Ask Colin

I have just read your latest column which I found fascinating and enlightening you state bear markets 73/74,80/82,87/88 fell 40-50 percent and 2001 around 17 percent and suggest there may be some more falls however, I was wondering whether, if these statistics were based on US dollars, how would they appear? Would they be anywhere near 40-50 percent?

This is an interesting and unusual question. I wonder why you have asked it. It seems to me that if we are invested in Australian stocks in AUD, then it is not really relevant what the USD value is. It would only be relevant if you were a US investor in our market and were not hedged. It would have been easier to address your implied question if you had given a reason for asking it.

However, lets just explore your question for a moment. The percentage fall in our market will only be different in USD if the exchange rate varied from the start to the end of the fall.

This chart shows what happened to the AUD:USD exchange rate during the three falls:

The black solid line is the Australian Stock Market. The blue solid line is the AUD in USD. The red dotted lines define the start and end of the three falls. The dotted blue line shows the difference in the exchange rate between the start and end of the fall.

In 1973/74 the AUD appreciated slightly. In 1980/82, the AUD depreciated by a bit more. In 1987/88, there was little change, because the period was quite short. I did not bother with 2001, because again there was not much change in the exchange rate. The charts are semi-log, so the difference in each situation is comparable.

It seems to me that this means that in the '70s, the USD fall would have been slightly less than the AUD fall. In the early '80s, the USD fall would have been a bit greater than the AUD fall. In the late '80s, the difference was negligible. In other words, they would still have been around the 40-50% mark

So there you are. I have no idea what your reason for asking was, or whether it proves anything. I doubt it, unless you are a US investor, or ......

Unless you were hoping to somehow persuade yourself that the implications for this time round are less than I suggested, if history repeats itself. This is based on the idea that human nature is fairly constant, in that the same speculative bubbles occur over and over again. Since markets tend to revert to the mean, the damage needs to be undone. There is some case for expecting that the medicine might turn out to be of similar severity each time. Since most of the market will be looking at it in AUD terms, USD value will only be relevant to a few US fund managers, who are invested here.

Keyword: