But if you overlay the performance of the Australian dollar with the performance of the Australian stock market, the correlation is pretty clear – Australian stocks rise as the Aussie dollar rises.

Now, the significant point to note is that although the Aussie dollar has recovered the ground it lost in late 2008, the Aussie stock market hasn’t. The Aussie stock market is still well below the 2007 peak.

But the point is still valid. Both the currency and the stock market are trading higher based on increased risk taking.

Which is hardly surprising when you consider the low yields available in the US and Europe, and the fraudulent money printing being undertaken by central banks in those economies.

So when it comes down to it, the rising Aussie dollar is just as much a function of the depreciation of the US dollar as it is a function of the resources boom.

You only have to look at what the US is doing to its currency to see that. This week the US Treasury auctioned off nearly $35 billion of 5-year treasury notes… for a maximum yield of 1.26%.

In other words, investors paid USD$99.95169 for something which has a face value of USD$100. Investors who hold these notes to maturity will receive the grand sum of 4.831 cents profit per $100 at the end of the five-year term!

Can you believe any investor would be prepared to lock up their money for that long for that kind of yield?

But it gets better – or worse – that was the highest yield accepted. Other mug investors were prepared to receive as low as 1.171% for their money.

It makes you wonder what they’re playing at.

What they’re playing at is this. Big institutions are leveraging up buying US treasuries from the US government and then selling them to the US Federal Reserve as part of its quantitative easing and monetisation programme.

Most buyers don’t have any intention of holding on for five years. They’ll look to flip them to the Fed as soon as they can.

It’s the classic bubble play. The classic greater fool theory. Banking on some other mug being prepared to pay a higher price than they’ve paid.

The more the Fed acts to monetise US debt, the more big investors take advantage of the situation by buying from one government stool pigeon and selling to another.

Of course, now investors expect this to happen they won’t be best pleased if this nonsensical money-go-round stops. Because if it stops, big investors will desert the bond market quicker than a rat up a drain pipe.

So what happens? The Fed has to keep on going. Hence why you’ve seen all the chatter about the Fed planning to embark on the so-called QE2 – quantitative easing II. Naturally we think a more apt name would be the Titanic, because it’s bound to end in disaster.

Anyway, the pushing down of yields in the US and Europe means that other big investors, those that aren’t in a position to profit from ramping up bond prices, have to take bigger risks.

Investors that were banking on bond yields of 7% or 8% over a thirty-year term are forced into buying up riskier assets.

And when we say big investors, we’re not just talking about your hedge fund types, or George Soros or Warren Buffet clones. No, big investors also means the likes of pension funds.

Pension funds which as I mentioned last week are still forecasting annual returns of around 8%. Despite stock markets returning less than a one per cent return annually over the last ten years, and where even the thirty year bond yields only 3.69%.

So where’s the other 5% going to come from?

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