The Philosophy of Currency Manipulation
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- Published on Tuesday, 25 September 2012 12:31
- Written by Sara Nunnally, Editor, Inside Investing Daily
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I want to start with a long quote from Germany's Central Bank President Jens Weidmann in response to the ECB's plan for unlimited bond buying.
The ECB should be aware that its independence also requires it to respect, but not overstep, its own mandate. What is politically desirable and what is economically prudent have not always coincided. Whether we're talking about interest rates or some sort of non-standard (monetary policy) measures, in the end, it always results in the central bank becoming instrumentally involved in fiscal policy objectives. In so doing, government policymakers tend to overestimate the central bank's capabilities by assuming that it can be used, not only for price stability reasons, but also for promoting economic growth, reducing the unemployment rate and stabilizing the banking system... If a central bank can potentially create an unlimited supply of money from nothing, how can it ensure that money is sufficiently scarce to retain its value?
If only our own Fed believed the same thing.
The Federal Reserve has strayed from its mandate of monetary stability and is now working to help stimulate the economy. That's not what it was created to do.
From the Federal Reserve Act, Dec. 23, 1913:
To provide for the establishment of Federal Reserve banks, to furnish an elastic currency, to afford means of rediscounting commercial paper, to establish a more effective supervision of banking in the United States, and for other purposes.
I guess all the market meddling falls into the "other purposes" category. But I digress. What Weidmann is saying is that the ECB's open-ended bond-buying program oversteps the ECB's mandate. Others disagree.
What the program is designed to do is shake out all the bond speculators who push interest rates into dangerously high territory. They're a backstop to the bond market and keep interest rates at more manageable levels.
Whether that's market manipulation or not depends on which side you're on. Some investors think the rampant speculation was more manipulative -- and they've got a point.
Here's the game as Chris Gaffney, vice president of EverBank World Markets, sees it:
In the past, bond traders would stay away from the market or even sell the bonds short in order to cause panic and drive rates even higher. Then they would purchase the bonds back at cheaper prices, using cheaper euros as the panic would force the common currency to lose value. But with the ECB providing a backstop to the debt markets, these bond investors are less likely to try to game the system.
It makes for a good monetary philosophy argument -- especially if one of you is for laissez-faire markets.
But in the investment world, what do all of these arguments mean? How will they affect currencies or international portfolios?
We've seen the impact of the Fed's stimulus programs propping up the equities markets, but once the programs are over, the markets fall. And all of this stimulus is going to have a long-term negative impact on our economy in the form of massive inflation or even a shaken faith in the U.S. dollar or our government bonds.
Now, I don't talk about this often enough, but there is a basket of currencies that you can easily invest in that has been performing exceptionally well against the dollar over the past three years.
It contains six currencies from "ultra-rich" countries, but not the countries you might expect. We found the top six countries that are resource-rich, freedom-rich, innovation-rich and cash-rich.
They are:
- Australia
- Canada
- Norway
- Hong Kong
- Singapore
- New Zealand.
Take a look at this chart from the beginning of 2009.
I expect more great things from these six currencies over the next six-12 months. The U.S. dollar and the euro -- heck, even the yen -- are being actively devalued. That means dollar-based investments aren't going to be worth as much down the road.
Investing in a currency basket like this can be a great hedge against the manipulation of the dollar and the euro.
And judging by this chart, it's not a bad way to make a tidy profit, either.
This basket of currencies is called the Ultra Resource Basket CD available through EverBank, and you can invest in three- or six-month terms, which is the perfect amount of time to take advantage of the Federal Reserve and ECB stimulus moves.
You can find all of the information on this CD here.
Happy Investing,
Sara
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