The Global Currency Picture: What To Buy, What To Avoid

Are you currently worried about carry trades? Here is what to do.

The Economic Time™ is changing globally

In our more recent Economic Time Update, "Bonds: What do you do?" we suggested that America is heading into cost-push inflation: productivity is waning while wages are rising, driving up unit labor costs. The result is that corporate profits in America get squeezed: either companies pass these higher costs on - thus goading the Fed to increase rates way above our June 2004 forecast of six percent, or companies do not pass these higher unit labor costs on, thereby hurting their own margins.

Another form of inflation is that of asset markets. The current excess supply of money is fanning that fire. As is another force: countries like Russia and China are opening up, so out pours all of that money.

Such inflationary fears also have been gripping Europe, Australia and New Zealand for some time, as you know.

How to Make Money Off This Idea

1. Keep buying high-yielding currencies like the New Zealand and Australian dollar, and the British pound, and the Euro. You might also want to look at the Norwegian kronor and the Canadian dollar. Importantly: most of these currencies are tied to commodities, suggesting that they will remain strong as long as places like China and India need such resources.
2. You might want to consider financing such purchases by buying the yen, which costs nothing - and won't for many years. I would avoid such a "carry" trade using the Swiss Franc: it is too volatile.

How to Save/Make Money Off This Idea

1. Avoid buying US stocks. Yes, they are going up - it's just that other stock markets like ours in Asia are doing SO much better, so don't go into the opportunity cost of buying into a market whose corporate profits must fall.
2. Avoid long-dated bonds for now: the more that the market accepts the reality of higher rates, of a worsening US Economic Time, the more that bonds will be sold off.