Bridgewater Associates and the Aussie Dollar

Introduction by Simon Kerr

Over the last decade Bridgewater Associates has managed an unusual feat – adding a lot of value to its investors at the same time as adding a lot of assets under management. In doing so it has hit some notable milestones in the last year – it is now by some way the biggest hedge fund group in the world with around $76bn under management. It has just been declared by Leveraged Capital Holdings, the fund of funds sponsored by LCF Rothschild Group and MeesPierson, that Bridgewater’s Pure Alpha Fund is the hedge fund that has produced the greatest net gains for investors since inception, and in doing so Ray Dalio’s Bridgewater has overtaken George Soros’ Quantum Endowment Fund.

Ray Dalio, Founder of Bridgewater Associates                                    Chris Ratcliffe/Bloomberg News

The Bridgewater Pure Alpha Fund’s biggest allocation of risk is in the currency markets; it is neutral on the dollar, long the yen and yuan, short other emerging currencies against the dollar, short the Aussie dollar and long the euro against Eastern European currencies. The fund is also long gold, German bunds and global equities. Bridgewater reported that in the fourth quarter of 2011 its’ biggest losses came from its positions in gold, the euro and Australian dollar crosses. So in 2012 Bridgewater is maintaining big positions that cost it at the end of last year. Though Bridgewater’s case for each position is not known in detail, it is know that property is considered an issue by Bridgewater for the A$, and that there is some conviction being expressed in keeping the positions on.

Here is the part of the bear case for the Aussie Dollar that arises because of concerns on property. It comes from Dr.Alex Cowie, Editor of Diggers and Drillers, and is taken from This is an Australian site, so it is interesting to see the comments posted after the article, but it is very telling that the story is rated 4.7 out of ten and that approve/disapprove score for the article is -13 from 45 votes cast. The response tells us that there is a lot of local resistance to the idea that Australian property prices can fall.

Will Australian Property Prices Keep Falling?
by Dr. Alex Cowie on 31st January 2012

Many years ago as a backpacker, the timing chain went on my knackered old Falcon XF. That was the end for ‘old Falco’.
As I stood in despair with the bonnet up, an irate local ran over to me. He was yelling ‘Put the bonnet down! You don’t want those Holden-driving buggers gloating, DO YA!?’

As a fresh-to-the-Lucky-Country pom, I thought this passion was great. These days, it seems this passionate division of opinion has migrated from Ford vs. Holden over to the Australian property debate.

With good reason. Property makes up a cornerstone of many Australian’s wealth. And Aussie property has had a bull market like no other. It started in the 1970s, decades before things got going in the United States. Over 40 years, Aussie property has gained an average of about 3% a year. Doesn’t sound like much, but it adds up quickly. From the 1990s onwards, Australian house prices went up a few gears, and never looked back. Prices rose at an average rate of 6% a year at that time.

Is the Party Over?

Australian property prices pulled back from gravity-defying heights by at least 3.7% last year. Melbourne houses are down 9%.
Many home owners are nervous. Is this pullback the start of something bigger? Nearly every property market elsewhere in the world has spent the last few years imploding. US property prices are down by 40% in six years. Compare US prices in blue on the chart below against Australian house prices (in red)

Is the 40-year run up in Aussie property setting us up
for the crash of all crashes?
Is the 40-year run up in Aussie property setting us up for the crash of all crashes?

When looked at like this, if property prices were to fall, you get a sense of just how far they could go. The 40% pullback in US prices that started in 2005 would be a picnic. But WILL they fall?

There are wildly diverse opinions on where house prices are heading. That’s what makes a market. Part of the reason for differing opinions is that there is more than one property market in Australia. The resource-rich states, such as Western Australia, can be rising. While an economy with slow growth, such as Victoria, can be falling. Top tier suburbs can outperform the boondocks. Boiling the country down to just one market oversimplifies it, but it is the right place to start before scratching deeper.

Another reason for differing opinions is that some commentators have a vested interest in maintaining high prices. It’s impossible for them to be objective. It’s human nature. For example, residential property loans makes up the vast majority of banks’ balance sheets. It’s not in their interest to put out negative research that could reduce the value of their portfolio. Yesterday’s ANZ report suggests ‘…housing market fundamentals remain supportive’. And it pins any falls during 2012 purely on sentiment.

Don’t Underestimate Sentiment

Australia dodged a crash last time because the government juiced the market with cheap loans in the form of First Home Buyers Grants. Now this sugar-hit has faded and prices are falling again, sentiment has really turned. Buyers are just waiting, knowing that house prices are likely to fall further. As they fall, their view is vindicated so they wait some more. It becomes self-fulfilling. Sentiment can quickly send a fragile market south.

Australian property has many home-grown critics. There is now a long and growing list of international experts expecting prices to fall. Last month, rating agency, Moody’s, reckoned current prices were ‘not sustainable’ based on simple metrics. Metrics such as the average-price-to-average-salary ratio being close to 7, when the average in the developed world is 3. Moody’s also pointed out that city house prices have quadrupled since 1990, and household debt has tripled. The point is that this puts home owners in a very delicate position in the event of an economic shock.

The Economist magazine calculates that, based on the ratio of rent to price, Australian property is overvalued by 53%. A leading US real estate analyst, Jordan Wirsz, is calling for the Aussie housing market to fall by as much as 60%. He said ‘I’m bearish about world real estate but I couldn’t be more bearish about the Australian market’.

This is just part of a growing chorus of voices from overseas ‘experts’. But what do ratings agencies, magazines and analysts really know? They don’t have their money on the line. What I put more weight on is when people start putting their money where their mouth and start making bets against property.

The world’s biggest hedge fund, Bridgewater Associates expects Australian property to fall and is betting heavily against the Australian dollar this year. Bridgewater was one of the few hedge funds to make money last year, and notched up one of the best returns in the hedge fund sector at 23%. This is on the back of consistently outperforming the market over 20 years.

No one knows for sure. But taking a calculated approach, my view is the risk of a crash outweighs the chance of making a meagre gain. I voted with my feet and sold out of property a year ago, buying gold with the proceeds. My mates thought I was nuts. But so far it has been a good trade. I’ll swap back when the time is right.

Most Australian ‘experts’ reckon Australia property won’t crash, and deny it is even in a bubble. Alan Greenspan and Ben Bernanke said the same thing to Congress in 2005 – right before the US housing market started a 40% fall that continues today.

Comments on the A$ or Bridgewater Associates position on it are welcome – please enter them below.

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