Overseas investments and the Dollar

The theme for the past few years has been to diversify into overseas markets. This theme has been taken too far. Money has flowed into these markets at stunning rates (especially china) and if the dollar should surprise everyone by mounting a strong rally, the biggest markets to get hit will be the developing markets. The theme being pumped now in these markets is that this is where the growth is (long term yes, but in the intermediate time frames these markets are more than ready to mount a strong correction). This mantra is especially true of China, where several sectors are simultaneously experiencing bubble like formations.

China is already facing a real estate bubble in many parts of the country. There are many so called super malls where in some cases more than 50% of the shops are boarded up because of lack of traffic. Too many stores and not enough consumers; the next to get hit will be the residential real estate sector.

Another bubble in the making could be the railway bubble. It has spent billions of dollars on laying high speed tracks throughout the country and will continue to do so at a break neck pace. However, commuters are not embracing these new trains for the cost is incredibly high, thus the investment is not going to pay for itself for a long time to come.

The masses are being driven to Gold and real estate with the belief that prices can and will only go up.  We could go on and on but that’s not the point. The point of this story is to pay close attention to the dollar.  Pay attention to these two levels for they could provide very early clues as to how high the dollar is going to rally.

A weekly close above 78.50 could be the very first strong signal of a stronger than expected rally. Even the worst investments, never trade in one direction forever; there are always counter rallies. The strength of the rally is determined by two factors

1)         How fast and far it pulled back. In the dollars case the correction was very hard and extreme

2)        How despised this investment is. In the dollar’s case it is almost despised universally.

We now live in a time of extremes; one extreme move leads to another and each move seems to build up in intensity. We are only harping about this topic so much because of the far reaching implications a strong dollar rally could have in the months to come.

The only real competitor right now to the dollar is the Euro and the Euro could be in trouble.  Moody’s recently made the following comments on two key members.

The Portuguese and Greek economies may face a “slow death” as they dedicate a higher proportion of wealth to paying off debt and investors demand a premium to hold their bonds, Moody’s Investors Service said. While the two countries can still avoid such a scenario, their window of opportunity ”will not be open indefinitely,” Moody’s said in a report today from London. Portugal, with a negative outlook on its Aa2 rating, has more time “to reverse this trend” while Greece “has significantly less time.” Moody’s cut Greece’s rating to A2 from A1 on Dec. 22. Full Story

In our opinion they should be adding Spain, Italy and Ireland to the equation and we are sure several more members are going to be running into trouble soon.

Saving the euro from a Greek tragedy

EU finance ministers are pressing their indebted and riot-prone Balkan member to embrace a massive austerity plan and plug its debilitating deficit. But with markets skeptical and the appetite for more bailouts at a low, there are deepening concerns that a Greek meltdown could deal a severe blow to the very European idea of a common currency, and set off a domino effect through Italy, Spain, and Portugal. The EU’s economy commissioner Joaquin Almunia warned of a domino effect, saying Greece’s debt crisis is already hurting other indebted countries that use the euro as nervous bond markets hike borrowing costs on fears that Greece could default or demand an unprecedented bailout from reluctant EU states.

“The fate of one is the fate of all,” he said. “This situation in Greece is having effects in other countries.” Eurozone nations are trying desperately to patch up the cracks, promising Monday to do more to run their economies in a uniform way and accepting possible warnings when they go astray — a major shift for sovereign nations that are not keen to see more EU oversight.

But Greece is the real litmus test.

If Greece can’t deliver the cuts it is promising and risks not being able to repay its debt, it will likely seek a bailout from EU members to rescue it from a crisis of its own making, where failure to curb a bloated public sector and endemic corruption have dragged down economic growth. Finland’s Finance Minister Jyrki Katainen bluntly said that would be asking too much. The Greeks couldn’t expect “any outside help” and “it’s purely up to them how well they will treat this crisis,” he told reporters. Full story

Conclusion

The current rally in the dollar and the fact that it could potentially trade much higher, in no way negates the fact that the dollar is in a long term downtrend. In the future it might not be a simple game of “as the dollar falls all competing currencies must rise“; going forward competing nations are going to have to provide a reason for investors to jump into their currencies. Resource based nations such as Australia and Canada will be in a position to do this but the Euro might find itself in a much harder place going forward. In Asian continent the Yuan also makes for a good long term investment.

In the end, the ultimate currency is still Gold.  Sadly most do not even view it as an alternate currency; to most it’s just another metal, albeit a pricier one and therein lies the opportunity. For the longer the masses ignore it the higher it will trade, for a day will come when they will stampede into the precious metal sector.

I did not wish to take a cabin passage, but rather to go before the mast and on the deck of the world, for there I could best see the moonlight amid the mountains. I do not wish to go below now.

Henry David Thoreau, 1817-1862, American Essayist, Poet, Naturalist