Currency wars

The third and final way I see policymakers shaking the economy this year has been the headlong push toward an outright global currency war as the world's major central banks all look to lower the value of their currencies as a way to boost exports, increase competitiveness and juice economic growth.

Much of the reason stocks have been on a tear lately has been because the Bank of Japan, spurred by a new government, has joined the Federal Reserve and the European Central Bank in committing to unlimited money printing in a last-ditch attempt to boost growth.

Because of this, the yen has collapsed back to early 2010 levels -- a development that worries European politicians. On Tuesday, French President François Hollande warned that Europe was leaving the euro vulnerable to volatility and asserted that the eurozone needed to work toward a lower-valued currency.

Other countries, such as Brazil, have been openly critical of what they see as a race to the bottom in exchange rates. Singapore's Monetary Authority recently warned of the need to avoid competitive devaluations and the protectionist measures that would surely follow as countries try to keep their products competitive in the global market. There is reason to be worried, with Singapore's non-oil exports down nearly 20% from last year because of currency issues.

This has similarities to the breakdown of trade relations during the Great Depression. Back then, the issue was tariffs on imports. Today, it's currency devaluation. But the intention (boosting exports) and the fallout (breakdown in trade relations) feels very similar.

What the pols are doing to you

While investors are feeling good right now, with active fund managers more aggressively positioned now than at the 2007 market top and small, speculative Russell 2000 Index ($RUT) futures traders moving to a near-record long position, cautious investors should keep an eye on these three areas in the weeks and months to come. If things go badly, they will disrupt the rally.

Politics is, by nature, unpredictable. And with recession-fatigued voters and high-strung tensions, fireworks are likely to disrupt the calm that has settled on Wall Street and enabled stocks to drift higher.  

In anticipation, and with cyclical, economically-sensitive stocks and sectors already rolling over, I've recommended shorts against weakening stocks such as AK Steel (AKS) and Alpha Natural Resources (ANR) as well as long positions in inverse exchange-traded funds such as ProShares UltraShort FTSE China 25 (FXP).

And if you're absolutely committed to maintaining long exposure, consider defensive, noncyclical issues just starting to perk up, including AT&T (T) and Integrys Energy (TEG).

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At the time of publication, Anthony Mirhaydari did not own or control shares of any company mentioned in this column in his personal portfolio. He has recommended Alpha Natural Resources and AK Steel short and ProShares UltraShort FTSE China 25 long to his money-management clients. At the time of publication, his Edge Letter Sample Portfolio had short positions in Alpha Resources and AK Steel.

Be sure to check out Anthony's new money management service, Mirhaydari Capital Management, and his investment newsletter, the Edge. A free, two-week trial subscription to the newsletter has been extended to MSN Money readers. Click here to sign up. Mirhaydari can be contacted at anthony@edgeletter.com and followed on Twitter at @EdgeLetter. You can view his current stock picks here. Feel free to comment below.