Mortgage rates

It seems very reasonable to me that US households can withstand higher mortgage rates, higher oil prices, without rolling over.

They just aren’t heavily leveraged.

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So housing can slow, and it can foreshadow bad things for risky assets, but it doesn’t seem like “everything” breaks.

Australia strikes us as different. Look again at the graph above, and also the below, when controlling for income differences (per capital GDP). We are levered to the eyeballs.

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As such, it is not so clear that households can withstand higher oil and gas prices, higher mortgage prices, without a material hit to the household budget.

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At the very least, we think it good reason to avoid domestic cyclical stocks, like discretionary retail.

Note also the idea that Australia might simply not have to raise rates, by all that much, given lower inflation. If households are so indebted, that even relatively small rate hikes are enough to cause consumption to slow, well then an RBA that’s cognizant of that might be able to achieve their monetary policy outcomes without doing as much as say international markets.

That seems plausible. However, yields globally are highly correlated. It doesn’t seem obvious to me that a more modest approach from the RBA won’t see Aussie yields move in tandem with international peers. The past 30 years hasn’t seen policy set in perfect synchronisation, and yet yields have behaved virtually identically.

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Perhaps, at the least, if there were to be a much more modest RBA move, the AUD might be the “escape valve”, by either not moving up, or by outright falling, compared to other currencies, in which case allocating to some offshore dollar earners would be a good strategy.

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