By BETTINA WASSENER
Published: October 18, 2010
HONG KONG — The World Bank flagged the potential risks on Tuesday of the flood of cash heading into emerging markets, while South Korea and Brazil signaled additional measures aimed at stemming the tide, highlighting how worried many emerging nations have become about the extent to which inflows have pushed up their currencies.
Yoshihiko Noda, the Japanese finance minister, added his voice to the chorus of concern about the flow of capital to emerging economies and called on finance ministers of the Group of 20 major economies to seek ways to stabilize currencies when they meet in South Korea this week, Reuters reported.
“Currencies will be the topic that many people will be talking about” at the meeting, Reuters quoted Mr. Noda as saying. “I hope that good ideas will be put forward there.”
A sharp rise in investments flowing into developing nations has caused many emerging-nation currencies to strengthen sharply in recent weeks, to the dismay of local policy makers and businesses, which fear a loss of competitiveness as their goods become more expensive in dollar terms.
Investors seeking to tap the positive growth environment, and the higher interest rates that are in force in many emerging-market economies, have flocked into bonds, equities and property, generating rising concern about asset bubbles.
The trend has added complexity to what was, until recently, a currency debate focused largely on the United States and China, with Washington asking Beijing to allow the renminbi to fluctuate more freely against the U.S. dollar and China resisting a rapid appreciation, fearing a potentially devastating effect on its export sector.
“This is no longer just a bilateral debate between the U.S. and China,” Frederic Neumann, a senior Asia economist at HSBC, said in Hong Kong on Tuesday.
Moreover, analysts say that the influx into emerging markets — and the upward pressure it puts on their currencies — is likely to receive added impetus if, as is widely expected, the U.S. Federal Reserve resumes buying vast amounts of U.S. government debt to aid recovery.
“Should inflows remain strong, especially against a background of weak global growth, the authorities will be faced with the challenge of balancing the need for large capital inflows — especially foreign direct investment — with ensuring competitiveness, financial sector stability and low inflation,” Vikram Nehru, chief economist at the World Bank for the East Asia and Pacific region, said in a statement accompanying an update Tuesday on the region’s economy.
The bank nudged up its 2010 growth forecast for the region — which includes China, Indonesia and Southeast Asia, but not India and Japan — to 8.9 percent, from its previous projection of 8.7 percent.
Growth is expected to slow next year as spare production capacity becomes scarce, economic stimulus measures are unwound and economic growth in the advanced economies remains relatively flat, the World Bank said, lowering its 2011 forecast to 7.8 percent from the 8 percent it had projected in April.
The bank also stressed that renewed flow of capital into the region, and the rise in asset prices that this has fueled, now presented a “growing risk to macroeconomic stability.”
Some emerging nations have started to take steps to slow these inflows, for example by raising taxes on foreign purchases of local bonds. Many have also intervened in the currency markets to slow the ascent of their currencies.
Brazil, where interest rates are particularly high and act as a magnet for foreign cash, raised taxes on Monday for foreigners buying local bonds, its second such move this month. Announcing the new measures, the Brazilian finance minister, Guido Mantega, called for a coordinated approach to the increasingly acrimonious topic of relative currency valuations. South Korea, meanwhile, said Tuesday it would consider lifting tax exemptions on government bonds owned by foreign investors. Such a step would make it less attractive for foreign investors to put their money in such instruments.
Ideally, the meeting of G-20 finance ministers, and a summit meeting next month of G-20 leaders, would bring about “a coordinated appreciation of emerging markets currencies, gradually, over time, to help rebalance the global economy,” Mr. Neumann of HSBC said. If not, he added, “we might see further unilateral actions aimed at protecting currencies.”
http://www.nytimes.com/2010/10/20/business/global/20asiaecon.html?_r=1&ref=business
Showing posts with label Currency movements. Show all posts
Showing posts with label Currency movements. Show all posts
Tuesday 19 October 2010
Tuesday 5 October 2010
China calls for more Asian clout in global economy
October 5, 2010 - 7:03AM
The surging economies of Asia should be granted more power in the traditionally Western-dominated global financial institutions, Chinese Premier Wen Jiabao said on Monday at the opening of the Euro-Asian summit.
The start of the two-day 48-nation meeting, set amid the high security and gilded opulence at the Belgian royal palace, underscored the Asian nations’ demands for a rebalancing of international financial structures as they lead the world out of recession.
Premier Wen stressed that Asian leaders expect Europe to relinquish some seats at the International Monetary Fund (IMF), the international lender charged with helping nations that get into currency and financial crises.
‘‘We need to improve the decision-making process and mechanisms of the international financial institutions, increase the representation and voice of developing countries, encourage wider participation,’’ Wen told the other leaders.
The Chinese premier and some other Asian leaders made it clear that Asia would start making its robust economic growth count on the global stage.
Cambodian President Hun Sen stressed the Asian economies should be recognised for leading the global economic recovery.
While demand in the EU (European Union) and US economies was once the driver of growth, it is in decline compared to demand growth in Asia.Even Germany, the economic giant of the European Union, paid tribute.
‘‘We have to thank the Asian upswing for the positive economic development,’’ German Chancellor Angela Merkel said.
Last week, the 27-nation EU said it could give up some of its power base at the IMF to emerging countries, a concession that could cost it two seats on the governing board and the right to have a European heading the Washington DC organisation, which hands out billions of US dollars around the world.
At the moment, EU countries occupy nine of the 24 seats.
‘‘The fact that Europeans show us the flexibility and willingness to negotiate is important,’’ said Rhee Chang-yong, a South Korean delegate.
‘‘For us, the IMF quota reform is very symbolic and very important,’’ he said.
South Korea will organise the Group of 20 (G20) meeting of the world’s major economies next month and expects to have an agreement then.
On Wednesday, there will also be bilateral EU summits with China and South Korea.
Overall, the nations from the two continents represent about half the world’s economic output and 60 per cent of global trade.
But, instead of Europe driving the summits, the emergence of China as a new trading juggernaut has somewhat turned the tables at the biennial meetings.
Last week, the IMF said that Asian and Latin American economies were doing well but prospects for some European countries, including Greece, remain uncertain.
On Wednesday, the EU leaders and South Korean President Lee Myung-bak will sign a free trade pact that will slash billions of dollars in industrial and agricultural duties, despite some nations’ worries that Europe’s auto industry could be hurt by a flood of cheaper cars.
The deal - the first such pact between the EU and an Asian trading partner - will begin on July 1, 2011.
Japan’s Prime Minister Naoto Kan will pursue a free trade agreement in his bilateral meetings with European leaders, said Foreign Ministry spokesman Satoru Satoh.He said Japanese business was ‘‘alarmed’’ by the EU’s deal with Seoul.
Japan feels it will be at a competitive disadvantage with South Korea, which has an agreement with the EU that threatens to take a bite out of Japanese exports, particularly of cars and televisions, he said.
While Japan is anxious for an agreement as soon as possible, he said the Europeans still lack consensus among its 27 members.
Besides the economy, Japan also has an issue with China, as both continue a diplomatic row following the arrest of a Chinese fishing boat captain whose trawler collided with Japanese patrol vessels near disputed islands.
Despite the formal opening, economic discord might also surface at the summit.
AP
http://www.smh.com.au/business/world-business/china-calls-for-more-asian-clout-in-global-economy-20101005-164p5.html
The surging economies of Asia should be granted more power in the traditionally Western-dominated global financial institutions, Chinese Premier Wen Jiabao said on Monday at the opening of the Euro-Asian summit.
The start of the two-day 48-nation meeting, set amid the high security and gilded opulence at the Belgian royal palace, underscored the Asian nations’ demands for a rebalancing of international financial structures as they lead the world out of recession.
Premier Wen stressed that Asian leaders expect Europe to relinquish some seats at the International Monetary Fund (IMF), the international lender charged with helping nations that get into currency and financial crises.
‘‘We need to improve the decision-making process and mechanisms of the international financial institutions, increase the representation and voice of developing countries, encourage wider participation,’’ Wen told the other leaders.
‘‘We must explore ways to establish a more effective global economic governance system.’’
The Chinese premier and some other Asian leaders made it clear that Asia would start making its robust economic growth count on the global stage.
Cambodian President Hun Sen stressed the Asian economies should be recognised for leading the global economic recovery.
While demand in the EU (European Union) and US economies was once the driver of growth, it is in decline compared to demand growth in Asia.Even Germany, the economic giant of the European Union, paid tribute.
‘‘We have to thank the Asian upswing for the positive economic development,’’ German Chancellor Angela Merkel said.
Because of the swing in economic momentum, the battle for seats at the IMF has become a symbolic battle ground.
Last week, the 27-nation EU said it could give up some of its power base at the IMF to emerging countries, a concession that could cost it two seats on the governing board and the right to have a European heading the Washington DC organisation, which hands out billions of US dollars around the world.
At the moment, EU countries occupy nine of the 24 seats.
‘‘The fact that Europeans show us the flexibility and willingness to negotiate is important,’’ said Rhee Chang-yong, a South Korean delegate.
‘‘For us, the IMF quota reform is very symbolic and very important,’’ he said.
South Korea will organise the Group of 20 (G20) meeting of the world’s major economies next month and expects to have an agreement then.
The leaders of 48 nations face potential clashes on market restrictions and trade surpluses.
On Wednesday, there will also be bilateral EU summits with China and South Korea.
Overall, the nations from the two continents represent about half the world’s economic output and 60 per cent of global trade.
But, instead of Europe driving the summits, the emergence of China as a new trading juggernaut has somewhat turned the tables at the biennial meetings.
Last week, the IMF said that Asian and Latin American economies were doing well but prospects for some European countries, including Greece, remain uncertain.
On Wednesday, the EU leaders and South Korean President Lee Myung-bak will sign a free trade pact that will slash billions of dollars in industrial and agricultural duties, despite some nations’ worries that Europe’s auto industry could be hurt by a flood of cheaper cars.
The deal - the first such pact between the EU and an Asian trading partner - will begin on July 1, 2011.
Japan’s Prime Minister Naoto Kan will pursue a free trade agreement in his bilateral meetings with European leaders, said Foreign Ministry spokesman Satoru Satoh.He said Japanese business was ‘‘alarmed’’ by the EU’s deal with Seoul.
Japan feels it will be at a competitive disadvantage with South Korea, which has an agreement with the EU that threatens to take a bite out of Japanese exports, particularly of cars and televisions, he said.
While Japan is anxious for an agreement as soon as possible, he said the Europeans still lack consensus among its 27 members.
Besides the economy, Japan also has an issue with China, as both continue a diplomatic row following the arrest of a Chinese fishing boat captain whose trawler collided with Japanese patrol vessels near disputed islands.
Despite the formal opening, economic discord might also surface at the summit.
Many Western nations have complained that China keeps its currency undervalued to give its exporters an unfair price advantage on international markets while at the same time China closes off its markets, keeping European businesses out.
AP
http://www.smh.com.au/business/world-business/china-calls-for-more-asian-clout-in-global-economy-20101005-164p5.html
Spectre of international trade war looms as recovery proves elusive
October 5, 2010
As world economies continue to falter, central banks are running out of options and the spectre of protectionism grows, writes Larry Elliott.
In all the comparisons between the Great Recession of the past three years and the Great Depression of the 1930s, one comforting thought for policymakers has been that there has been no return to tit-for-tat protectionism, which saw one country after another impose high tariffs to cut the dole queues.
Yet the commitment of governments this time round to keep markets open was based on the belief that recovery would be swift and sustained. If, as many now suspect, the global economy is stuck in a low-growth, high-unemployment rut, the pressures for protectionism will grow.
The former British chancellor Kenneth Clarke summed up the mood when he said in the Observer that it is hard to be ''sunnily optimistic'' about the West's economic prospects.
Despite a colossal stimulus, the recovery has been shortlived and, by historical standards, feeble. The traditional tools - cutting interest rates and spending more public money - were not enough, so have had to be supplemented by the creation of electronic money. In both the US and Britain, policymakers are canvassing the idea that more quantitative easing will be required, even though they well understand its limitations.
There is the sense of finance ministries and central banks running out of options. They cannot cut interest rates any further; there is strong resistance from both markets and voters to further fiscal stimulus, and so far quantitative easing has had a more discernible effect on asset prices than it has on the real economy.
So what is left? The answer is that countries can try to give themselves an edge by manipulating their currencies, or they can go the whole hog and put up trade barriers.
Brazil's Finance Minister, Guido Mantega, warned that an ''international currency war'' has broken out following the recent moves by Japan, South Korea and Taiwan to intervene directly in the foreign exchange markets. China has long been criticised by other nations, the US in particular, for building up massive trade surpluses by holding down the level of its currency, the renminbi.
The currencies under the most upward pressure are the yen and the euro. Why? Because the Chinese have all but pegged the renminbi to a US dollar that has been weakened by the prospect of more quantitative easing over the coming months.
But currency intervention is one thing, full-on protectionism another. The existence of the World Trade Organisation has made it more difficult to indiscriminately slap tariffs on imports. What's more, there is still a strong attachment to the concept of free trade.
The question now is whether the commitment to free trade is as deep as it seems. The round of trade liberalisation talks started in Doha almost nine years ago remain in deep freeze. Attempts to conclude the talks have run into the same problem: trade ministers talk like free traders but they act like mercantilists, seeking to extract the maximum amount of concessions for their exporters while giving away as little as possible in terms of access to their own domestic markets.
The approach taken by countries at the WTO talks also governs their thinking when it comes to steering their countries out of trouble. There are plenty of nations extolling the virtues of export-led growth, but very few keen on boosting their domestic demand so that those exports can find willing buyers.
The global imbalances between those countries running trade surpluses and those running trade deficits are almost as pronounced as they were before the crisis, and are getting wider. This is a recipe for tension, especially between Beijing and Washington.
This tension manifested itself last week when the House of Representatives passed a bill that would allow US companies to apply for duties to be put on imports from countries where the government actively weakened the currency - in other words, China.
The Senate will debate its version of the same bill after the mid-term elections next month, but it was interesting that the House bill was passed by a big majority and with considerable bipartisan support.
China responded swiftly and testily to the developments on Capitol Hill. It argued that the move would contravene WTO rules and quite deliberately tweaked its currency lower.
It is not hard to see why Beijing got the hump. It introduced the biggest fiscal stimulus (in relation to GDP) of any country and helped lift the global economy out of its trough. It can only fulfil its domestic policy goal of alleviating poverty if it can shift large numbers of people out of the fields and into the factories, and that requires a cheap currency. It has been financing the US twin deficits.
Unsurprisingly, then, its message to the Americans was clear: ''It is not smart to get on the wrong side of your bank manager, so do not mess with us.''
What happens next depends to a great extent on whether the global economy can make it through the current soft patch.
Guardian News & Media
http://www.smh.com.au/business/spectre-of-international-trade-war-looms-as-recovery-proves-elusive-20101004-164e1.html
As world economies continue to falter, central banks are running out of options and the spectre of protectionism grows, writes Larry Elliott.
In all the comparisons between the Great Recession of the past three years and the Great Depression of the 1930s, one comforting thought for policymakers has been that there has been no return to tit-for-tat protectionism, which saw one country after another impose high tariffs to cut the dole queues.
Yet the commitment of governments this time round to keep markets open was based on the belief that recovery would be swift and sustained. If, as many now suspect, the global economy is stuck in a low-growth, high-unemployment rut, the pressures for protectionism will grow.
The former British chancellor Kenneth Clarke summed up the mood when he said in the Observer that it is hard to be ''sunnily optimistic'' about the West's economic prospects.
Despite a colossal stimulus, the recovery has been shortlived and, by historical standards, feeble. The traditional tools - cutting interest rates and spending more public money - were not enough, so have had to be supplemented by the creation of electronic money. In both the US and Britain, policymakers are canvassing the idea that more quantitative easing will be required, even though they well understand its limitations.
There is the sense of finance ministries and central banks running out of options. They cannot cut interest rates any further; there is strong resistance from both markets and voters to further fiscal stimulus, and so far quantitative easing has had a more discernible effect on asset prices than it has on the real economy.
So what is left? The answer is that countries can try to give themselves an edge by manipulating their currencies, or they can go the whole hog and put up trade barriers.
Brazil's Finance Minister, Guido Mantega, warned that an ''international currency war'' has broken out following the recent moves by Japan, South Korea and Taiwan to intervene directly in the foreign exchange markets. China has long been criticised by other nations, the US in particular, for building up massive trade surpluses by holding down the level of its currency, the renminbi.
The currencies under the most upward pressure are the yen and the euro. Why? Because the Chinese have all but pegged the renminbi to a US dollar that has been weakened by the prospect of more quantitative easing over the coming months.
The question now is whether the commitment to free trade is as deep as it seems. The round of trade liberalisation talks started in Doha almost nine years ago remain in deep freeze. Attempts to conclude the talks have run into the same problem: trade ministers talk like free traders but they act like mercantilists, seeking to extract the maximum amount of concessions for their exporters while giving away as little as possible in terms of access to their own domestic markets.
The approach taken by countries at the WTO talks also governs their thinking when it comes to steering their countries out of trouble. There are plenty of nations extolling the virtues of export-led growth, but very few keen on boosting their domestic demand so that those exports can find willing buyers.
The global imbalances between those countries running trade surpluses and those running trade deficits are almost as pronounced as they were before the crisis, and are getting wider. This is a recipe for tension, especially between Beijing and Washington.
This tension manifested itself last week when the House of Representatives passed a bill that would allow US companies to apply for duties to be put on imports from countries where the government actively weakened the currency - in other words, China.
The Senate will debate its version of the same bill after the mid-term elections next month, but it was interesting that the House bill was passed by a big majority and with considerable bipartisan support.
China responded swiftly and testily to the developments on Capitol Hill. It argued that the move would contravene WTO rules and quite deliberately tweaked its currency lower.
It is not hard to see why Beijing got the hump. It introduced the biggest fiscal stimulus (in relation to GDP) of any country and helped lift the global economy out of its trough. It can only fulfil its domestic policy goal of alleviating poverty if it can shift large numbers of people out of the fields and into the factories, and that requires a cheap currency. It has been financing the US twin deficits.
Unsurprisingly, then, its message to the Americans was clear: ''It is not smart to get on the wrong side of your bank manager, so do not mess with us.''
What happens next depends to a great extent on whether the global economy can make it through the current soft patch.
But imagine that the next three months see the traditional policy tools becoming increasingly ineffective, that the slowdown intensifies and broadens, and that the Democrats get a pasting in the mid-term elections. In those circumstances, a trade war would be entirely feasible.
Guardian News & Media
http://www.smh.com.au/business/spectre-of-international-trade-war-looms-as-recovery-proves-elusive-20101004-164e1.html
Thursday 1 July 2010
Who Is Participating In Forex Market Trades?
Who Is Participating In Forex Market Trades?
Jun 30, 2010
The forex market is all about trading between countries, the currencies of these nations and the timing of investing in sure currencies. The FX market is trading between counties, usually completed with a dealer or a monetary company. Many people are concerned in forex trading, which is similar to stock market trading, but FX buying and selling is accomplished on a much larger total scale. Much of the buying and selling does take place between banks, governments, brokers and a small quantity of trades will take place in retail settings where the typical particular person concerned in trading is called a spectator. Monetary market and monetary conditions are making the forex market buying and selling go up and down daily. Hundreds of thousands are traded on a daily basis between most of the largest countries and this is going to incorporate some amount of trading in smaller international locations as well.
From the studies through the years, most trades in the foreign exchange market are accomplished between banks and this is referred to as interbank. Banks make up about 50 percent of the buying and selling in the forex market. So, if banks are broadly utilizing this method to generate income for stockholders and for their own bettering of enterprise, you already know the money have to be there for the smaller investor, the fund managers to use to increase the quantity of interest paid to accounts. Banks commerce money each day to extend the amount of money they hold. Overnight a bank will invest millions in forex markets, after which the next day make that money available to the general public in their savings, checking accounts and etc.
Business firms are also trading more typically in the foreign exchange markets. The commercial companies resembling Deutsche bank, UBS, Citigroup, and others reminiscent of HSBC, Braclays, Merrill Lynch, JP Morgan Chase, and nonetheless others corresponding to Goldman Sachs, ABN Amro, Morgan Stanley, and so forth are actively buying and selling within the foreign exchange markets to extend wealth of stock holders. Many smaller companies will not be concerned within the foreign exchange markets as extensively as some massive corporations are however the choices are stil there.
Central banks are the banks that maintain worldwide roles in the international markets. The supply of money, the availability of cash, and the interest rates are managed by central banks. Central banks play a big position within the forex trading, and are situated in Tokyo, New York and in London. These usually are not the one central locations for foreign currency trading but these are among the many very largest concerned on this market strategy. Typically banks, industrial investors and the central banks may have massive losses, and this in flip is handed on to investors. Other instances, the buyers and banks will have big gains.
http://www.themarketfinancial.com/who-is-participating-in-forex-market-trades/5560
Jun 30, 2010
The forex market is all about trading between countries, the currencies of these nations and the timing of investing in sure currencies. The FX market is trading between counties, usually completed with a dealer or a monetary company. Many people are concerned in forex trading, which is similar to stock market trading, but FX buying and selling is accomplished on a much larger total scale. Much of the buying and selling does take place between banks, governments, brokers and a small quantity of trades will take place in retail settings where the typical particular person concerned in trading is called a spectator. Monetary market and monetary conditions are making the forex market buying and selling go up and down daily. Hundreds of thousands are traded on a daily basis between most of the largest countries and this is going to incorporate some amount of trading in smaller international locations as well.
From the studies through the years, most trades in the foreign exchange market are accomplished between banks and this is referred to as interbank. Banks make up about 50 percent of the buying and selling in the forex market. So, if banks are broadly utilizing this method to generate income for stockholders and for their own bettering of enterprise, you already know the money have to be there for the smaller investor, the fund managers to use to increase the quantity of interest paid to accounts. Banks commerce money each day to extend the amount of money they hold. Overnight a bank will invest millions in forex markets, after which the next day make that money available to the general public in their savings, checking accounts and etc.
Business firms are also trading more typically in the foreign exchange markets. The commercial companies resembling Deutsche bank, UBS, Citigroup, and others reminiscent of HSBC, Braclays, Merrill Lynch, JP Morgan Chase, and nonetheless others corresponding to Goldman Sachs, ABN Amro, Morgan Stanley, and so forth are actively buying and selling within the foreign exchange markets to extend wealth of stock holders. Many smaller companies will not be concerned within the foreign exchange markets as extensively as some massive corporations are however the choices are stil there.
Central banks are the banks that maintain worldwide roles in the international markets. The supply of money, the availability of cash, and the interest rates are managed by central banks. Central banks play a big position within the forex trading, and are situated in Tokyo, New York and in London. These usually are not the one central locations for foreign currency trading but these are among the many very largest concerned on this market strategy. Typically banks, industrial investors and the central banks may have massive losses, and this in flip is handed on to investors. Other instances, the buyers and banks will have big gains.
http://www.themarketfinancial.com/who-is-participating-in-forex-market-trades/5560
Thursday 1 April 2010
The Role of Hedge Funds in Financial Crise
The Role of Hedge Funds in Financial Crises – Stephen Brown 
On October 2, the U.S. House Oversight and Government Reform Committeeannounced a Hearing on Regulation of Hedge Funds scheduled for Thursday, November 13, 2008. The focus is on the causes and impacts of the financial crisis on Wall Street, and the Committee will hear from hedge fund managers who have earned over $1 Billion.
The underlying premise of these hearings was expressed by Dr. Mahathir Bin Mohamad, the former Prime Minister of Malaysia, who wrote on September 26 “Because of the extraordinary greed of American financiers and businessmen, they invent all kinds of ways to make huge sums of money. We cannot forget how in 1997-98 American hedge funds destroyed the economies of poor countries by manipulating their national currencies”. The Prime Minister is recognized as an authority on the role of hedge funds in financial crises, given his experience managing the Asian currency crisis as it engulfed his nation in September eleven years ago. He is particularly critical of the role of George Soros who will in fact be invited to testify before the House Committee at their November hearing.
It is perhaps too early to write about the causes and consequences of the current financial crisis while the storm still rages. However, it is not too early to examine the history of the earlier financial crisis. During the 1990s, according to the International Monetary Fund, financial intermediaries had been investing steadily into South East Asia. There was a net inflow of about US$20 billion into the region over and above portfolio and direct investment, up until 1995 and 1996 when the amount increased dramatically to US$45 billion per annum. Then with the collapse in both the Baht and the Ringgit in 1997, there was a sudden outflow of US$58 billion. It was self-evident to the central bankers in the region that the collapse in the currency had everything to do with an attack on the currencies of the region by well-financed international speculators. As Dr. Mahathir observed in a Wall Street Journal opinion piece that was published on September 23, 1997: “We are now witnessing how damaging the trading of money can be to the economies of some countries and their currencies. It can be abused as no other trade can. Whole regions can be bankrupted by just a few people whose only objective is to enrich themselves and their rich clients…. We welcome foreign investments. We even welcome speculators. But we don’t have to welcome share- and financial-market manipulators. We need these manipulators as much as travelers in the good old days needed highwaymen”. What was most remarkable about this statement was that its premises and its conclusion were immediately accepted by the international community, despite the fact that Dr. Mahathir did not provide any evidence to support his analysis of the role of hedge funds in the Asian financial crisis.
The first premise of Dr. Mahathir’s argument is that hedge funds act in concert to destabilize global economies. This is at best a misapprehension of the definition of a “hedge fund”. There is no such thing as a well defined hedge fund strategy or approach to investing. Rather, a hedge fund is a limited investment partnership otherwise exempt from registering with the Securities and Exchange Commission under Sections 3C1 and 3C7 of the Investment Company Act of 1940. As I note in my testimony last year before the House Financial Services Committee the available data show a remarkable diversity of styles of management under the “hedge fund” banner. The long-short strategy often associated with hedge funds captures about 30 to 40 percent of the business. The style mix has been fairly stable (in terms of percentage of funds) although there has been a dramatic rise in assets managed by funds of funds. These diversified portfolios of hedge funds are attractive to an institutional clientele. Event-driven funds focussing on private equity have risen in market share from 19% to 25% over the past decade, while the global macro style popularized by Soros has actually fallen from 19% to 3%. In my paper Hedge Funds with Style, with William Goetzmann, Journal of Portfolio Management 29, Winter 2003 101-112 we show that accounting for style differences alone explains about 20 percent of the cross sectional dispersion of hedge fund returns. The facts do not support a presumption that hedge funds adopt similar investment strategies coordinated with the objective of causing global instability. If their objective was to profit from the current instability, they were remarkably unsuccessful. According to Hedge Fund Research, the average fund this year is down 10.11 percent through September with equity hedge funds down 15.45 percent.
The second premise of Dr. Mahathir’s argument is that hedge funds are risktakers – gunslingers on a global scale. While it is true that the aggressive incentive fee structures (often 20 percent of any profits on top of a management fee of about 2 percent of assets under management) appear to encourage risk taking, career concerns are an offsetting factor. Given that the typical hedge fund has a half life of five years or less and the fact that it is hard to restart a hedge fund career after a failure, managers can be quite risk averse as we document inCareers and Survival: Competition and Risk in the Hedge Fund and CTA Industry, with William Goetzmann and James Park, Journal of Finance 61 2001 1869-1886. According to a recent Wall Street Journal article (10/14/2008)some of the few remaining successful hedge fund managers such as Steven Cohen of SAC CapitalAdvisors, Israel Englander of Millenium Partners and John Paulson of Paulson & Co (who is scheduled to appear in the November 13 hearings) have taken their funds out of the market and are in cash investments.
This last result seems at variance with popular wisdom that has arisen around some recent and spectacular hedge fund failures. The failure of Amaranth, a multi-strategy fund with more than $8 Billion assets under management, with more than 80 percent invested in a natural gas trading strategy, is often cited as an example of undiversified financial risk exposure. However, a close reading of the U.S. Senate Permanent Subcommittee on Investigation’s report on the Amaranth blow-up, Excessive Speculation in the Natural Gas Market shows clearly that excessive risk taking took place in a context of poor operational controls, where trading limits were exceeded multiple times and ordinary risk management procedures were dysfunctional. In recent research forthcoming in the Financial Analysts Journal Estimating Operational Risk for Hedge Funds: The ω-Score, with William Goetzmann, Bing Liang and Christopher Schwarz we argue that operational risk is a more significant explanation of fund failure than is financial risk, and that financial risk events typically occur within the context of poor operational controls.
Given that the initial premises are false, it is not surprising to find that the strong conclusions Dr. Mahathir draws from them are also false. In Hedge Funds and the Asian Currency Crisis of 1997, with William Goetzmann and James Park, Journal of Portfolio Management 26 Summer 2000 95-101 we show that while it is possible that hedge funds involved in currency trade could have put into effect the destabilizing carry trade Dr. Mahathir describes, there is no evidence that these funds maintained significant positions in the Asia currency basket over the time of the crisis. As to the question of illicit enrichment that Dr. Mahathir charges George Soros with, his funds did not increase in value, but actually lost five to ten percent return per month over the period of the crisis.
From a point of pure logic, there cannot be any factual basis for any of these claims. Malaysia is fortunate in having a very fine and able Securities Commission. If there were any factual evidence at all to support a claim that Soros had intervened in the markets to bring down the Ringgit, it would have been produced by now. I should note that the silence is deafening. I suspect that what is really going on is that Soros was an expedient target of opportunity. The only remaining question is why, given the lack of evidence, Dr. Mahathir felt compelled to bring such serious charges against the hedge fund industry in general, and George Soros in particular. There is an interesting story here which I document in Hedge funds: Omniscient or just plain wrong, Pacific-Basin Finance Journal 9 2001 301-311.
It is interesting to note that Dr. Mahathir’s feelings about currency speculation have changed over the years. In the shark-infested waters of international Finance the name of Malaysia’s central bank, Bank Negara stands out. In late 1989, Bank Negara was using its inside information as a member of the club of central bankers to speculate in currencies, sometimes to an amount in excess of US$1 billion a day. The US Federal Reserve Board had advised Bank Negara to curtail its foreign exchange bets, which were out of proportion to its reserves which at that time were about US$7 billion. At the time, Dr. Mahathir defended this currency speculation, referring to it as active reserve management and was quoted by the official Bernama News Agency in December 1989 as saying “We are a very small player, and for a huge country like the United States, which has a deficit of US$250 million, to comment on a country like Malaysia buying and selling currency is quite difficult to understand”. According to a report in the Times of London (4/3/1994) . Bank Negara came something of a cropper in 1992 when it thought to bet against George Soros on whether Britain would stay in the European Rate Mechanism (ERM), and promptly lost US$3.6 billion in the process and would end up making a US$9 billion loss for 1992. Malaysia’s loss was Soros’ gain.
Tuesday 16 June 2009
Currencies trading are very difficult.
Currencies trading are very difficult. They are more difficult than stocks and certainly more difficult than interest rates.
You need to learn by looking at price behaviour in the past, but trying to understand what currencies have done even recently is tough. There have been some big moves.
Take the US dollar versus euro rate, for example. It has ranged over the last few years from around 85 to 130. How is it possible that the currencies of the world's two largest economies can change in relative value by over 50%?
These types of currency moves are intriguing.
1. Purchasing price parity (PPP) is not much use
This theory suggests that currencies should tend towards the level where a collection of goods and services costs the same amount in different countries. PPP would suggest that if they are too expensive in one country, then that country's currency should fall.
The famous McDonald's Big Mac index is sometimes published in the Economist magazine, and it applies this analysis, to the price of the burgers in various countries.
The problem is that in reality PPP does not seem to have much impact on currency level. Perhaps it is for the same reason that people living in tiny but very expensive apartments in Tokyo do not migrate to Sydney or LA and buy a huge house. If they did, perhaps currencies would be easier to evaluate.
2. Market sentiment has the most impact
Since there are no reliable benchmarks, market sentiment is the huge factor that dominates events.
In 2005, the US dollar has been out of favour, despite an improving US economy and rising US dollar interest rates. The market is more worried about the US current account deficit. But is that econmies or fashion? There's the difficulty.
Conclusion
You need not avoid currency trading completely.
There are occasional opportunities such as the big market moves that you have seen in the major currencies during the last few years.
You should only be involved when you have a very firm grip on what's driving the market. That doesn't happen too often for any of us!
You need to learn by looking at price behaviour in the past, but trying to understand what currencies have done even recently is tough. There have been some big moves.
Take the US dollar versus euro rate, for example. It has ranged over the last few years from around 85 to 130. How is it possible that the currencies of the world's two largest economies can change in relative value by over 50%?
These types of currency moves are intriguing.
- The first thing to be aware of, is that you are looking at two economies. With stocks and interest rates, youj basically have only one economy to figure out.
- However, the second and bigger challenge is that currencies are largely driven by market sentiment, and the reason is that there is absolutely no successful benchmark for the pricing of a currency.
1. Purchasing price parity (PPP) is not much use
This theory suggests that currencies should tend towards the level where a collection of goods and services costs the same amount in different countries. PPP would suggest that if they are too expensive in one country, then that country's currency should fall.
The famous McDonald's Big Mac index is sometimes published in the Economist magazine, and it applies this analysis, to the price of the burgers in various countries.
The problem is that in reality PPP does not seem to have much impact on currency level. Perhaps it is for the same reason that people living in tiny but very expensive apartments in Tokyo do not migrate to Sydney or LA and buy a huge house. If they did, perhaps currencies would be easier to evaluate.
2. Market sentiment has the most impact
Since there are no reliable benchmarks, market sentiment is the huge factor that dominates events.
In 2005, the US dollar has been out of favour, despite an improving US economy and rising US dollar interest rates. The market is more worried about the US current account deficit. But is that econmies or fashion? There's the difficulty.
Conclusion
You need not avoid currency trading completely.
There are occasional opportunities such as the big market moves that you have seen in the major currencies during the last few years.
You should only be involved when you have a very firm grip on what's driving the market. That doesn't happen too often for any of us!
Saturday 14 February 2009
The Currency Market Information Edge
The Currency Market Information Edge
by Investopedia Staff, (Investopedia.com) (Contact Author Biography)
The global foreign exchange (forex) market had an average daily turnover of $3.2 trillion as of April 2007, an increase of 69% from the previous year, according to the 2007 Triennial Central Bank Survey of Foreign Exchange and Derivatives Market Activity, conducted by the Bank for International Settlements. It is by far the largest financial market in the world, and its size and liquidity ensure that new information or news is disseminated within minutes. However, the forex market has some unique characteristics that distinguish it from other markets. These unique features may give some participants an "information edge" in some situations, resulting in new information being absorbed over a longer period. (For background reading, see the Forex Tutorial.)
Unique Characteristics of the Forex Market
Unlike stocks, which trade on a centralized exchange such as the New York Stock Exchange, currency trades are generally settled over the counter (OTC). The OTC nature of the global foreign exchange market means that rather than a single, centralized exchange (as is the case for stocks and commodities), currencies trade in a number of different geographical locations, most of which are linked to each other by state-of-the-art communications technology. OTC trading also means that at any point in time, there are likely to be a number of marginally different price quotations for a particular currency; a stock, on the other hand, only has one price quoted on an exchange at a particular instant. The global forex market is also the only financial market to be open virtually around the clock, except for weekends.
Another key distinguishing feature of the currency markets is the differing levels of price access enjoyed by market participants. This is unlike the stock and commodity markets, where all participants have access to a uniform price. (For more insight, read Basic Concepts Of The Forex Market.)
Market Participants
Currency markets have numerous participants in multiple time zones, ranging from very large banks and financial institutions at one end of the spectrum, to small retail brokers and individuals on the other. Central banks are among the largest and most influential participants in the forex market. However, on a daily basis, large commercial banks are the dominant players in the forex market, on account of their corporate customers and currency trading desks. Large corporations also account for a significant proportion of foreign exchange volume, especially companies that have substantial trade or capital flows. Investment managers and hedge funds are also major participants.
Differing Prices
Banks' currency trading desks trade in the interbank market, which is characterized by large deal size, huge volumes and tight bid/ask spreads. These currency trading desks take foreign exchange positions either to cover commercial demand (for example, if a large customer needs a currency such as the euro to pay for a sizable import), or for speculative purposes. Large commercial customers get prices from these banks that have a markup embedded in them; the markup or margin depends on the size of the customer and the size of the forex transaction.
Retail customers who need foreign currency have to contend with bid/ask spreads that are much wider than those in the interbank market. (For more insight, see The Foreign Exchange Interbank Market.)
Speculative Positions Vs. Commercial Transactions
In the global foreign exchange market, speculative positions outnumber commercial foreign exchange transactions, which arise due to trade or capital flows, by a huge margin, although the exact extent is difficult to quantify. This makes the forex market very sensitive to new information, since an unexpected development will cause speculators to reassess their original trades and cause them to adjust these trades to reflect the new information.
For example, if a company has to remit a payment to a foreign supplier, it has a finite window in which to do so. The company may try to time the purchase of the currency so as to obtain a favorable rate, or it may use a hedging strategy to cover its exchange risk; however, the transaction has to occur by a definite date, regardless of conditions in the foreign exchange market.
On the other hand, a trader with a speculative currency position seeks to maximize his or her trading profit or minimize loss at all times; as such, the trader can choose to retain the position or close it at any point. In the event of new information, the adjustment process for such speculative positions is likely to be almost instantaneous. The proliferation of instant communications technology has caused reaction times to shorten dramatically in all financial markets, not just in the forex market.
However, this "knee jerk" reaction is generally followed by a more gradual adjustment process as market participants digest the new information and analyze it in greater depth.
Information Edge
While there are numerous factors that affect exchange rates, from economic and political variables to supply/demand fundamentals and capital market conditions, the hierarchical structure of the forex market gives the biggest players a slight information edge over the smallest ones.
In some situations, therefore, exchange rates take a little longer to adjust to new information. For example, consider a case where the central bank of a major nation with a widely-traded currency decides to support it in the foreign exchange markets, a process known as "intervention." If this intervention is unexpected and covert, the major banks from which the central banks buy the currency have an information edge over other participants, because they know the identity and the intention of the buyer. Other participants, especially those with short positions in the currency, may be taken by surprise to see the currency suddenly strengthen. While they may or may not cover their short positions right away, the fact that the central bank is now intervening to support the currency may cause these participants to reassess the viability and implications of their short strategy. (For more on interventions, see Profiting From Interventions In Forex Markets.)
Example – Forex Market Reaction to News
All financial markets react strongly to unexpected news or developments, and the foreign exchange market is no exception. Consider a situation in which the U.S. economy is weakening, and there is widespread expectation that the Federal Reserve will reduce the benchmark federal funds rate by 25 basis points (0.25%) at its next meeting. Currency exchange rates will factor in this rate reduction in the period leading up to the expected policy announcement. However, if the Federal Reserve decides at its meeting to leave rates unchanged, the U.S. dollar will in all likelihood react dramatically to this unexpected development. If the Federal Reserve implies in its policy announcement that the U.S. economy's prospects are improving, the U.S. dollar may also strengthen against major currencies. (For a related strategy, see Using Interest Rate Parity To Trade Forex.)
Conclusion
While the massive size and liquidity of the foreign exchange market ensures that new information or news is generally absorbed within minutes, its unique features may result in new information being absorbed over a longer period in some situations.
In addition, the hierarchical structure of the forex market can give the biggest players a slight information edge.
by Investopedia Staff, (Contact Author Biography)
Investopedia.com believes that individuals can excel at managing their financial affairs. As such, we strive to provide free educational content and tools to empower individual investors, including thousands of original and objective articles and tutorials on a wide variety of financial topics.
http://www.investopedia.com/articles/forex/09/forex-information-currency-market.asp?partner=basics2
by Investopedia Staff, (Investopedia.com) (Contact Author Biography)
The global foreign exchange (forex) market had an average daily turnover of $3.2 trillion as of April 2007, an increase of 69% from the previous year, according to the 2007 Triennial Central Bank Survey of Foreign Exchange and Derivatives Market Activity, conducted by the Bank for International Settlements. It is by far the largest financial market in the world, and its size and liquidity ensure that new information or news is disseminated within minutes. However, the forex market has some unique characteristics that distinguish it from other markets. These unique features may give some participants an "information edge" in some situations, resulting in new information being absorbed over a longer period. (For background reading, see the Forex Tutorial.)
Unique Characteristics of the Forex Market
Unlike stocks, which trade on a centralized exchange such as the New York Stock Exchange, currency trades are generally settled over the counter (OTC). The OTC nature of the global foreign exchange market means that rather than a single, centralized exchange (as is the case for stocks and commodities), currencies trade in a number of different geographical locations, most of which are linked to each other by state-of-the-art communications technology. OTC trading also means that at any point in time, there are likely to be a number of marginally different price quotations for a particular currency; a stock, on the other hand, only has one price quoted on an exchange at a particular instant. The global forex market is also the only financial market to be open virtually around the clock, except for weekends.
Another key distinguishing feature of the currency markets is the differing levels of price access enjoyed by market participants. This is unlike the stock and commodity markets, where all participants have access to a uniform price. (For more insight, read Basic Concepts Of The Forex Market.)
Market Participants
Currency markets have numerous participants in multiple time zones, ranging from very large banks and financial institutions at one end of the spectrum, to small retail brokers and individuals on the other. Central banks are among the largest and most influential participants in the forex market. However, on a daily basis, large commercial banks are the dominant players in the forex market, on account of their corporate customers and currency trading desks. Large corporations also account for a significant proportion of foreign exchange volume, especially companies that have substantial trade or capital flows. Investment managers and hedge funds are also major participants.
Differing Prices
Banks' currency trading desks trade in the interbank market, which is characterized by large deal size, huge volumes and tight bid/ask spreads. These currency trading desks take foreign exchange positions either to cover commercial demand (for example, if a large customer needs a currency such as the euro to pay for a sizable import), or for speculative purposes. Large commercial customers get prices from these banks that have a markup embedded in them; the markup or margin depends on the size of the customer and the size of the forex transaction.
Retail customers who need foreign currency have to contend with bid/ask spreads that are much wider than those in the interbank market. (For more insight, see The Foreign Exchange Interbank Market.)
Speculative Positions Vs. Commercial Transactions
In the global foreign exchange market, speculative positions outnumber commercial foreign exchange transactions, which arise due to trade or capital flows, by a huge margin, although the exact extent is difficult to quantify. This makes the forex market very sensitive to new information, since an unexpected development will cause speculators to reassess their original trades and cause them to adjust these trades to reflect the new information.
For example, if a company has to remit a payment to a foreign supplier, it has a finite window in which to do so. The company may try to time the purchase of the currency so as to obtain a favorable rate, or it may use a hedging strategy to cover its exchange risk; however, the transaction has to occur by a definite date, regardless of conditions in the foreign exchange market.
On the other hand, a trader with a speculative currency position seeks to maximize his or her trading profit or minimize loss at all times; as such, the trader can choose to retain the position or close it at any point. In the event of new information, the adjustment process for such speculative positions is likely to be almost instantaneous. The proliferation of instant communications technology has caused reaction times to shorten dramatically in all financial markets, not just in the forex market.
However, this "knee jerk" reaction is generally followed by a more gradual adjustment process as market participants digest the new information and analyze it in greater depth.
Information Edge
While there are numerous factors that affect exchange rates, from economic and political variables to supply/demand fundamentals and capital market conditions, the hierarchical structure of the forex market gives the biggest players a slight information edge over the smallest ones.
In some situations, therefore, exchange rates take a little longer to adjust to new information. For example, consider a case where the central bank of a major nation with a widely-traded currency decides to support it in the foreign exchange markets, a process known as "intervention." If this intervention is unexpected and covert, the major banks from which the central banks buy the currency have an information edge over other participants, because they know the identity and the intention of the buyer. Other participants, especially those with short positions in the currency, may be taken by surprise to see the currency suddenly strengthen. While they may or may not cover their short positions right away, the fact that the central bank is now intervening to support the currency may cause these participants to reassess the viability and implications of their short strategy. (For more on interventions, see Profiting From Interventions In Forex Markets.)
Example – Forex Market Reaction to News
All financial markets react strongly to unexpected news or developments, and the foreign exchange market is no exception. Consider a situation in which the U.S. economy is weakening, and there is widespread expectation that the Federal Reserve will reduce the benchmark federal funds rate by 25 basis points (0.25%) at its next meeting. Currency exchange rates will factor in this rate reduction in the period leading up to the expected policy announcement. However, if the Federal Reserve decides at its meeting to leave rates unchanged, the U.S. dollar will in all likelihood react dramatically to this unexpected development. If the Federal Reserve implies in its policy announcement that the U.S. economy's prospects are improving, the U.S. dollar may also strengthen against major currencies. (For a related strategy, see Using Interest Rate Parity To Trade Forex.)
Conclusion
While the massive size and liquidity of the foreign exchange market ensures that new information or news is generally absorbed within minutes, its unique features may result in new information being absorbed over a longer period in some situations.
In addition, the hierarchical structure of the forex market can give the biggest players a slight information edge.
by Investopedia Staff, (Contact Author Biography)
Investopedia.com believes that individuals can excel at managing their financial affairs. As such, we strive to provide free educational content and tools to empower individual investors, including thousands of original and objective articles and tutorials on a wide variety of financial topics.
http://www.investopedia.com/articles/forex/09/forex-information-currency-market.asp?partner=basics2
Friday 23 January 2009
Introduction to Currencies
Education
Introduction to Currencies
Floating Rates Versus Fixed Rates
Basic Concepts For the Currencies Market
What Affects Currency Values?
Fundamental Factors That Affect Currency Values
Why Central Banks and Interest Rates Are so Important
Types of Currency Trading Instruments
Currency ETFs Simplify Trading
Getting Started in Currency Futures
How to Trade Currencies
I’m Ready to Trade. Where Do I Start?
Getting Started In Currencies
Introduction to Currencies
Floating Rates Versus Fixed Rates
Basic Concepts For the Currencies Market
What Affects Currency Values?
Fundamental Factors That Affect Currency Values
Why Central Banks and Interest Rates Are so Important
Types of Currency Trading Instruments
Currency ETFs Simplify Trading
Getting Started in Currency Futures
How to Trade Currencies
I’m Ready to Trade. Where Do I Start?
Getting Started In Currencies
Friday 26 December 2008
Source of wealth affects nation's currency value
Source of wealth affects nation's currency value
CURRENCY MATTERS: Kathy Lien, GFT research director December 10, 2008
Article from: The Australian
OVER the past four weeks, we have discussed the three primary things that move currency markets -- politics, economics and monetary policy.
However, as you learn more about investing and trading currencies, you will quickly realise that the foreign exchange market is also intimately tied with commodity and equity markets.
Knowing this can help you predict movements in currencies or offer additional ideas for diversification.
When trading currencies, you are taking a view on a country. Therefore, the source of that country's wealth has a direct impact on its growth prospects and, by extension, the value of its currency.
For example, the lifeblood of Australia is gold and coal. As the world's third-largest producer of gold and fourth-largest producer of coal, the values of these commodities have a direct impact on the value of the Australian dollar.
When gold prices hit a record high above $1000 an ounce, the Australian dollar hit a 25-year high. Now that the price of gold has plunged 20 per cent, the value of the Australian dollar has declined 30 per cent.
Canada on the other hand has the second-largest oil reserves in the world, making the Canadian dollar sensitive to the price of oil.
Since this past northern summer, oil prices have plunged approximately 65 per cent from its record high of $US147.27 barrel.
During that same period, the Canadian dollar has fallen more than 20 per cent.
Similarly, when oil prices were soaring late last year, the Canadian dollar hit a record high, with one Canadian dollar worth more than one US dollar.
For countries that have well-developed capital markets, equities can also have a substantial impact on the value of their currencies.
Over the past few years, we have seen a positive correlation between the S&P 500 and US dollar/Japanese yen.
When US equities rally, the dollar has tended to rally against the yen. The same is true for the FTSE in Britain.
Generally speaking, when the FTSE sells off, we also see weakness in the British pound.
We must understand, however, that although these correlations are historically valid, like all things, they are not accurate 100 per cent of the time.
This is especially true if there are big surprises in politics, economic data or monetary policy.
However, these correlations generally have stood the test of time.
In fact, certain currency brokers allow you to track the price action of instruments such as the Australian dollar/US dollar and gold on the same chart so that you can see whether the correlation is holding on a day-to-day or even minute-to-minute basis.
Share This Article
From here you can use the Social Web links to save Source of wealth affects nation's currency value to a social bookmarking site.
CURRENCY MATTERS: Kathy Lien, GFT research director December 10, 2008
Article from: The Australian
OVER the past four weeks, we have discussed the three primary things that move currency markets -- politics, economics and monetary policy.
However, as you learn more about investing and trading currencies, you will quickly realise that the foreign exchange market is also intimately tied with commodity and equity markets.
Knowing this can help you predict movements in currencies or offer additional ideas for diversification.
When trading currencies, you are taking a view on a country. Therefore, the source of that country's wealth has a direct impact on its growth prospects and, by extension, the value of its currency.
For example, the lifeblood of Australia is gold and coal. As the world's third-largest producer of gold and fourth-largest producer of coal, the values of these commodities have a direct impact on the value of the Australian dollar.
When gold prices hit a record high above $1000 an ounce, the Australian dollar hit a 25-year high. Now that the price of gold has plunged 20 per cent, the value of the Australian dollar has declined 30 per cent.
Canada on the other hand has the second-largest oil reserves in the world, making the Canadian dollar sensitive to the price of oil.
Since this past northern summer, oil prices have plunged approximately 65 per cent from its record high of $US147.27 barrel.
During that same period, the Canadian dollar has fallen more than 20 per cent.
Similarly, when oil prices were soaring late last year, the Canadian dollar hit a record high, with one Canadian dollar worth more than one US dollar.
For countries that have well-developed capital markets, equities can also have a substantial impact on the value of their currencies.
Over the past few years, we have seen a positive correlation between the S&P 500 and US dollar/Japanese yen.
When US equities rally, the dollar has tended to rally against the yen. The same is true for the FTSE in Britain.
Generally speaking, when the FTSE sells off, we also see weakness in the British pound.
We must understand, however, that although these correlations are historically valid, like all things, they are not accurate 100 per cent of the time.
This is especially true if there are big surprises in politics, economic data or monetary policy.
However, these correlations generally have stood the test of time.
In fact, certain currency brokers allow you to track the price action of instruments such as the Australian dollar/US dollar and gold on the same chart so that you can see whether the correlation is holding on a day-to-day or even minute-to-minute basis.
Share This Article
From here you can use the Social Web links to save Source of wealth affects nation's currency value to a social bookmarking site.
Tuesday 23 December 2008
****Deflation Survival Briefing
Gala Issue: Biggest Sea Change of Our Lifetime! by Martin D. Weiss, Ph.D.
Dear,
The Fed, the Treasury and all major governments on the planet are throwing the kitchen sink at this debt crisis. But their efforts are being overwhelmed by a monumental sea change — the shift from rising prices to falling prices, from booming asset values to crashing asset values, from wealth creation to wealth destruction, from inflation to deflation.
For my entire lifetime, and probably yours as well, we have been living with inflation — sometimes tame, sometimes rampant — but consistently eroding the purchasing power of our dollar.Inflation pervaded every money decision we made or thought about making, every retirement plan or business model. Inflation was factored into our leases, our employment contracts, our budgets, our investment programs.
Now, all of that is changing; and it's doing so dramatically! Suddenly, the polar opposite of inflation is taking hold in America: Deflation!
Suddenly, prices are plummeting — not just for real estate, but also for automobiles, appliances, clothing and gasoline. From peaks reached just a few months ago to the latest bottoms, the price of oil has plunged 73% ... copper has fallen 66% ... lead and nickel are down 73% ... platinum is down 66% ... and wheat is off 64%.
Even the government's slow-to-change, lagging index of inflation — the CPI — has caved in to deflation, falling by the most since the government first introduced the index in 1946. These are not numbers that denote less inflation. They are hard evidence of outright deflation! This is crucial for you: If you continue investing as you did in inflationary times, you risk losing almost everything. However, if you acknowledge this historic shift and make the right moves now, you'll have the opportunity to build substantial wealth. This inflation-deflation switch is turning the entire world of investments upside down and inside out.
It means you must consider the grave new dangers deflation brings your portfolio and, at the same time, the unique new opportunities deflation gives you to grow your wealth. This past week, during our Deflation Survival Briefing, I covered both topics with Jack Crooks, the only currency expert I'm aware of who, unlike his peers, not only warned unambiguously about deflation but also has a unique way to profit from the deflation. I assume you attended the event online from start to finish. At times, however, the sound may have been unclear, and I apologize. So here's an edited transcript for your convenience. It's a double-length gala issue especially for you, my way of underscoring the vital importance of this sea change.
Deflation Survival Briefingwith Martin D. Weiss and Jack Crooks(Edited Transcript)
Martin Weiss: Jack, the division of labor I've mapped out is this: I will focus on the dangers and protective strategies; you can focus on the opportunities and profit strategies.
Jack Crooks: That makes sense, but I think it's pretty obvious what the dangers are.
Martin: Specifically, you're referring to ...
Jack: Losing money. Losing a lot of money. Deflation means most asset prices go down. When asset prices go down, anyone who owns those assets loses money. It's that simple.
Martin: What most people don't seem to grasp is how much money — the sheer magnitude of the losses. But the Fed just released the numbers, and I want to show them to you. I want you to see for yourself the amazing drama that literally bursts from these pages. On the Web, just go to Flow of Funds, pdf page 113. From this table, I've pulled out the main numbers to walk you through this step by step, because it's probably the most important set of facts you've seen — or will see — for a long time:
The Fed tracks five key sectors that go into household wealth: real estate, corporate equities, mutual fund shares, life insurance and pension fund reserves, plus equity in noncorporate businesses. Now let me show you how the wealth destruction is spreading throughout the U.S. economy. First quarter 2007: Every single wealth sector is still growing, except one — real estate. This $53 billion loss in real estate is a time and place that will go down in history as the great turning point of our era.Second quarter 2007: Another $190 billion in real estate wealth destroyed. Third quarter 2007: Households suffer a whopping $496 billion in losses — nearly 10 times as much as in the first quarter.Fourth quarter 2007: The wealth destruction spreads to nearly all other sectors. Households lose $708 billion in real estate, the most in history. Plus, they lose $377 billion in stocks, $145 billion in mutual funds, $265 billion in their life insurance and pension reserves.First quarter 2008: The carnage deepens. Households lose $911 billion in stocks, $297 billion in mutual funds and $832 billion in insurance and pension fund reserves. Plus, the losses spread to the last major sector, equity in noncorporate businesses. Second quarter 2008: The Bush economic stimulus package kicks in, and it slows down the pace a bit. But the hemorrhaging continues. Not one single sector recovers.Third quarter 2008: Earth-shattering losses across the board, with households losing
...ANOTHER $647 billion in real estate
$922 billion in corporate equities
$523 billion in mutual funds
$653 billion in insurance and pension fund reserves
$128 billion in noncorporate businesses
Grand total: Nearly $2.9 trillion in losses — the worst in recorded history.
Grand total lost over the past year: $7.2 trillion.
Jack: And this is not just a bunch of numbers. It's a hard-nosed reality that almost everyone is up against.
Martin: Absolutely! At the peak of the housing boom, one of our associates had his home appraised at $1.4 million. Three weeks ago, he had it appraised again and it was down around $700,000. That's a 50% decline. And it's not just the high end of the market. In May 2005, another home in our area sold for $175,000; now it's listed at Realtor.com for only $64,000.
Jack: People think that since home values have already fallen so far, they must be near a bottom.
Martin: I don't agree with that view. Most of the price declines we've seen so far merely represent a recognition that the peak prices of the mid-2000s were a fantasy built upon "Frankenstein Financing" — wildly speculative credit terms such as option ARMs and liar loans. The hard-core declines in housing, driven by basic things like recession and unemployment, are just now getting under way.
Jack: How much further do you see home prices falling?
Martin: My personal opinion is that that over half of the declines are still ahead. That applies not only to housing, but also to commercial properties; not only to real estate, but also to stocks and other assets. Consumer prices just began to fall in October. Outright contractions in the economy are just now getting under way. Deflation is still in its early stages. The wealth destruction has a long way to go.
Jack: You call this wealth destruction and I don't deny the validity of that term. But another way to describe it is rampant deflation. Deflation in the value of real estate and other investments, deflation in energy, deflation at the car dealer and deflation at every mall. In each and every sector that you've described, the U.S. dollar buys more.
Martin: That's the positive side of the story. But whatever you call it, these numbers don't lie. You can see with your own eyes that it's massive and that it's spreading throughout the entire economy.
Jack: Martin, all this raises some urgent questions in my mind and probably in the minds of our readers as well. First, can the government offset this massive destruction of wealth with more bailouts, more Fed actions and gigantic economic stimulus packages? Martin: They can buy some time or they can slow down the process temporarily, as they did in the second quarter of 2008, for example. But still, my answer is a flat NO! Not even Washington can print enough money fast enough to halt this deflationary spiral; it's just too huge. And all the printing press money in the world won't do much if it's not lent or spent. Bottom line: No matter which companies Washington bails out, this is a house of cards. It's coming down. And you must get out if its way.
Jack: Still, a lot of people have big expectations for President-elect Obama's stimulus package starting next year.
Martin: The highest estimates for the Obama stimulus package are $1 trillion. But even if it's that big, it's still small in contrast to the wealth destruction we're already seeing. And it's going to take a couple of years before all of that money reaches Americans. By that time, trillions more in wealth could be lost.
Jack: Every economist I read likes to leave some wiggle room for future butt-covering, just in case they turn out to be wrong. But you're not pulling any punches, are you? Why is that?Martin: It's not needed in this situation — because of the sheer enormity and speed of the wealth destruction: $7.2 trillion just through over the past year. In contrast, the Trouble Asset Relief Program (TARP) is $700 billion. So these losses are already ten times more than the entire bailout program.
Let's compare how much is being lost vs. what the government is doing to offset it. Here's the progression we just saw:
$1.5 trillion lost in the fourth quarter of 2007
$2.7 trillion lost in the first quarter of 2008
$630 billion lost in the second quarter of 2008
$2.9 trillion in the third quarter
Now, let me demonstrate why the government's efforts are unable to offset this wealth destruction. Congress has authorized $700 billion for TARP. But the Treasury Department reports that in the fourth quarter, only $330 billion has been committed so far.
Jack: Committed or actually disbursed?
Martin: Committed.
Jack: The ol' check-in-the-mail routine, eh?
Martin: Yes. But let's assume the $330 billion is already at the banks. And let's say that in the first quarter of 2009, they are able to disburse all of the rest. That's still minuscule in comparison to the wealth destruction.
Jack: Meanwhile, the wealth destruction continues.
Martin: Right. We don't know how much. But let's assume the wealth destruction does not decelerate or accelerate. Let's just assume it continues at the same pace.
Here's what it would look like. Moreover, most of the money being funneled to the banks is not reaching consumers and businesses. Instead, it's sitting idle at the banks, to rebuild their capital, to try to offset all the losses they've sustained.
Jack: How much of the TARP money are the banks actually lending out?
Martin: We don't know.
Jack: Isn't this why Congress is so ticked off, trying to find a way to force the banks to lend out the TARP money?
Martin: Yes. But it's a tough sell. The banks are going broke. They're being asked to lend it to borrowers, who they fear will also go broke. So the resistance is great. But even if you assume that Congress can force the Treasury Department to, in turn, force the banks to loan out some fraction of the TARP money, it would still be only a fraction of the total TARP funds.
Jack: A drop in the bucket.
Martin: Absolutely! The huge red areas in this chart represent the tremendous power of deflation. The small black areas represent the impotence of government to offset the deflation.
The power of deflation is hundreds of times larger than the government's ability to counteract it. This is why the U.S. government was not able to prevent deflation in the 1930s. And it's also why the Japanese government was unable to prevent its deflation in the 1990s.
Jack: Still, most people think the government can just print more money at will. They're now talking about a total bill of $8.5 trillion. Your numbers don't seem to account for that.
Martin: Because those bigger numbers are almost entirely guarantees and swaps — not net new money added to the economy. Plus, please bear in mind one more thing: The wealth destruction we've been discussing today does not include the losses by financial institutions, corporations and governments.
Jack: Good point. But let me go to the second major question I get from readers: What's causing this and when will it end?
Martin: What's perpetuating the deflation is excess debts. Look. Debts were usually bearable. As long as people had the income to make their payments — or as long as they could borrow from Peter to pay Paul — they could keep piling up more debt, and life went on. Deflation alone is also not so bad. It makes homes more affordable, college education more accessible, and basic necessities of life cheaper.
Jack: But when you put debts and deflation together
...Martin: That's when things fall apart! That's when you get not only wealth destruction but DEBT destruction.
Jack: And we have evidence of that as well, I presume.
Martin: Yes, undeniable, smoking-gun evidence. For decades, we've almost always seen more debt piled up quarter after quarter, year after year. But then, beginning in the third quarter of 2007, all that changed. For the first time, we saw massive debt liquidation — debt destruction. It started in the commercial paper market, where corporations issue short-term corporate IOUs to borrow in massive amounts: In the third quarter of 2007, instead of growing as it almost always has, commercial paper was being liquidated at a rapid pace. That was the canary in the coal mine.
Jack: And now?
Martin: Now the debt liquidation has spread: In addition to the liquidation of commercial paper, we're seeing massive debt liquidation in mortgages and corporate bonds.Jack: How big?
Martin: The biggest ever in recorded history. Look at mortgages! The Fed reports how much in new mortgages are created each quarter at an annual rate. Ever since you and I were born, all we've even seen is net new growth in mortgages. That's how it was when we were growing up, that's how it was in recent years, and that's what we saw in the third quarter of 2007. See?
Jack: $1,005 billion.
Martin: Yes. Net net, after all mortgage paydowns, new mortgages were added at the rate of $1,005 billion per year. Almost the same in the fourth quarter of 2007. But then look: First quarter 2008 — $539 billion. Second quarter 2008 — new mortgages begin to vanish from the market. Yet, up until this point, we're just talking about a credit crunch.
Jack: In other words, less new credit.
Martin: Yes, and that's already a powerful deflationary force: Most people can't get mortgages. So they can't buy. Since there are few buyers, prices fall. That's when people think: "This is terrible. It couldn't possibly get any worse."
Jack: But it does, doesn't it?
Martin: Dramatically worse: In third quarter of 2008, the volume of mortgages going bad is so big and the volume of new mortgages being created is so small, we have a net decline in mortgages outstanding. For the first time in recorded history, we have a net destruction of debts in this sector. This is far worse than a credit crunch. It is a DEBT COLLAPSE, an unprecedented, unstoppable deflationary force.
The same kind of debt collapse also hits corporate bonds. Third quarter of 2007 — no problem. New bonds are issued at the annual rate of nearly $1,481 billion per year.Fourth quarter of 2007 — big decline, to $821 billion.
Jack: Credit crunch begins to hit.
Martin: Exactly. First and second quarters of 2008 — credit crunch hits even harder. Third quarter of 2008 — debt collapse strikes! It's the biggest net reduction of corporate bonds in recorded history, running at the annual rate of $755 billion (red bar in chart). Again, one of the most powerful deflationary forces of all time!
Jack: So what's the next stage?
Martin: A chain reaction of corporate bankruptcies.
Jack: But it looks like they're going to save companies like General Motors and Chrysler.
Martin: Even if they do, they cannot save hundreds of thousands of smaller and medium-sized companies that are going bankrupt all over the country ... tens of thousands of municipalities and states running out of money ... tens of millions of Americans who have gotten smacked with the trillions in losses I've just showed you in the household sector.
This wealth destruction and debt liquidation is classic; and despite all the government intervention, it is fundamentally very similar to the collapse we saw in 1929 and the early 1930s.
Jack: But many people believe the 1930s Depression was caused by the failure of the federal government to fight the decline. This time, they say, the government is doing precisely the opposite.
Martin: In reality, America's First Great Depression wasn't caused by what the government failed to do to stop it. Rather, it was largely caused by all the wild things the government did do to create the superboom in the Roaring '20s that preceded it. They dished out money to banks like candy. They let banks loan money to brokers without restraint. And they encouraged brokers to hand it off to stock market speculators with 10% margin. But if you want to see what happens when a government intervenes aggressively after a bust, just look at Japan since 1990. Japan lowered interest rates to zero, just like the Fed is doing today. Japan bailed out banks, brokerage firms and insurance companies, much like the Fed is doing here. Japan embarked on massive public works projects, much like President-elect Obama is proposing now.
But it did not end the deflation. And it did not prevent their stock market from making brand-new lows this year. All it did was prolong the agony — now 18 years and counting.
Jack: So precisely how much longer do you think the deflation will continue in the U.S.?
Martin: Nobody knows. But it's clear that this is not a short-term situation that will be resolved in the foreseeable future. It could take years to flush out the bad debts and restore confidence. The key is the debt liquidation. That's the main engine behind the deflation and a major element in vicious cycles that are just beginning to gain momentum. Consider the housing market, for example. The more debts are liquidated, the more prices fall ... and the more prices fall, the more people abandon their homes and mortgages, leading to more debt liquidation. This is what's happening all around the country right now — not only in housing, but also in every asset imaginable. These vicious cycles are like hurricanes striking every city and state in the country. Until they exhaust themselves, the deflation will continue.
Like you said at the outset, deflation is falling asset prices across the board. Not just falling home prices, but falling prices on land and commercial properties. Not just stocks and bonds, and commodities, but also collectibles — art, antiques, stamps and, soon, rare coins as well. There may be some exceptions. But overall, unless you have some very convincing evidence to the contrary, you must assume the value of your assets are going down and going down hard.
Jack: So what's a person to do?
Martin: If you don't need something, seriously consider selling it. Real estate. Stocks. Corporate bonds. Even collectibles if you consider them an investment.Jack: Even if it has already gone down a lot?
Martin: Don't look back at what the price was. Just look ahead to what the price will be after a massive deflation. You don't have to sell everything all at once at any price. Every time the government inspires a rally in the stock market, use that as a selling opportunity. Every time the government stimulates some activity in real estate or in the economy, grab that chance as well.
Jack: Suppose market conditions are so severe, there are no buyers. Then what?
Martin: Then, you can afford to wait for a temporary stabilization or recovery. Markets never go straight down. And even in some of the worst markets, there are ways to sell most assets.
Jack: What about antiques and art?
Martin: For the first time in many years, you're seeing a contraction in major auctions sales. For example, annual sales of contemporary art at Sotheby's and Christie's auctions in New York and London are down 17% in 2008. In the two years before that, they doubled in sales. So that's not a huge decline yet. But it's a sign.You won't get peak prices. However, if you act swiftly, you can still sell. If you wait, you'll get caught. Ditto for stamps and rare coins.
Jack: Gold is holding its value the best compared to the much larger percentages you cited earlier for other commodities. But I believe it's only a matter of time before gold succumbs to the deflation as well. What do you think?
Martin: This is hard for a lot of people to accept, but it's also hard to envision a situation in which gold defies gravity for much longer. It's still a good insurance policy against governments that could run amuck. But I suggest you reduce your holdings to a bare minimum. No matter what, the key is to pile up as much cash as you possibly can. Then put that cash into the safest place you possibly can — short-term Treasury securities. You can buy them from the Treasury Department directly, through their Treasury Direct Program. Or for even better liquidity, I recommend a Treasury-only money market fund. Our favorites are Capital Preservation Fund and the Weiss Treasury Only Money Market Fund. There are many more to choose from and they all provide the same safety.
Jack: Last week, there were some Treasury bills auctioned off at zero yield. Doesn't that discourage you?
Martin: Not in the slightest. As long as your cash is in a safe place, the deeper the deflation, the more your money is worth. My last word: Just make sure you keep it safe!
Jack: Martin, I'm going to assume that's my cue to jump in and take us beyond just safety and protection, so we can talk about turning this deflation into a profit opportunity.
Martin: Yes, please do.
Jack: There is just one thing that always goes up with deflation: The U.S. dollar! By DEFINITION, when the price of investments or goods and services goes down, the value of each dollar goes UP. That's the essence of deflation. And here's the key: When the value of the dollar goes up in the United States, it inevitably goes up abroad as well.
Martin: Please explain that connection more specifically.
Jack: Virtually everything that matters in the global economy — trade, commodities, GDP, debts — is measured in U.S. dollars. The dollar is the world's reserve currency. So just as we see domestically, when your dollar buys more, its value also rises internationally.
Martin: There was a lot of talk about other currencies replacing the dollar as a reserve currency. Jack: Talk, yes; action, no. It never happened. And now, it's going the other way: Your dollars now buy more than two gallons of gas for every one gallon they bought just a few months ago. The dollar now buys three times more oil and copper than just a few months ago. Not just 20% more or 50% more, but three times more! We're seeing the same thing happen against currencies. The dollar is in a massive, long-term uptrend against the euro, the British pound and virtually every currency in the world. Yes, we've witnessed a temporary dollar setback in recent days, but it does nothing to change the big trend.
Martin: It certainly does not change the deflation. But please give us specific reasons why the dollar is rising against currencies in particular.
Jack: There are three big reasons. The main one is that, as I said, the dollar is the global measure of virtually everything. So when there's global deflation, the dollar is the prime beneficiary. Look. We've had decade after decade of inflation and global expansion. During most of that period, the worldwide supply of dollars and dollar-based credit expanded dramatically. And those dollars became the key funding source of bubbles in nearly every major asset class — real estate, stocks, commodities, energy and metals. As the supply of dollars expanded, the dollar lost value. Now we have deflation and global contraction. So now everything is turning the other way. Despite the Fed's efforts to lower interest rates, credit — dollar credit — is drying up all over the world. The overall supply of dollars is contracting. So U.S. dollars are suddenly scarce and their value is going up.
Martin: Still many people in the U.S. don't see that. They think: "If the U.S. economy is in so much trouble, isn't that bad for the dollar?"
Jack: No, that's simply not how it works. A country's currency is never valued based on how well or how poorly that particular economy is doing in isolation. It's always measured against another country's currency. So it is always valued based on how a particular economy is doing relative to another economy. It's not the U.S. dollar vs. some other measure. It's the U.S. dollar versus the euro, the British pound, the Aussie dollar, etc. So the relevant question is never, "How well is the U.S. economy doing?" The question is, "How is the U.S. economy doing compared to the European economy, the U.K. or Australia?" In this environment, it's not a beauty contest. It's a contest of which economy is the least ugly ... which leads me to the second reason the dollar is rising: The U.S. is winning the least ugly contest hands down.
Martin: Please elaborate.Jack: Europe's banks have lent more than $2.7 trillion to the high-risk emerging markets, and those emerging markets are being crushed by deflation. Europe's banks have big exposure to Hungary, and Hungary is collapsing. They have big exposure to the Ukraine and to Russia, which are also collapsing.
Europe's economy is in much worse shape than ours. In Germany, export demand has vanished. So it's just now starting to accelerate downward. Worst of all, the Eurozone's governing bodies are a mess. You've got each member nation making its own monetary policy and each going off on a different course with its economic stimulus plans. For example, the European Central Bank wants to retain some semblance of moderation in its monetary policy. But the leaders in countries like Italy, Greece, Spain, Portugal and Ireland are scared. So they're going to whatever it takes to try to prop up demand, no matter what the central banks says.
Martin: It's adding political chaos to financial chaos.
Jack: Precisely. These are the reasons the euro has been falling and, despite a sharp rally, will likely continue to fall — probably down to parity with the dollar, or lower.
Martin: That's a huge drop — over 30% from these levels. What about the U.K.?
Jack: Worse. Their housing bust is more extreme than ours. Their reliance on revenues from a sinking financial center — London — is far worse than ours. Their consumers have more debt than almost any other developed country.
Martin: And the Australian dollar?
Jack: Solid as long as commodities were going up ... but a disaster with commodities going down! In just the last five months, the Australian dollar has lost 31% of its peak value. Other currencies tied to commodities are also getting killed: The New Zealand dollar is down 39% from its peak; the Brazilian real, 35%; the Canadian dollar, 23%.
Martin: And going forward?
Jack: Deflation means more declines in commodities. And the more commodities fall, the more these commodity currencies plunge. It's that simple.
Martin: You said you had three reasons for the dollar's surge.
Jack: The third reason is the flight to the center. Think of the world currency market as a solar system. The dollar is the sun; the other currencies, the planets. As the system expands, investors migrate from the core currency, the U.S. dollar, to the inner planets — currencies like the euro, the Swiss franc or the pound. And as the system expands even more, they migrate to the next tier of currencies, like the Australian dollar or the Canadian dollar ... and then, still further, to the system's periphery — outer planets like the Brazilian real, the Mexican peso or the South African rand. At each step of the way, they take more risk with less stable economies, use more leverage, go for bigger returns — all fueled by abundant dollar credit.
Martin: OK. What happens when the global economy contracts?
Jack: Precisely the reverse. As the global economy begins to come unglued, they rush back to the center, creating a massive flight back to the U.S. dollar. They have no love affair with the dollar. They just see the peripheral economies going down and they dump those currencies. These are the first risky investments they sell, almost invariably switching back to U.S. dollars. The U.S. economy, despite all its troubles, is still the dominant world economy. Militarily, it's the only remaining superpower. Financially, it's still the world's capital. So it's natural that when investors are running from risk, they rush back to the dollar, bidding up its value.Martin: Is this true across the board, regardless of the currency?
Jack: No. There's one notable exception: The Japanese yen. Japan is the world's second largest economy and also one of the world's largest sources of capital. So when the other currencies go down, a lot of that money goes back to Japan, boosting the yen. But the main point is this: The single most consistent consequence of global deflation is a rising dollar.
Martin: So in the midst of all these bear markets, if you're looking for a big bull market
...Jack: You've found it! It's the U.S. dollar. I think the U.S. dollar is in the early stages of a powerful bull market that could last for years. It's the single cleanest way to make windfall profits from the deflation.
Martin: A year or two ago, you were betting against the dollar, and you were right. Now you're betting on a rising dollar. That's a big change.
Jack: You're darn right it is! It goes hand-in-hand with the big sea change you've so clearly illustrated today.
Martin: Can you explain to our readers how to go about betting on a rising dollar?
Jack: There are several ways. You can place your bets in favor of the dollar, using instruments that are tied to the dollar index. So as the dollar index rises against other currencies, you profit directly. Or you can bet against foreign currencies. Remember, the flip side of a rising dollar is falling currencies. The more those currencies fall against the dollar, the more you make. I prefer betting against the currencies because that lets me choose the weakest of them all.
Martin: What instruments do you use?
Jack: I use a revolutionary investment vehicle called currency ETFs. They're simply exchange-traded funds, just like any other ETFs. The same ease of trading and flexibility, the same low commissions, the same availability through any stock broker. If you buy stocks or any other ETF, you can buy currency ETFs.
Martin: Before we get into this any further, can you give us full disclosure on the risks?
Jack: All investments have risk. If the currency goes the wrong way, you lose money. But the advantage of the currency market is that it's divorced from the stock market. The stock market could be crashing, and it would not interfere with your ability to make large steady profits in the currency market. The U.S. economy could be sinking into a depression, and it would still not interfere with your ability to make nice large steady profits in the currency market. No matter what happens in the global economy or the world's financial markets, there is always at least some major currency that's going up in value.
Martin: Please explain that.
Jack: Currencies are measured against each other. When one is going up, the other is going down, like a seesaw. Therefore, there's always at least one currency going up. There's always a bull market in currencies and, therefore, always a bull market in currency ETFs. I don't recommend currency ETFs for all of your money. But at a time when nearly all other investments are going down, it's a great place to get away from the disasters and find a whole separate world of investment opportunity.
Martin: A world that's far removed from those disasters.
Jack: Exactly. I also think that it's the ideal vehicle for average investors to profit from deflation and a rising dollar.
Martin: Specifically, which ETF do you use to profit from a rising dollar?
Jack: There's an ETF that's tied directly to a rising dollar index. The more the dollar rises, the more money you can make. And there's virtually no limit to how far it can go.
Martin: Before we end today, please name it for us. But of course, it's a two-way street. If the dollar falls, then this ETF would fall in value as well.
Jack: Of course. But there are also ETFs tied to specific falling currencies. When the dollar is rising, it means other currencies are falling. And with these ETFs, the more those currencies fall, the more money you can make. Plus, you can do it with two-for-one leverage.Take the euro, for example. If the euro falls 10%, you stand to make 20%. If the euro falls 20%, you can make 40%. And if you want to be more aggressive and buy them with 50% margin, you can double that leverage. In other words, every 10% decline in the currency gives you a 40% profit opportunity.
Martin: Do you recommend margin?
Jack: I don't think you need it. The currency market offers plenty of profit opportunity without margin.
Martin: Can you give us some specific examples without using margin?
Jack: Sure. Let's say you bet against the British pound last August. In just three months' time, you could have grabbed the equivalent of a 52% annual return on your money. The return on the euro would have been even better. If you could have bought the ETF that's designed to profit from a falling euro, you could have grabbed the equivalent of an 81% total annual return. On the Aussie, you could have made a 68% annual return.
Martin: With the way the stock market is performing and the way yields have fallen, I think most people would be happy with a lot less than that. Jack, if you can help folks make, say, 30% or even 20% per year, and you do so regularly, that would be a great service you provide.
Jack: Plus, we're not talking about speculating on some little-known stock or exoteric bond. When you buy currency ETFs, you're investing in the currency itself — CASH MONEY. You never own a single share of stock or any kind of bond.You're also not affected by financial failures. Since you never buy stocks or bonds in a bank or corporation that could default, currency ETFs help insulate you from the debt crisis. In fact, the debt crisis overseas, which is far more frightening than the debt crisis here, is driving investors into the U.S. dollar, which can actually help investors make more money in their dollar ETFs.
Martin: Since the ETFs are not investing in stocks or bonds, please explain what they are investing in.
Jack: In most cases, interest-bearing money markets. So in those ETFs, on top of the appreciation in the currency we're aiming for, you also earn interest. And with many currency ETFs, the interest yield is higher than what you can make in any U.S. money market.
Martin: Let's say you're wrong about the dollar and the dollar turns down. Then what?
Jack: In 2007, when the dollar was falling, we did very nicely. I have a service dedicated exclusively to currency ETFs, called World Currency Alert. And in it, I can recommend currency ETFs that are available now on every major currency. There's an ETF for the euro, the Japanese yen, the British pound, the Swiss franc, the Australian dollar, the Canadian dollar and more.
Sometimes we'll focus on just a couple of special opportunities; sometimes, when we have a broad movement in the currencies, we'll recommend you diversify among many different ones.
Martin: Does that require a larger investment?
Jack: No. Remember, these are just ETFs, just shares traded on the exchange. So you could buy just one share of each if you wanted to. In other words, there's virtually no investment minimum. With just $1,000, you could buy a whole range of different ETFs across several different currencies.
Martin: What kind of fees are we talking about to buy and sell the currency ETFs?
Jack: You pay a broker commission. But if you use a discount or online broker, your commission costs can be slashed to the bone.
Martin: How does this compare to trading standard ETFs, like those that focus on particular stock sectors?
Jack: I think it's a lot easier and better.
Martin: Why is that?
Jack: Instead of thousands of stocks and stock sectors, you only have to track six major currencies — the euro, British pound, Swiss franc, Japanese yen, Australian dollar and Canadian dollar. Instead of choppy and crazy stock market surges and plunges, currencies tend to give you much bigger, sweeping trends.
Martin: Because ...
Jack: Because once you get these massive macro global trends — like the deflation we talked about — turning them around is like turning a big tanker at sea. They can last for many years. It's like sailing with the Gulf Stream. You just follow the currency current as far as it will take you.
Martin: How would you characterize this current you're riding right now — the deflation pushing the dollar higher?
Jack: I've seen big currency trends before, but nothing quite like this one, nothing as powerful and large. Your numbers bring that home very convincingly, I think.
Martin: Tell us why you think investors should buy your service, and don't be bashful. I think it's safe to say that our readers want to know how to make real money from this deflation, and if you have a unique way to do this, its information they're going to want to pay close attention to. Jack: Actually, you don't need World Currency Alert to invest in currency ETFs. It's very easy to do, and like I said, they're readily available to anyone with a regular stock brokerage account. You buy and sell them just like a stock or any other ETF. You don't need any new accounts. They're extremely liquid. You just aim to buy them low and sell them high, like any other investment.Martin: What would you buy when?
Jack: Whenever you see a setback in the dollar, I would buy the PowerShares Dollar Bull ETF.
Martin: OK. So why should someone buy your service?
Jack: You don't need my service to buy them. You need World Currency Alert to make money in them, to take your profits, and to do it with some degree of consistency.
If your goal is to take no risk whatsoever and keep all your money 100% safe, then buying currency ETFs would be a mistake, because there IS always risk of loss. But if you're concerned about this deflation — or a future return of inflation — then NOT taking this opportunity is the mistake you'd be making, in my view. There's nothing, absolutely nothing standing in your way.
Martin: Except the cost of the service.Jack: No, I don't see that as an obstacle. The cost of World Currency Alert is just $295 per year. If you invested just a couple thousand in one of the trades I just mentioned, you could cover an entire year's cost very easily.
Martin: In terms of timing, when would be a good time for investors to start with your service?Jack: There's no particular time that's better than any other. Right now, we've had a setback in the dollar. So I'm looking to jump in with a new batch of recos, perhaps around the first week of the new year. So you could wait until then. The key timing issue is the price change we're going to put into place: Starting January 1, we're raising the price to $395. So don't wait until then. Because as long as you join before December 31, you save $100. Plus, there are even bigger savings if you join for two years. In fact, I think the two-year membership makes the most sense.
Martin: Because
...Jack: Because, like I said, it offers the biggest savings. And no matter what, if you're not happy, if it doesn't work for you or you just decide to change your mind, no problem — 100% money-back guarantee in the first 90 days; pro-rated refund at any time thereafter.
Martin: That's very fair. Please provide a web link for more info and to order your service.
Jack: It's http://images.moneyandmarkets.com/1195/88357.html
Or you can call 800-393-0189.
Martin: One way to look at this is like a home business to generate extra revenues.
Jack: I agree. All it takes is a couple of minutes each day, and for each minute of your time, you could be looking at a thousand or two in revenue per hour. Just remember, the price goes up January 1, 2009.
Martin: Thank you, Jack. And thank YOU, our readers, for joining us today. Let's talk again soon.Good luck and God bless!Martin
About Money and MarketsFor more information and archived issues, visit http://www.moneyandmarkets.com/Money and Markets (MaM) is published by Weiss Research, Inc. and written by Martin D. Weiss along with Tony Sagami, Nilus Mattive, Sean Brodrick, Larry Edelson, Michael Larson and Jack Crooks. To avoid conflicts of interest, Weiss Research and its staff do not hold positions in companies recommended in MaM, nor do we accept any compensation for such recommendations. The comments, graphs, forecasts, and indices published in MaM are based upon data whose accuracy is deemed reliable but not guaranteed. Performance returns cited are derived from our best estimates but must be considered hypothetical in as much as we do not track the actual prices investors pay or receive. Regular contributors and staff include Kristen Adams, Andrea Baumwald, John Burke, Amber Dakar, Michelle Johncke, Dinesh Kalera, Red Morgan, Maryellen Murphy, Jennifer Newman-Amos, Adam Shafer, Julie Trudeau and Leslie Underwood.Attention editors and publishers! Money and Markets issues can be republished. Republished issues MUST include attribution of the author(s) and the following short paragraph:This investment news is brought to you by Money and Markets. Money and Markets is a free daily investment newsletter from Martin D. Weiss and Weiss Research analysts offering the latest investing news and financial insights for the stock market, including tips and advice on investing in gold, energy and oil. Dr. Weiss is a leader in the fields of investing, interest rates, financial safety and economic forecasting. To view archives or subscribe, visit http://www.moneyandmarkets.com/.From time to time, Money and Markets may have information from select third-party advertisers known as "external sponsorships." We cannot guarantee the accuracy of these ads. In addition, these ads do not necessarily express the viewpoints of Money and Markets or its editors. For more information, see our terms and conditions.View our Privacy Policy.Would you like to unsubscribe from our mailing list?To make sure you don't miss our urgent updates, add Weiss Research to your address book. Just follow these simple steps.© 2008 by Weiss Research, Inc. All rights reserved.15430 Endeavour Drive, Jupiter, FL 33478
Dear,
The Fed, the Treasury and all major governments on the planet are throwing the kitchen sink at this debt crisis. But their efforts are being overwhelmed by a monumental sea change — the shift from rising prices to falling prices, from booming asset values to crashing asset values, from wealth creation to wealth destruction, from inflation to deflation.
For my entire lifetime, and probably yours as well, we have been living with inflation — sometimes tame, sometimes rampant — but consistently eroding the purchasing power of our dollar.Inflation pervaded every money decision we made or thought about making, every retirement plan or business model. Inflation was factored into our leases, our employment contracts, our budgets, our investment programs.
Now, all of that is changing; and it's doing so dramatically! Suddenly, the polar opposite of inflation is taking hold in America: Deflation!
Suddenly, prices are plummeting — not just for real estate, but also for automobiles, appliances, clothing and gasoline. From peaks reached just a few months ago to the latest bottoms, the price of oil has plunged 73% ... copper has fallen 66% ... lead and nickel are down 73% ... platinum is down 66% ... and wheat is off 64%.
Even the government's slow-to-change, lagging index of inflation — the CPI — has caved in to deflation, falling by the most since the government first introduced the index in 1946. These are not numbers that denote less inflation. They are hard evidence of outright deflation! This is crucial for you: If you continue investing as you did in inflationary times, you risk losing almost everything. However, if you acknowledge this historic shift and make the right moves now, you'll have the opportunity to build substantial wealth. This inflation-deflation switch is turning the entire world of investments upside down and inside out.
It means you must consider the grave new dangers deflation brings your portfolio and, at the same time, the unique new opportunities deflation gives you to grow your wealth. This past week, during our Deflation Survival Briefing, I covered both topics with Jack Crooks, the only currency expert I'm aware of who, unlike his peers, not only warned unambiguously about deflation but also has a unique way to profit from the deflation. I assume you attended the event online from start to finish. At times, however, the sound may have been unclear, and I apologize. So here's an edited transcript for your convenience. It's a double-length gala issue especially for you, my way of underscoring the vital importance of this sea change.
Deflation Survival Briefingwith Martin D. Weiss and Jack Crooks(Edited Transcript)
Martin Weiss: Jack, the division of labor I've mapped out is this: I will focus on the dangers and protective strategies; you can focus on the opportunities and profit strategies.
Jack Crooks: That makes sense, but I think it's pretty obvious what the dangers are.
Martin: Specifically, you're referring to ...
Jack: Losing money. Losing a lot of money. Deflation means most asset prices go down. When asset prices go down, anyone who owns those assets loses money. It's that simple.
Martin: What most people don't seem to grasp is how much money — the sheer magnitude of the losses. But the Fed just released the numbers, and I want to show them to you. I want you to see for yourself the amazing drama that literally bursts from these pages. On the Web, just go to Flow of Funds, pdf page 113. From this table, I've pulled out the main numbers to walk you through this step by step, because it's probably the most important set of facts you've seen — or will see — for a long time:
The Fed tracks five key sectors that go into household wealth: real estate, corporate equities, mutual fund shares, life insurance and pension fund reserves, plus equity in noncorporate businesses. Now let me show you how the wealth destruction is spreading throughout the U.S. economy. First quarter 2007: Every single wealth sector is still growing, except one — real estate. This $53 billion loss in real estate is a time and place that will go down in history as the great turning point of our era.Second quarter 2007: Another $190 billion in real estate wealth destroyed. Third quarter 2007: Households suffer a whopping $496 billion in losses — nearly 10 times as much as in the first quarter.Fourth quarter 2007: The wealth destruction spreads to nearly all other sectors. Households lose $708 billion in real estate, the most in history. Plus, they lose $377 billion in stocks, $145 billion in mutual funds, $265 billion in their life insurance and pension reserves.First quarter 2008: The carnage deepens. Households lose $911 billion in stocks, $297 billion in mutual funds and $832 billion in insurance and pension fund reserves. Plus, the losses spread to the last major sector, equity in noncorporate businesses. Second quarter 2008: The Bush economic stimulus package kicks in, and it slows down the pace a bit. But the hemorrhaging continues. Not one single sector recovers.Third quarter 2008: Earth-shattering losses across the board, with households losing
...ANOTHER $647 billion in real estate
$922 billion in corporate equities
$523 billion in mutual funds
$653 billion in insurance and pension fund reserves
$128 billion in noncorporate businesses
Grand total: Nearly $2.9 trillion in losses — the worst in recorded history.
Grand total lost over the past year: $7.2 trillion.
Jack: And this is not just a bunch of numbers. It's a hard-nosed reality that almost everyone is up against.
Martin: Absolutely! At the peak of the housing boom, one of our associates had his home appraised at $1.4 million. Three weeks ago, he had it appraised again and it was down around $700,000. That's a 50% decline. And it's not just the high end of the market. In May 2005, another home in our area sold for $175,000; now it's listed at Realtor.com for only $64,000.
Jack: People think that since home values have already fallen so far, they must be near a bottom.
Martin: I don't agree with that view. Most of the price declines we've seen so far merely represent a recognition that the peak prices of the mid-2000s were a fantasy built upon "Frankenstein Financing" — wildly speculative credit terms such as option ARMs and liar loans. The hard-core declines in housing, driven by basic things like recession and unemployment, are just now getting under way.
Jack: How much further do you see home prices falling?
Martin: My personal opinion is that that over half of the declines are still ahead. That applies not only to housing, but also to commercial properties; not only to real estate, but also to stocks and other assets. Consumer prices just began to fall in October. Outright contractions in the economy are just now getting under way. Deflation is still in its early stages. The wealth destruction has a long way to go.
Jack: You call this wealth destruction and I don't deny the validity of that term. But another way to describe it is rampant deflation. Deflation in the value of real estate and other investments, deflation in energy, deflation at the car dealer and deflation at every mall. In each and every sector that you've described, the U.S. dollar buys more.
Martin: That's the positive side of the story. But whatever you call it, these numbers don't lie. You can see with your own eyes that it's massive and that it's spreading throughout the entire economy.
Jack: Martin, all this raises some urgent questions in my mind and probably in the minds of our readers as well. First, can the government offset this massive destruction of wealth with more bailouts, more Fed actions and gigantic economic stimulus packages? Martin: They can buy some time or they can slow down the process temporarily, as they did in the second quarter of 2008, for example. But still, my answer is a flat NO! Not even Washington can print enough money fast enough to halt this deflationary spiral; it's just too huge. And all the printing press money in the world won't do much if it's not lent or spent. Bottom line: No matter which companies Washington bails out, this is a house of cards. It's coming down. And you must get out if its way.
Jack: Still, a lot of people have big expectations for President-elect Obama's stimulus package starting next year.
Martin: The highest estimates for the Obama stimulus package are $1 trillion. But even if it's that big, it's still small in contrast to the wealth destruction we're already seeing. And it's going to take a couple of years before all of that money reaches Americans. By that time, trillions more in wealth could be lost.
Jack: Every economist I read likes to leave some wiggle room for future butt-covering, just in case they turn out to be wrong. But you're not pulling any punches, are you? Why is that?Martin: It's not needed in this situation — because of the sheer enormity and speed of the wealth destruction: $7.2 trillion just through over the past year. In contrast, the Trouble Asset Relief Program (TARP) is $700 billion. So these losses are already ten times more than the entire bailout program.
Let's compare how much is being lost vs. what the government is doing to offset it. Here's the progression we just saw:
$1.5 trillion lost in the fourth quarter of 2007
$2.7 trillion lost in the first quarter of 2008
$630 billion lost in the second quarter of 2008
$2.9 trillion in the third quarter
Now, let me demonstrate why the government's efforts are unable to offset this wealth destruction. Congress has authorized $700 billion for TARP. But the Treasury Department reports that in the fourth quarter, only $330 billion has been committed so far.
Jack: Committed or actually disbursed?
Martin: Committed.
Jack: The ol' check-in-the-mail routine, eh?
Martin: Yes. But let's assume the $330 billion is already at the banks. And let's say that in the first quarter of 2009, they are able to disburse all of the rest. That's still minuscule in comparison to the wealth destruction.
Jack: Meanwhile, the wealth destruction continues.
Martin: Right. We don't know how much. But let's assume the wealth destruction does not decelerate or accelerate. Let's just assume it continues at the same pace.
Here's what it would look like. Moreover, most of the money being funneled to the banks is not reaching consumers and businesses. Instead, it's sitting idle at the banks, to rebuild their capital, to try to offset all the losses they've sustained.
Jack: How much of the TARP money are the banks actually lending out?
Martin: We don't know.
Jack: Isn't this why Congress is so ticked off, trying to find a way to force the banks to lend out the TARP money?
Martin: Yes. But it's a tough sell. The banks are going broke. They're being asked to lend it to borrowers, who they fear will also go broke. So the resistance is great. But even if you assume that Congress can force the Treasury Department to, in turn, force the banks to loan out some fraction of the TARP money, it would still be only a fraction of the total TARP funds.
Jack: A drop in the bucket.
Martin: Absolutely! The huge red areas in this chart represent the tremendous power of deflation. The small black areas represent the impotence of government to offset the deflation.
The power of deflation is hundreds of times larger than the government's ability to counteract it. This is why the U.S. government was not able to prevent deflation in the 1930s. And it's also why the Japanese government was unable to prevent its deflation in the 1990s.
Jack: Still, most people think the government can just print more money at will. They're now talking about a total bill of $8.5 trillion. Your numbers don't seem to account for that.
Martin: Because those bigger numbers are almost entirely guarantees and swaps — not net new money added to the economy. Plus, please bear in mind one more thing: The wealth destruction we've been discussing today does not include the losses by financial institutions, corporations and governments.
Jack: Good point. But let me go to the second major question I get from readers: What's causing this and when will it end?
Martin: What's perpetuating the deflation is excess debts. Look. Debts were usually bearable. As long as people had the income to make their payments — or as long as they could borrow from Peter to pay Paul — they could keep piling up more debt, and life went on. Deflation alone is also not so bad. It makes homes more affordable, college education more accessible, and basic necessities of life cheaper.
Jack: But when you put debts and deflation together
...Martin: That's when things fall apart! That's when you get not only wealth destruction but DEBT destruction.
Jack: And we have evidence of that as well, I presume.
Martin: Yes, undeniable, smoking-gun evidence. For decades, we've almost always seen more debt piled up quarter after quarter, year after year. But then, beginning in the third quarter of 2007, all that changed. For the first time, we saw massive debt liquidation — debt destruction. It started in the commercial paper market, where corporations issue short-term corporate IOUs to borrow in massive amounts: In the third quarter of 2007, instead of growing as it almost always has, commercial paper was being liquidated at a rapid pace. That was the canary in the coal mine.
Jack: And now?
Martin: Now the debt liquidation has spread: In addition to the liquidation of commercial paper, we're seeing massive debt liquidation in mortgages and corporate bonds.Jack: How big?
Martin: The biggest ever in recorded history. Look at mortgages! The Fed reports how much in new mortgages are created each quarter at an annual rate. Ever since you and I were born, all we've even seen is net new growth in mortgages. That's how it was when we were growing up, that's how it was in recent years, and that's what we saw in the third quarter of 2007. See?
Jack: $1,005 billion.
Martin: Yes. Net net, after all mortgage paydowns, new mortgages were added at the rate of $1,005 billion per year. Almost the same in the fourth quarter of 2007. But then look: First quarter 2008 — $539 billion. Second quarter 2008 — new mortgages begin to vanish from the market. Yet, up until this point, we're just talking about a credit crunch.
Jack: In other words, less new credit.
Martin: Yes, and that's already a powerful deflationary force: Most people can't get mortgages. So they can't buy. Since there are few buyers, prices fall. That's when people think: "This is terrible. It couldn't possibly get any worse."
Jack: But it does, doesn't it?
Martin: Dramatically worse: In third quarter of 2008, the volume of mortgages going bad is so big and the volume of new mortgages being created is so small, we have a net decline in mortgages outstanding. For the first time in recorded history, we have a net destruction of debts in this sector. This is far worse than a credit crunch. It is a DEBT COLLAPSE, an unprecedented, unstoppable deflationary force.
The same kind of debt collapse also hits corporate bonds. Third quarter of 2007 — no problem. New bonds are issued at the annual rate of nearly $1,481 billion per year.Fourth quarter of 2007 — big decline, to $821 billion.
Jack: Credit crunch begins to hit.
Martin: Exactly. First and second quarters of 2008 — credit crunch hits even harder. Third quarter of 2008 — debt collapse strikes! It's the biggest net reduction of corporate bonds in recorded history, running at the annual rate of $755 billion (red bar in chart). Again, one of the most powerful deflationary forces of all time!
Jack: So what's the next stage?
Martin: A chain reaction of corporate bankruptcies.
Jack: But it looks like they're going to save companies like General Motors and Chrysler.
Martin: Even if they do, they cannot save hundreds of thousands of smaller and medium-sized companies that are going bankrupt all over the country ... tens of thousands of municipalities and states running out of money ... tens of millions of Americans who have gotten smacked with the trillions in losses I've just showed you in the household sector.
This wealth destruction and debt liquidation is classic; and despite all the government intervention, it is fundamentally very similar to the collapse we saw in 1929 and the early 1930s.
Jack: But many people believe the 1930s Depression was caused by the failure of the federal government to fight the decline. This time, they say, the government is doing precisely the opposite.
Martin: In reality, America's First Great Depression wasn't caused by what the government failed to do to stop it. Rather, it was largely caused by all the wild things the government did do to create the superboom in the Roaring '20s that preceded it. They dished out money to banks like candy. They let banks loan money to brokers without restraint. And they encouraged brokers to hand it off to stock market speculators with 10% margin. But if you want to see what happens when a government intervenes aggressively after a bust, just look at Japan since 1990. Japan lowered interest rates to zero, just like the Fed is doing today. Japan bailed out banks, brokerage firms and insurance companies, much like the Fed is doing here. Japan embarked on massive public works projects, much like President-elect Obama is proposing now.
But it did not end the deflation. And it did not prevent their stock market from making brand-new lows this year. All it did was prolong the agony — now 18 years and counting.
Jack: So precisely how much longer do you think the deflation will continue in the U.S.?
Martin: Nobody knows. But it's clear that this is not a short-term situation that will be resolved in the foreseeable future. It could take years to flush out the bad debts and restore confidence. The key is the debt liquidation. That's the main engine behind the deflation and a major element in vicious cycles that are just beginning to gain momentum. Consider the housing market, for example. The more debts are liquidated, the more prices fall ... and the more prices fall, the more people abandon their homes and mortgages, leading to more debt liquidation. This is what's happening all around the country right now — not only in housing, but also in every asset imaginable. These vicious cycles are like hurricanes striking every city and state in the country. Until they exhaust themselves, the deflation will continue.
Like you said at the outset, deflation is falling asset prices across the board. Not just falling home prices, but falling prices on land and commercial properties. Not just stocks and bonds, and commodities, but also collectibles — art, antiques, stamps and, soon, rare coins as well. There may be some exceptions. But overall, unless you have some very convincing evidence to the contrary, you must assume the value of your assets are going down and going down hard.
Jack: So what's a person to do?
Martin: If you don't need something, seriously consider selling it. Real estate. Stocks. Corporate bonds. Even collectibles if you consider them an investment.Jack: Even if it has already gone down a lot?
Martin: Don't look back at what the price was. Just look ahead to what the price will be after a massive deflation. You don't have to sell everything all at once at any price. Every time the government inspires a rally in the stock market, use that as a selling opportunity. Every time the government stimulates some activity in real estate or in the economy, grab that chance as well.
Jack: Suppose market conditions are so severe, there are no buyers. Then what?
Martin: Then, you can afford to wait for a temporary stabilization or recovery. Markets never go straight down. And even in some of the worst markets, there are ways to sell most assets.
Jack: What about antiques and art?
Martin: For the first time in many years, you're seeing a contraction in major auctions sales. For example, annual sales of contemporary art at Sotheby's and Christie's auctions in New York and London are down 17% in 2008. In the two years before that, they doubled in sales. So that's not a huge decline yet. But it's a sign.You won't get peak prices. However, if you act swiftly, you can still sell. If you wait, you'll get caught. Ditto for stamps and rare coins.
Jack: Gold is holding its value the best compared to the much larger percentages you cited earlier for other commodities. But I believe it's only a matter of time before gold succumbs to the deflation as well. What do you think?
Martin: This is hard for a lot of people to accept, but it's also hard to envision a situation in which gold defies gravity for much longer. It's still a good insurance policy against governments that could run amuck. But I suggest you reduce your holdings to a bare minimum. No matter what, the key is to pile up as much cash as you possibly can. Then put that cash into the safest place you possibly can — short-term Treasury securities. You can buy them from the Treasury Department directly, through their Treasury Direct Program. Or for even better liquidity, I recommend a Treasury-only money market fund. Our favorites are Capital Preservation Fund and the Weiss Treasury Only Money Market Fund. There are many more to choose from and they all provide the same safety.
Jack: Last week, there were some Treasury bills auctioned off at zero yield. Doesn't that discourage you?
Martin: Not in the slightest. As long as your cash is in a safe place, the deeper the deflation, the more your money is worth. My last word: Just make sure you keep it safe!
Jack: Martin, I'm going to assume that's my cue to jump in and take us beyond just safety and protection, so we can talk about turning this deflation into a profit opportunity.
Martin: Yes, please do.
Jack: There is just one thing that always goes up with deflation: The U.S. dollar! By DEFINITION, when the price of investments or goods and services goes down, the value of each dollar goes UP. That's the essence of deflation. And here's the key: When the value of the dollar goes up in the United States, it inevitably goes up abroad as well.
Martin: Please explain that connection more specifically.
Jack: Virtually everything that matters in the global economy — trade, commodities, GDP, debts — is measured in U.S. dollars. The dollar is the world's reserve currency. So just as we see domestically, when your dollar buys more, its value also rises internationally.
Martin: There was a lot of talk about other currencies replacing the dollar as a reserve currency. Jack: Talk, yes; action, no. It never happened. And now, it's going the other way: Your dollars now buy more than two gallons of gas for every one gallon they bought just a few months ago. The dollar now buys three times more oil and copper than just a few months ago. Not just 20% more or 50% more, but three times more! We're seeing the same thing happen against currencies. The dollar is in a massive, long-term uptrend against the euro, the British pound and virtually every currency in the world. Yes, we've witnessed a temporary dollar setback in recent days, but it does nothing to change the big trend.
Martin: It certainly does not change the deflation. But please give us specific reasons why the dollar is rising against currencies in particular.
Jack: There are three big reasons. The main one is that, as I said, the dollar is the global measure of virtually everything. So when there's global deflation, the dollar is the prime beneficiary. Look. We've had decade after decade of inflation and global expansion. During most of that period, the worldwide supply of dollars and dollar-based credit expanded dramatically. And those dollars became the key funding source of bubbles in nearly every major asset class — real estate, stocks, commodities, energy and metals. As the supply of dollars expanded, the dollar lost value. Now we have deflation and global contraction. So now everything is turning the other way. Despite the Fed's efforts to lower interest rates, credit — dollar credit — is drying up all over the world. The overall supply of dollars is contracting. So U.S. dollars are suddenly scarce and their value is going up.
Martin: Still many people in the U.S. don't see that. They think: "If the U.S. economy is in so much trouble, isn't that bad for the dollar?"
Jack: No, that's simply not how it works. A country's currency is never valued based on how well or how poorly that particular economy is doing in isolation. It's always measured against another country's currency. So it is always valued based on how a particular economy is doing relative to another economy. It's not the U.S. dollar vs. some other measure. It's the U.S. dollar versus the euro, the British pound, the Aussie dollar, etc. So the relevant question is never, "How well is the U.S. economy doing?" The question is, "How is the U.S. economy doing compared to the European economy, the U.K. or Australia?" In this environment, it's not a beauty contest. It's a contest of which economy is the least ugly ... which leads me to the second reason the dollar is rising: The U.S. is winning the least ugly contest hands down.
Martin: Please elaborate.Jack: Europe's banks have lent more than $2.7 trillion to the high-risk emerging markets, and those emerging markets are being crushed by deflation. Europe's banks have big exposure to Hungary, and Hungary is collapsing. They have big exposure to the Ukraine and to Russia, which are also collapsing.
Europe's economy is in much worse shape than ours. In Germany, export demand has vanished. So it's just now starting to accelerate downward. Worst of all, the Eurozone's governing bodies are a mess. You've got each member nation making its own monetary policy and each going off on a different course with its economic stimulus plans. For example, the European Central Bank wants to retain some semblance of moderation in its monetary policy. But the leaders in countries like Italy, Greece, Spain, Portugal and Ireland are scared. So they're going to whatever it takes to try to prop up demand, no matter what the central banks says.
Martin: It's adding political chaos to financial chaos.
Jack: Precisely. These are the reasons the euro has been falling and, despite a sharp rally, will likely continue to fall — probably down to parity with the dollar, or lower.
Martin: That's a huge drop — over 30% from these levels. What about the U.K.?
Jack: Worse. Their housing bust is more extreme than ours. Their reliance on revenues from a sinking financial center — London — is far worse than ours. Their consumers have more debt than almost any other developed country.
Martin: And the Australian dollar?
Jack: Solid as long as commodities were going up ... but a disaster with commodities going down! In just the last five months, the Australian dollar has lost 31% of its peak value. Other currencies tied to commodities are also getting killed: The New Zealand dollar is down 39% from its peak; the Brazilian real, 35%; the Canadian dollar, 23%.
Martin: And going forward?
Jack: Deflation means more declines in commodities. And the more commodities fall, the more these commodity currencies plunge. It's that simple.
Martin: You said you had three reasons for the dollar's surge.
Jack: The third reason is the flight to the center. Think of the world currency market as a solar system. The dollar is the sun; the other currencies, the planets. As the system expands, investors migrate from the core currency, the U.S. dollar, to the inner planets — currencies like the euro, the Swiss franc or the pound. And as the system expands even more, they migrate to the next tier of currencies, like the Australian dollar or the Canadian dollar ... and then, still further, to the system's periphery — outer planets like the Brazilian real, the Mexican peso or the South African rand. At each step of the way, they take more risk with less stable economies, use more leverage, go for bigger returns — all fueled by abundant dollar credit.
Martin: OK. What happens when the global economy contracts?
Jack: Precisely the reverse. As the global economy begins to come unglued, they rush back to the center, creating a massive flight back to the U.S. dollar. They have no love affair with the dollar. They just see the peripheral economies going down and they dump those currencies. These are the first risky investments they sell, almost invariably switching back to U.S. dollars. The U.S. economy, despite all its troubles, is still the dominant world economy. Militarily, it's the only remaining superpower. Financially, it's still the world's capital. So it's natural that when investors are running from risk, they rush back to the dollar, bidding up its value.Martin: Is this true across the board, regardless of the currency?
Jack: No. There's one notable exception: The Japanese yen. Japan is the world's second largest economy and also one of the world's largest sources of capital. So when the other currencies go down, a lot of that money goes back to Japan, boosting the yen. But the main point is this: The single most consistent consequence of global deflation is a rising dollar.
Martin: So in the midst of all these bear markets, if you're looking for a big bull market
...Jack: You've found it! It's the U.S. dollar. I think the U.S. dollar is in the early stages of a powerful bull market that could last for years. It's the single cleanest way to make windfall profits from the deflation.
Martin: A year or two ago, you were betting against the dollar, and you were right. Now you're betting on a rising dollar. That's a big change.
Jack: You're darn right it is! It goes hand-in-hand with the big sea change you've so clearly illustrated today.
Martin: Can you explain to our readers how to go about betting on a rising dollar?
Jack: There are several ways. You can place your bets in favor of the dollar, using instruments that are tied to the dollar index. So as the dollar index rises against other currencies, you profit directly. Or you can bet against foreign currencies. Remember, the flip side of a rising dollar is falling currencies. The more those currencies fall against the dollar, the more you make. I prefer betting against the currencies because that lets me choose the weakest of them all.
Martin: What instruments do you use?
Jack: I use a revolutionary investment vehicle called currency ETFs. They're simply exchange-traded funds, just like any other ETFs. The same ease of trading and flexibility, the same low commissions, the same availability through any stock broker. If you buy stocks or any other ETF, you can buy currency ETFs.
Martin: Before we get into this any further, can you give us full disclosure on the risks?
Jack: All investments have risk. If the currency goes the wrong way, you lose money. But the advantage of the currency market is that it's divorced from the stock market. The stock market could be crashing, and it would not interfere with your ability to make large steady profits in the currency market. The U.S. economy could be sinking into a depression, and it would still not interfere with your ability to make nice large steady profits in the currency market. No matter what happens in the global economy or the world's financial markets, there is always at least some major currency that's going up in value.
Martin: Please explain that.
Jack: Currencies are measured against each other. When one is going up, the other is going down, like a seesaw. Therefore, there's always at least one currency going up. There's always a bull market in currencies and, therefore, always a bull market in currency ETFs. I don't recommend currency ETFs for all of your money. But at a time when nearly all other investments are going down, it's a great place to get away from the disasters and find a whole separate world of investment opportunity.
Martin: A world that's far removed from those disasters.
Jack: Exactly. I also think that it's the ideal vehicle for average investors to profit from deflation and a rising dollar.
Martin: Specifically, which ETF do you use to profit from a rising dollar?
Jack: There's an ETF that's tied directly to a rising dollar index. The more the dollar rises, the more money you can make. And there's virtually no limit to how far it can go.
Martin: Before we end today, please name it for us. But of course, it's a two-way street. If the dollar falls, then this ETF would fall in value as well.
Jack: Of course. But there are also ETFs tied to specific falling currencies. When the dollar is rising, it means other currencies are falling. And with these ETFs, the more those currencies fall, the more money you can make. Plus, you can do it with two-for-one leverage.Take the euro, for example. If the euro falls 10%, you stand to make 20%. If the euro falls 20%, you can make 40%. And if you want to be more aggressive and buy them with 50% margin, you can double that leverage. In other words, every 10% decline in the currency gives you a 40% profit opportunity.
Martin: Do you recommend margin?
Jack: I don't think you need it. The currency market offers plenty of profit opportunity without margin.
Martin: Can you give us some specific examples without using margin?
Jack: Sure. Let's say you bet against the British pound last August. In just three months' time, you could have grabbed the equivalent of a 52% annual return on your money. The return on the euro would have been even better. If you could have bought the ETF that's designed to profit from a falling euro, you could have grabbed the equivalent of an 81% total annual return. On the Aussie, you could have made a 68% annual return.
Martin: With the way the stock market is performing and the way yields have fallen, I think most people would be happy with a lot less than that. Jack, if you can help folks make, say, 30% or even 20% per year, and you do so regularly, that would be a great service you provide.
Jack: Plus, we're not talking about speculating on some little-known stock or exoteric bond. When you buy currency ETFs, you're investing in the currency itself — CASH MONEY. You never own a single share of stock or any kind of bond.You're also not affected by financial failures. Since you never buy stocks or bonds in a bank or corporation that could default, currency ETFs help insulate you from the debt crisis. In fact, the debt crisis overseas, which is far more frightening than the debt crisis here, is driving investors into the U.S. dollar, which can actually help investors make more money in their dollar ETFs.
Martin: Since the ETFs are not investing in stocks or bonds, please explain what they are investing in.
Jack: In most cases, interest-bearing money markets. So in those ETFs, on top of the appreciation in the currency we're aiming for, you also earn interest. And with many currency ETFs, the interest yield is higher than what you can make in any U.S. money market.
Martin: Let's say you're wrong about the dollar and the dollar turns down. Then what?
Jack: In 2007, when the dollar was falling, we did very nicely. I have a service dedicated exclusively to currency ETFs, called World Currency Alert. And in it, I can recommend currency ETFs that are available now on every major currency. There's an ETF for the euro, the Japanese yen, the British pound, the Swiss franc, the Australian dollar, the Canadian dollar and more.
Sometimes we'll focus on just a couple of special opportunities; sometimes, when we have a broad movement in the currencies, we'll recommend you diversify among many different ones.
Martin: Does that require a larger investment?
Jack: No. Remember, these are just ETFs, just shares traded on the exchange. So you could buy just one share of each if you wanted to. In other words, there's virtually no investment minimum. With just $1,000, you could buy a whole range of different ETFs across several different currencies.
Martin: What kind of fees are we talking about to buy and sell the currency ETFs?
Jack: You pay a broker commission. But if you use a discount or online broker, your commission costs can be slashed to the bone.
Martin: How does this compare to trading standard ETFs, like those that focus on particular stock sectors?
Jack: I think it's a lot easier and better.
Martin: Why is that?
Jack: Instead of thousands of stocks and stock sectors, you only have to track six major currencies — the euro, British pound, Swiss franc, Japanese yen, Australian dollar and Canadian dollar. Instead of choppy and crazy stock market surges and plunges, currencies tend to give you much bigger, sweeping trends.
Martin: Because ...
Jack: Because once you get these massive macro global trends — like the deflation we talked about — turning them around is like turning a big tanker at sea. They can last for many years. It's like sailing with the Gulf Stream. You just follow the currency current as far as it will take you.
Martin: How would you characterize this current you're riding right now — the deflation pushing the dollar higher?
Jack: I've seen big currency trends before, but nothing quite like this one, nothing as powerful and large. Your numbers bring that home very convincingly, I think.
Martin: Tell us why you think investors should buy your service, and don't be bashful. I think it's safe to say that our readers want to know how to make real money from this deflation, and if you have a unique way to do this, its information they're going to want to pay close attention to. Jack: Actually, you don't need World Currency Alert to invest in currency ETFs. It's very easy to do, and like I said, they're readily available to anyone with a regular stock brokerage account. You buy and sell them just like a stock or any other ETF. You don't need any new accounts. They're extremely liquid. You just aim to buy them low and sell them high, like any other investment.Martin: What would you buy when?
Jack: Whenever you see a setback in the dollar, I would buy the PowerShares Dollar Bull ETF.
Martin: OK. So why should someone buy your service?
Jack: You don't need my service to buy them. You need World Currency Alert to make money in them, to take your profits, and to do it with some degree of consistency.
If your goal is to take no risk whatsoever and keep all your money 100% safe, then buying currency ETFs would be a mistake, because there IS always risk of loss. But if you're concerned about this deflation — or a future return of inflation — then NOT taking this opportunity is the mistake you'd be making, in my view. There's nothing, absolutely nothing standing in your way.
Martin: Except the cost of the service.Jack: No, I don't see that as an obstacle. The cost of World Currency Alert is just $295 per year. If you invested just a couple thousand in one of the trades I just mentioned, you could cover an entire year's cost very easily.
Martin: In terms of timing, when would be a good time for investors to start with your service?Jack: There's no particular time that's better than any other. Right now, we've had a setback in the dollar. So I'm looking to jump in with a new batch of recos, perhaps around the first week of the new year. So you could wait until then. The key timing issue is the price change we're going to put into place: Starting January 1, we're raising the price to $395. So don't wait until then. Because as long as you join before December 31, you save $100. Plus, there are even bigger savings if you join for two years. In fact, I think the two-year membership makes the most sense.
Martin: Because
...Jack: Because, like I said, it offers the biggest savings. And no matter what, if you're not happy, if it doesn't work for you or you just decide to change your mind, no problem — 100% money-back guarantee in the first 90 days; pro-rated refund at any time thereafter.
Martin: That's very fair. Please provide a web link for more info and to order your service.
Jack: It's http://images.moneyandmarkets.com/1195/88357.html
Or you can call 800-393-0189.
Martin: One way to look at this is like a home business to generate extra revenues.
Jack: I agree. All it takes is a couple of minutes each day, and for each minute of your time, you could be looking at a thousand or two in revenue per hour. Just remember, the price goes up January 1, 2009.
Martin: Thank you, Jack. And thank YOU, our readers, for joining us today. Let's talk again soon.Good luck and God bless!Martin
About Money and MarketsFor more information and archived issues, visit http://www.moneyandmarkets.com/Money and Markets (MaM) is published by Weiss Research, Inc. and written by Martin D. Weiss along with Tony Sagami, Nilus Mattive, Sean Brodrick, Larry Edelson, Michael Larson and Jack Crooks. To avoid conflicts of interest, Weiss Research and its staff do not hold positions in companies recommended in MaM, nor do we accept any compensation for such recommendations. The comments, graphs, forecasts, and indices published in MaM are based upon data whose accuracy is deemed reliable but not guaranteed. Performance returns cited are derived from our best estimates but must be considered hypothetical in as much as we do not track the actual prices investors pay or receive. Regular contributors and staff include Kristen Adams, Andrea Baumwald, John Burke, Amber Dakar, Michelle Johncke, Dinesh Kalera, Red Morgan, Maryellen Murphy, Jennifer Newman-Amos, Adam Shafer, Julie Trudeau and Leslie Underwood.Attention editors and publishers! Money and Markets issues can be republished. Republished issues MUST include attribution of the author(s) and the following short paragraph:This investment news is brought to you by Money and Markets. Money and Markets is a free daily investment newsletter from Martin D. Weiss and Weiss Research analysts offering the latest investing news and financial insights for the stock market, including tips and advice on investing in gold, energy and oil. Dr. Weiss is a leader in the fields of investing, interest rates, financial safety and economic forecasting. To view archives or subscribe, visit http://www.moneyandmarkets.com/.From time to time, Money and Markets may have information from select third-party advertisers known as "external sponsorships." We cannot guarantee the accuracy of these ads. In addition, these ads do not necessarily express the viewpoints of Money and Markets or its editors. For more information, see our terms and conditions.View our Privacy Policy.Would you like to unsubscribe from our mailing list?To make sure you don't miss our urgent updates, add Weiss Research to your address book. Just follow these simple steps.© 2008 by Weiss Research, Inc. All rights reserved.15430 Endeavour Drive, Jupiter, FL 33478
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