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In the immediate aftermath of the 2007-2009 credit crisis and economic collapse, policymakers the world over locked hands and came up with ways to fight it together. Monetary and fiscal policy worked in concert to get things back on track.
But those kumbaya days are over! Now, we’re seeing a global currency war heat up dramatically — and the implications for many asset classes are large indeed!
Japan vs. Germany vs.
the U.K. vs. Switzerland vs. …
If you follow currency markets like I do, you know that money trades in pairs. On any given day, the Japanese yen may go down against the euro … or the dollar may rise against the British pound … and so on. No currency is an island unto itself.
In recent months, though, Japan has tried to turn that system on its head. It has done all it can to drive its currency down against every other form of money on the planet!
The catalyst was the election of Prime Minster Shinzo Abe. Since he came into office, he has browbeaten the Bank of Japan (BOJ), pushing it to adopt the most reckless monetary policy on the planet. And the BOJ just complied!
It agreed to double its inflation target to 2 percent at a policy meeting this week, and to launch “open ended” asset purchases in 2014 when the current QE program expires later this year. That comes on top of a fresh fiscal stimulus program totaling more than 10 trillion yen, one that will help push Japan’s debt-to-GDP ratio to almost 240 percent!
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Japan is hoping a cheaper yen will make its products more competitive and stimulate exports. |
Japan’s belief is that devaluing its currency will promote exports by making them cheaper on the world markets. The problem is, virtually every other country on the planet has the same game plan!
Jean-Claude Juncker, the head of the euro-zone’s finance minister group, tried to talk the euro down several days ago. He warned that the common currency was “dangerously high” — code words for “We need a cheaper euro!”
Jens Weidmann, the president of the German Bundesbank, added his own warning. He said Japan was experiencing “alarming infringements” of central bank independence, and that the risk of “competitive devaluations” of global currencies was rising.
Alexei Ulyukayev, deputy chairman at Russia’s central bank, went even further. He said several days ago that the world was on the brink of a new “currency war.” China added its own fiery language, saying that the “decision to crank up money printing presses is dangerous.”
Other officials in South Korea, Norway, Sweden, and the U.K. have also weighed in with warnings. That sets the stage for major conflicts on policy at the upcoming G-20 meeting in February!
The Implications for
Your Investments
Coordinated, easy monetary policy among the world’s central banks has been a key driver of asset values. That much is undeniable. I have highlighted multiple markets — from junk bonds to farmland to emerging market bonds — where bubblicious activity is rearing its ugly head again as a result, just as it did in previous periods of overly aggressive policy easing.
We know this doesn’t end well. The only question is timing. I’ve been taking a middle-of-the-road approach. I’m highlighting select opportunities and investments that should do well in almost any environment, but that still come down on the safer side of the ledger.
Master Limited Partnerships, or MLPs, are a key example — and they’ve worked out well. One sector ETF I’ve been recommending in my Safe Money Report just traded to within a few pennies of an all-time high!
I’ve also been suggesting you maintain at least some hedges, given the fact they are extremely cheap and protect you against future potential shocks. Stock market volatility is hovering around the lowest level in six years, while bond market volatility is very close to an all-time low — signs of extreme investor complacency.
If we see more pushback against Japan’s policies, or retaliatory actions from other countries in their own currency markets, I’d expect that to shock the markets quite a bit. Any stepback from the policy-easing ledge here in the U.S., perhaps signaled by the more hawkish meeting minutes in December, would also knock things for a loop.
So stick with the game plan, and keep your eyes open. We are definitely walking a high tightrope here in the markets, and that’s when you have to be the most alert!
Until next time,
Mike
