2/8/2013 9:15 PM ET|
Let's play global currency wars
Japan is leading the way as nations look to boost exports by devaluing their currencies. Here's how investors can profit from this battle.
The decision of the new government of Prime Minister Shinzo Abe in Japan to weaken the yen against the world's other currencies has set off a new round of warnings about a global currency war.
The warning echoes cries from Brazil in 2011 as a steady appreciation of the real against the currencies of trading partners such as China devastated Brazil's manufacturers. This time, remarks like these from the perpetually understated German Chancellor Angela Merkel have raised a red flag: "I do not want to say that I can look at Japan at the moment without any concern," she said at the World Economic Forum in Davos, Switzerland, last month.
But what is most interesting to me as an investor is that although some countries have decided to fight these wars tooth and nail, others have decided to sit them out. I think that creates a clear divide between countries like Japan that have decided to play for the short term and those such as Singapore that see a clear long-term advantage to not fighting in the short-term war.
And I think your portfolio should reflect that division of the world into short-term currency war combatants and long-term noncombatants. I'll have picks for you from both categories later in this column.
Why Japan wants a fight
You can certainly understand why Japan's government wants to fight the short-term currency battle.
In the last part of 2008, the yen traded at 109.89 to the U.S. dollar, making Japanese exports relatively cheap for overseas consumers. That increased the competitive edge of Japanese exporters such as Toyota Motor (TM) and Canon (CAJ) and increased the profits of any company that sold outside of Japan and then translated those sales from dollars or euros into a cheaper yen. The exchange rate was especially valuable to companies such as Mazda Motor (MZDAY) -- which trades as 7261.JP in Tokyo -- and Fuji Heavy Industries (FUJHY) -- which trades as 7270.JP -- that did most of their manufacturing in Japan and that therefore got the biggest benefit from a cheap yen. (Mazda now manufactures 71% of its vehicles in Japan. Fuji Heavy, the maker of Subaru, does 75% of its manufacturing there.)
But as the yen climbed from near 110 to the dollar at the end of 2008 to 76 to the dollar at the end of 2012, Japanese exporters took a beating. (Remember that since the yen/dollar exchange rate is usually cited as yen to the dollar, the higher the number, the cheaper the yen.) Credit Suisse calculates that the higher yen has cost Japanese automakers 3.68 trillion yen (roughly $40 billion at 90 yen to the dollar) in the five years that ended March 2012.
In response to a more expensive yen, Japanese manufacturers moved jobs from Japan to lower-cost countries such as China, Thailand, Mexico and the United States, in an echo of the hollowing-out we've seen in U.S. manufacturing. As a result, in December 2012, the number of manufacturing jobs in Japan fell below 10 million for the first time since 1961.
No wonder, then, that in the run-up to the December elections for the lower house of parliament, the emphasis was on how to revive the Japanese economy -- and quickly. The country had slipped back into recession, with a 3.5% annualized drop in gross domestic product in the third quarter (following on a revised 0.1% drop in the second quarter). The quickest way to get the job done, Liberal Democratic Party leader Abe argued, was a massive program of bond buying by the Bank of Japan focused on the purchase of foreign securities that would drive down the price of the yen.
With currency markets anticipating what turned out to be an Abe victory in December, the yen began to fall even before the votes were cast. The currency has dropped by 14% against the dollar in the past three months, according to Bloomberg.
And you can already see the short-term effects on Japanese exporters. On Feb. 5, Toyota raised its earnings projections for the fiscal year that ends in March by 10%. On Feb. 6, Mazda doubled its earnings forecast for the fiscal year that ends in March. The shares of Japanese exporters have soared. Shares of Toyota were up 34% from the Nov. 11 low as of Feb. 6. Shares of Mazda were up 248% from their Oct. 30 low. (And I think they have further to run, which is why I added Toyota to my Jubak's Picks portfolio. In raising its earnings forecast for fiscal 2013, the company increased its assumption on the value of the yen to 81 to the dollar from 79 to the dollar. The yen traded at 93 to the dollar on Feb. 7, and I expect the currency to weaken further to 100 to the dollar in calendar 2013.
Not yet out of trouble
But as effective as a weaker yen might be in the short term in increasing exports by Japan-based manufacturers and at increasing the profits at these companies, it does nothing to address the structural problems in Japan's economy or the country's long-term demographic challenge.
Japan remains trapped in a deflationary psychology that makes Japanese companies and consumers reluctant to spend. Since everything will be cheaper tomorrow (in yen terms), why buy anything? Since demand is falling, why expand production or capital spending? Japan has an extraordinary level of government debt (240% of GDP), but the country still has a high savings rate (1.9% in 2013, according to projections by the Organisation for Economic Co-Operation and Development), considering years of recession, high (for Japan) unemployment and minuscule interest rates on deposits and government bonds.
Much of Japan's government spending in stimulus packages is politically allocated and has done little to add to real economic growth. The politically powerful countryside still gets more than its share of government outlays. An aging population requires an ever-bigger share of the government budget. A falling population of young workers and restrictive policies on immigration mean an aging, smaller workforce.
And I'd have to question how long Japan's consumers and any businesses that rely on imported inputs will put up with the pain caused by a falling yen. Japan imports almost all of its energy in commodities priced in dollars. In 2012, energy costs rose 10%. And that's before the yen recorded the major share of its recent decline.
That's only the beginning of the long-term costs of a weak-yen policy. A falling currency will eventually push up inflation (which, in the face of Japan's current deflation, would be good) and interest rates (which, given Japan's huge accumulated deficit and need to finance current spending with debt, would be bad). It increases the costs of financing for Japanese companies and it can, by giving companies an earnings crutch, reduce the chances that Japanese companies will restructure to assure continued global competitiveness. And a weak yen will further diminish the standing of Tokyo as a global financial center. In the competition with Hong Kong, Shanghai and Singapore, the decreased political independence of the Bank of Japan is a negative.
For Japan's new government, the balance of short-term pluses and long-term minuses comes down on the side of a weaker yen. Japan will be an aggressor in the global currency wars.
The war beyond Japan
In some other countries, current leaders who are not facing the same kind of short-term crisis as the Abe government in Japan have reached a very different conclusion. For them, the long-term benefits outweigh the short-term pain of the currency wars.
Singapore, for example, seems to have concluded that if a country wants to ride the rise of Asian economies to become one of the top global financial centers, a sound, predictable currency is a big plus. It tightened monetary policy in 2012 to fight inflation that ran at 4.6% in 2012. That knocked down growth below levels in regional economies such as the Philippines and Indonesia.
The rewards, however, are that Singapore's bonds are rated AAA (in a world with increasingly fewer AAA-rated countries) and that it can borrow at low interest rates. The yield on the 10-year government bond is just 1.33% versus 4.53% in the Philippines and 3.69% in Thailand.
I think this is a huge edge for the Singapore Stock Exchange (SGX.SP) over the long term. Reports of negotiations between the Singapore Exchange and LCH Clearnet, Europe's biggest derivatives clearinghouse, if true, suggest that the Singapore Exchange fully intends to push its advantage.
So how do you play currency wars?
So what does my perspective on the currency wars mean to you as an investor?
It says that when you see a country announce that it is about to advance into the wars with banners flying in the short term, you should buy shares of that country's leading export companies. I'd recommend that play for Japan for the next few months, until the rising costs of things like energy start to outweigh the rising earnings from a weaker yen.
Other countries that are likely to play this game include Brazil, where the government of Dilma Rousseff is torn between defending Brazil's manufacturing sector in the short run and prodding those companies (and the economy generally) into greater efficiencies. Switzerland, which I'd once have put in the solid-money camp, has linked its currency to the euro, indicating that it will stand for just so much pain from a strong Swiss franc.
France, as recent calls to battle from President François Hollande indicate, would love to pursue a weak franc policy -- but, whoops, there is no franc. The French economy may be weakening faster than any other in the eurozone, and French companies may be facing a terrible competitive disadvantage from a strengthening euro, but Germany has been adamant in its opposition to weakening the euro. In recent remarks, European Central Bank President Mario Draghi has indicated that he sees the economic pain a strong euro is inflicting, but he doesn't seem to feel pressed to do anything to weaken it.
I'd look to pick up shares of French sector leaders such as Danone (DANOY), which trades as BN.FP in Paris, or Louis Vuitton Moët Hennessy (LVMUY), traded as MC.FP in Paris, on strong euro weakness in the coming weeks. I think the euro will retreat again in the second half of the year.
As a debtor country, the United States wouldn't mind seeing a weaker dollar, but the Federal Reserve isn't going to do anything to suggest an official policy of devaluing the dollar because any increase in interest rates would devastate the budget.
Countries that look as if they'll stay out of the wars and reap long-term rewards from the gains in credit rating and financial reputation that come with that include Chile, Norway, Canada and Australia (though Australia may stay out of the wars not so much out of conviction as out of policy muddle). Sweden, which has a reputation for financial stability, is showing signs of wavering as its export companies feel the pain of a strong currency but seems likely to -- mostly -- hold to recent policies.
One way to profit from long-term advantages of nonparticipation in the currency wars is to look to financial institutions in these countries that -- like the Singapore Stock Exchange -- will be able to turn a reputation for stability into a competitive advantage. I think that includes banks in these countries that will be able to use that strength to move out onto a regional stage from the national markets. Four to watch would be CorpBanca (BCA) in Chile as it moves out into the rest of Latin America, Westpac Banking (WBK) in Australia, and Canada's TD Bank (TD) and Bank of Nova Scotia (BNS). The two Canadian banks are moving on different strategies, with TD Bank targeting the U.S. market and Bank of Nova Scotia headed into developing economies. Both, though, get an edge because Canada has steered clear of the short-term currency wars. (Westpac Banking is a member of my Dividend Income portfolio.)
Updates to Jubak's Picks
These recent blog posts contain updates to the stocks in Jubak's market-beating portfolios:
- Time to sell Nestlé after stock's big gain
- Why Toyota is a smart yen play
- Yum is still stalled in China
- Why Qualcomm is headed up
- Apple is still a growth stock
- McDonald's can't match year-ago growth
- Why Intel's on a spending binge
- Investors welcome China's market moves
- MGM sees progress on Macau casino
At the time of publication, Jim Jubak did not own or control shares of any company mentioned in this column in his personal portfolio. The mutual fund he manages, Jubak Global Equity Fund (JUBAX), may or may not now own positions in any stock mentioned in this post. The fund did own shares of CorpBanca, Louis Vuitton Moët Hennessy, Singapore Stock Exchange and Westpac Banking as of the end of September.Find a full list of the stocks in the fund as of the end of September on the Jubak Global Equity Fund website.
Jim Jubak's column has run on MSN Money since 1997. He is the author of the book "The Jubak Picks," based on his market-beating Jubak's Picks portfolio; the writer of the Jubak's Picks blog; and the senior markets editor at MoneyShow.com. Get a free 60-day trial subscription to JAM, his premium investment letter, by using this code: MSN60 when you register at the Jubak Asset Management website.
Click here to find Jubak's most recent articles, blog posts and stock picks.
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The central banks, which operate in almost all the nations on earth, monetize debt.
How long each nation has been sucked dry by these fractional banking debt monetary systems, determines their indebtedness, cost of living, rate of pay and their ability or inabilty to compete on international markets.
The longer a nation is under these ponzi monetary systems, the more difficuilt it becomes to compete economically with nations that have not built up as much debt as theirs.
As the cost of living and taxes go up, more and more demands for higher wages and benefits force businesses to look for ways to cut costs in order to be able to compete.
First comes cutting quality, quantity or if possible, prices for goods or services.
Next comes cuts in wages and benefits or hours.
Next comes downsizing.
next comes outsourcing.
Finally, moving to a foreign country with cheaper operating costs.
All of these things factor into currency wars also. Until we get congress to take action against this ponzi system, we will only go deeper into debt, until the system collapses, taking along with it, your IRA's, 401k"s and pension plans that are invested in the stock and bond markets.
Think people. Money has to have an origin. Your employer didn't always have it, nor did the consumer. All of this debt money is created through the extension of credit from private commercial banks, and other debt instruments, such as treasury bills, notes and bonds.
Always remember, no money is ever created to address the interest on any of the borrowed debt dollars. The money to pay that interest comes from the debt principal of more loans that are spent into circulation. Business loans and interest go into the price you pay for goods and services. Government borrowing and interest goes into the constantly growing amount of taxes you pay.
It's a constantly upward spiraling demand for more taxes, higher cost of doing business and more demands for higher wages and benefits. each feeds off of the other, all because of this monetary system that monetizes debt.
look up the national debt clock. It will open your eyes.
the worldwide ponzie scheme known as "fiat money" is running its course. Inflation is always the end game. But the first to print do not feel its affects, only the ones that wait pay that penalty. Japan is just doing what makes sense in these times, printing money while paper still has SOME worth.
I think this is just the beginning of "currency wars" that will be happening with anyone that has the power to print. So grab some munchies a few beers and kick back and watch it all unfold...cause it is gonna be the ugliest show the world has ever seen.
Historically, currency wars have led to real wars. Not good. Unlike those on Wall Street and the central planners in government, who gain and profit from it, I don’t think currency wars are a game, and I don’t want to play.
Japan is steadily being eliminated by China. The people will move on, leaving a radioactive hulk of land that anchors the sub-China tectonic plate in place. Note the last Japan civilization remains 100 miles further out to sea. Note the unstable Himalayan range still being pushed by the Indian sub-continent. Anyone can pull up the the seismic charts for the plate border areas and see that cataclysm is more likely than not. China isn't going to make it for purely natural reasons. The ensuing Tsunami gets our West Coast.
Brazil dismantled the Wal-Mart stores being built, even though the request to build them was denied. Brazil is very careful now about how much undermining from anywhere outside of Brazil is being done. They will systematically bulk-up in-coming foreign package shipments and destroy them at random. It makes them an unreliable global relationship.
The B.R.I.C. nations each have significant internal issues. Once upon a time, we sent agents into these places to rile up the masses, extend credit for weapons to both sides, sell them the weapons and screw our own shareholders until the government bailed them, as corruption quietly collected the debt. It's how each of those nations realized massive inflation while their currencies collapsed or devalued. Each of these will be better off disconnecting from Northern Hemisphere nations and creating self-sustaining economy. All they need is to break free from Western Civilization thinking. We do too. Where will the Ivy League go once the whole world realizes they are the problem and eliminating the problem brings World Peace?
It will be only a matter of time before debt instruments are indexed for government money printing. Interest 3%, plus the exact amount our government increases the M2 money supply applied to the priniciple sum...
Thus as an example, a mortgage will have 3% interest, and a 58% increase in the principle owned to account for the 58% increase in M2 since Obama has taken office. This protects the debt holder from government, and ends the governments ability to devalue debt and wages.
This comes right out of Marx "Das Capital"... In order to destroy the Bourgeoisie one must destroy the value of their pay envelops and their savings. Once you wipe these out the rich will be easy to dispose of. The easiest way to accomplish this is to use fiat currency and the printing press.
We have a socialist trying to do just that...
A "secret" inflation is already hitting us. Go to the store and try to purchase meat. Try to purchase fresh fruits and many other products. Try to purchase a new vehicle ($48,000). Most people could purchase their first fixer upper home for that.
It is getting more expensive to live. I'm guessing that is the reason money can be had so cheaply...Borrow it to live on and then file bankruptcy.
We have been duped into fighting for the all the wrong reasons and for people who just want to establish themselves as the rulers of a planet of people being manipulated to compete against one another to produce an ever decreasing standard of living for the masses while the masters of this scheme reap all the wealth and power.
Welcome to the cancerous New World Order.
BUY AMERICAN , so our children will have jobs. Bring home wealth creation (manufacturing) STOP exporting to the enemy in Red China, DRILL HERE and DRILL NOW.
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