In Search of Healthy Currencies

Ambrose Evans-Pritchard has a post about the US dollar's hegemonic status that knocks it out of the park. The long and short of it is that the dollar will not lose its reserve status during this century, China faces some demographic issues in another decade or so, and at some point water quality will become a big problem too. He expects growth and other good things that people are so excited about to continue somewhat unabated over the next decade, with China moving closer to the US, but obstacles he cites will then come into play down the road.

This is not to say he is bullish on the dollar, but he is not in the death blow camp because of the problems the other big currencies have. Japan has bigger problems, a lot of debt and a bigger demographic problem, and the euro has problems galore as well.

As opposed to trying to sort out whether he is correct or not, it might make more sense to sort out what to do assuming he is correct. If his thesis is correct, it will play out very slowly, giving time for recognition and implementation.

I am likely to have Chinese equity exposure more often than not for a long time to come. Plenty has occurred there already but there is still plenty more. The country is going to move up the chain and life on the ground there is going to improve substantially. There will of course be cyclicality, the occasional policy mistake and other growing pains but China is one spot where it is happening. That said, I doubt my exposure will ever exceed 6-7% of the portfolio.

If we do get to a point where the world is trying to sort out the USD, JPY, EUR, CNY or some basket dominated by those four, I think I would rather sidestep that (mostly) and favor currencies, and by extension equities from those countries, that can grow and thrive irrespective of the world reserve issue.

This line of thinking leads me to quite a few familiar (to long time readers) countries but it makes sense to expect the list to evolve over time. In no particular order: Canada, Australia, Norway, Chile, Israel, New Zealand (at some point), Brazil, Vietnam and Singapore (if there were ever to be a pan Asian currency it would be based on SGD and it is not clear to me if that would be a good thing or not).

In the future there would probably be some additions from Africa (Egypt has an interesting story but is difficult to access), Kazakhstan (resources galore and corruption galore), some of the Arabic countries pegged to the USD will probably have to break the peg at some point due to inflation threats, and maybe some place like Peru should be part of the conversation. Feel free to add others as you think of them.

The idea is to gravitate to smaller, hopefully simpler countries that are either in their own world, can sell things that the big dogs have to buy or some combo of the two.

As has been a common refrain around here, this would require more work, not less, but if the hegemony debate really devolves into who is the least unhealthy - wouldn't you want to seek out the healthier countries?

Comments

[User 353732:]

It is, in my view, an error to confuse Govt issued currencies with no convertibility into real wealth with money.
A Govt. currency is a symbol of a deeper economic reality: the capacity and means to procure both the essentials and luxuries of material life. Only real things whether they be useful things from the earth(energy, minerals, water) or on the earth(food, fiber, water, timber, stone etc) or technology(embedded knowledge that combines matter, energy,bandwidth and logic to produce desirable things) can provide these essentials and luxuries. These real things are true money.
Confusing the symbol with the thing itself is what enables Govts to print currency and issue scrip and delude ordinary people into believing that substantive wealth, or genuine assets, or true purchasing power is being generated by the magic of Govt fiat. As long as the majority of Americans refuse to distinguish between the dollar( or Euro or Yen) and real money they will continue to be enslaved by financial spells and economic incantations.

What the world is starting to look for, with growing urgency, is not yet another Govt currency but a new money. Very likely several currencies will have to collapse before the new money or monies gain circulation and general acceptance in trade and exchange. Since most Govts are both bad and intellectually bankrupt, private vision and ingenuity will design and propagate this new money or monies. They will, of necessity, be based on a combination of real things.
The possible sequence is the fall of major Govt currencies, the privatization of money and monies and then the emergence of these monies or meta-money as legal public tender and finally the dominance of this new meta-money as global media of exchange and store of value.Money and currency will again converge.

Change in finance, economics, technology, society and culture often starts in the ignored and disparaged margins. The incumbents and insiders neither see the change (or if they do, dismiss it with sneering contempt) nor when it is upon them, understand its potency. So it will be with the replacement of the current major Govt currencies.

Oct 26 12:23 PM

[Uncle Pie:]

Don't forget CHF the Swiss franc. A US$ used to buy four Swiss francs, today it will just buy one with a couple of pennies left over. Conveniently, you can easily invest in world class companies which pay their dividends in Swiss francs; I've invested in Novartis NVS, Swisscom SCMWY, Roche Holdings RHHBY, and Zurich Financial ZFSVY. These complement my dividend payers in Australian $: BHP, ANZBY, NABZY, WOPEY and TLSYY. They complement my holdings which pay dividends in Canadian $, Euros, Norwegian krone, etc., too numerous to list here but mentioned in some of my other posts.

Oct 26 12:23 PM

[Jim Nash:]

I'm still trying to figure out why Bernanke got reappointed after
being wrong on just about every level since he was appointed to
his current position by Bush. What's up with Obama ?

Oct 26 01:24 PM

[Roger Nusbaum:]

the downside of Swissi appears to be the SNB's desire to have it lower and that it is no where near big enough to help its banks out if it needed to.


On Oct 26 12:23 PM Uncle Pie wrote:

> Don't forget CHF the Swiss franc. A US$ used to buy four Swiss francs,
> today it will just buy one with a couple of pennies left over. Conveniently,
> you can easily invest in world class companies which pay their dividends
> in Swiss francs; I've invested in Novartis NVS, Swisscom SCMWY,
> Roche Holdings RHHBY, and Zurich Financial ZFSVY. These complement
> my dividend payers in Australian $: BHP, ANZBY, NABZY, WOPEY and
> TLSYY. They complement my holdings which pay dividends in Canadian
> $, Euros, Norwegian krone, etc., too numerous to list here but mentioned
> in some of my other posts.

Oct 26 01:33 PM

[Analyste de...:]

There is no alternative to the Dollar NOW. Everyone knows this (or should) and until something is in the works that's the Devil-We- Know.

Don't presuppose there will BE no alternatives going forward, that's absurd. But it won't be any fun getting there, either...

Just as some pretend "no one" anticipated the catastrophic collapse, there's a peculiar anglocentric delusion the US Dollar is somehow immune to the Ultimate Crisis. Study history, folks!

The circumstances of dead fiats can be enlightening: the reasons are varied.
www.dollardaze.org/blo...

I'll offer a prognostication here: if we have another deflationary crash within 2-3 years, that probably won't kill the Dollar. But the NEXT one probably will.

Until then we trade, trade, trade ... and cycle profits into the barbarous relic!

Oct 26 01:42 PM

[Bob Mayo:]

User 353732, I found your post very insightful. What would a "real asset" currency look like? Would it be a basket of commodities? There are so many real things in the world. I can't imagine a currency tied to a basket that includes 500 bushels of wheat, 1 Toyota Corrolla, 8 iPods, 1 copy of each of the best selling 100 books, 4 movie tickets, and 63 hamburgers, for example.

Oct 26 05:12 PM

[Clive Corcoran:]

Much as I am a fan of Ambrose Evans Pritchard, I think it is rash to say that the US currency will be the global reserve currency for the remainder of this century.
The process of superseding the status quo may not be an entirely orderly one - but financial crises seldom are - and there is surely a growing need for a global unit of account that is not subject to the whim's of central bankers and how much of their currency they want to print

Oct 27 08:37 AM

[Roger Nusbaum:]

good point and I think consistent with my interest in sidestepping some of this workout.


On Oct 27 08:37 AM Clive Corcoran wrote:

> Much as I am a fan of Ambrose Evans Pritchard, I think it is rash
> to say that the US currency will be the global reserve currency for
> the remainder of this century.
> The process of superseding the status quo may not be an entirely
> orderly one - but financial crises seldom are - and there is surely
> a growing need for a global unit of account that is not subject to
> the whim's of central bankers and how much of their currency they
> want to print

Oct 27 10:20 AM

[Michael Eis...:]

Roger - Good one. I think another point everyone needs to think about is day to day exposure. My case is easy. I live in Israel. Hence I moved almost all of my dollars to shekels about 12 months both to avoid the weak currency and to put most of my eggs in the basket that I have most of my expenses. People living in the US though do not realize that given that many goods are imported, they effectively have currency exposure in their day to day lives as the dollar drops and imported goods become more expensive. It is worth thinking in terms of global currency hedging in terms of COL as well.

Finally, I think Israel has a lot of this correct and the Shekel feels like a good place to be vis a vis the euro and the dollar.

Oct 28 05:44 AM

[Roger Nusbaum:]

here's hoping for easy shekel access for US based investors...


On Oct 28 05:44 AM Michael Eisenberg wrote:

> Roger - Good one. I think another point everyone needs to think about
> is day to day exposure. My case is easy. I live in Israel. Hence
> I moved almost all of my dollars to shekels about 12 months both
> to avoid the weak currency and to put most of my eggs in the basket
> that I have most of my expenses. People living in the US though do
> not realize that given that many goods are imported, they effectively
> have currency exposure in their day to day lives as the dollar drops
> and imported goods become more expensive. It is worth thinking in
> terms of global currency hedging in terms of COL as well.
>
> Finally, I think Israel has a lot of this correct and the Shekel
> feels like a good place to be vis a vis the euro and the dollar.

Oct 28 12:17 PM

[mbkelly75:]

A lot of food for thought both in the article and in the comments. My thanks to all of you. I find myself agreeing with the idea that the Dollar will stay the reserve currency for quite a while - the end of the century might be pushing it. Historically fiat currencies usually have trouble making it past 75 years, but we will see.

Oct 29 03:37 PM