Watching the world currency in these current market conditions is like watching a race to find out who the slowest person is going to be. Countries around the world are all dealing with the same problems and listening to some of the commentary and market news the best investment opportunity is to find the country that can holdout the longest before being overwhelmed by its debt.
Where to hold your assets?
Unfortunately, I don’t like any of the major currencies at the moment and believe that it is going to be some of the secondary currencies like the Canadian dollar, Australian dollar. Let’s just take a look at the U.S. dollar, which was once considered the reserve currency of the world is now wobbling on its pedestal and if the spending habits of the government don’t change it could fall fairly quickly.
Anywhere but in the U.S.?
The reality is that more and more international investors are losing faith in the U.S. dollar. Looking at a long-term chart we can see that the U.S. dollar index has been in a sharp decline since early 2002. Although the financial crisis provided some short-term momentum in 2008 and 2009, it has continued it is downward trend since June 2010.
On April 27 the U.S. dollar index hit its lowest point since 2008 and is hanging around 73.34. The index has dropped about 17% within the last year. In June of 2010 it rallied to a high of 88.70.
(Click to enlarge)
From a technical perspective, the long-term chart does not support higher prices. There appears to be a strong double top forming around the 90.00 area, which is providing some resistance. A break below around 70.00 would mean a continuation of its long-term downward trend.
Unfortunately the fundamental outlook does not look any rosier. The government is trying to spend their way out of this recession (oh wait apparently that ended in 2010 but don’t tell anyone who is still looking for employment) and all they are doing is adding to the bill that they will eventually have to pay off later. On April 27 Fed Chairman Ben Bernanke said that the second round of quantitative easing will end as planned in June but that only address one problem. Currently the national debt is well over $14 trillion and climbing and unfortunately nobody has any new ideas on how to resolve this. We even did discuss the idea of shorting the U.S. government.
We can already start to see the cracks forming in the once solid foundation. A few weeks ago Standard and Poor’s released a confusing outlook on the country’s sovereign debt. Although the country is holding on to its AAA rating but the global rating agency lowered its outlook to "negative" from "stable."
The reality is that the economy remains under pressure and this will continue to impact the U.S. dollar. The unemployment picture is starting to improve but the unemployment rate is still high and consumers are still extremely timid. The reality is, if U.S. consumers are not spending their hard earned money, the global economy and the U.S. economy will not improve.
It could be worse
As I said at the beginning of this article, the U.S. isn’t even in the worst shape. The European Union is dealing with some major debt problems in several countries, which include: Ireland, Spain, Portugal and Greece; however this is all old news so nobody is paying much attention to them now.
Japan is also in pretty bad shape. In March Standard and Poor's lowered the sovereign debt rating to AA- (minus) and just released a report, which downgraded the country’s debt outlook to "negative" from "stable." The country continues to pile on the debt as they try to rebuild their country.
The only positive news about the U.S. is that it is too big to fail. According to the U.S. Treasury Department in February China held about $1 trillion in U.S. debt. Japan is in second place and holds about $890 billion and the United Kingdom owes about $290 billion in government bonds. If the U.S. dollar falls too low these investments will be basically worthless.
But as I said in the beginning of this article none of the major currencies look great. The U.S. dollar might start to rebound but to use my favorite expression; trying to time the bottom is like trying to catch a falling knife. With a little bit of patience you can find better investment opportunities.
So what can we do?
Personally, what I take from all of this is the importance to be diversified. It’s difficult to predict how assets and economies will do in the near future. Greece, Ireland and other European countries could take European assets on quite a ride and it’s always possible that your own country could be next. With all of these sovereign credit issues, I think it’s critical to have a strong diversified portfolio. For a passive income portfolio, that means adding international names. They can still be listed on U.S. markets but would be international companies that have a correlation with international currencies. In the case of a passive ETF portfolio, this is just a reminder of how important it is to include international ETF’s. In terms of rewards vs risks, adding international exposure is a no-brainer …