clear that economic growth could achieve that, since there is an argument that the richer you are the more affordable housing should be – not that 2.4 percent growth are in the cards anyway


Since the RBA finds that 2.4 expected (real) house price appreciation is needed to justify current price levels, and since I am very confident that this is not going to be achieved for any medium term horizon, I conclude that the housing market is indeed in a bubble. Coupled with a deteriorating export market (China) this further increases the vulnerability of the economy and the banking system. And to round it up, my favorite chart,


Maybe it is time to increase my short position…



  1. Immigration plays role in the housing price increases, no? This seems to me to be a steady and secular trend for Australia and maybe even Canada. And this helped to ride well the 2008/2009 US house decline and helps them further to sustain it?

    1. Hi, just saw your comment.
      If immigration leads to higher wealth/capita AND there is no comensureate supply response (like in London over the past 30 years)-yes, otherwise it is not so clear.

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