Friday, 3 May 2024

By Nick Hubble Editor, Strategic Intelligence Australia

[6 min read]

Dear Reader,

Jim Rickards’ message in this week’s Strategic Intelligence Australia update is simple.

Currency wars aren’t back. They never left us!

His analysis is that we’re in a new phase of the Currency War which began in 2010. The last few years were just a lull.

Countries are back to devaluing their currencies to try and gain an exporting edge in global markets.

Of course, that’s a fool’s game. Try manufacturing without importing resources. Try mining resources without importing manufactured goods.

You probably heard about the wild swings in the Japanese currency over the last seven days. First it plunged, then it recovered its plunge. Then it fell again. Then it surged 3% in a day! And who knows what’ll happen by the time you read this.

It might look like Japan is trying to devalue its currency to gain a competitive edge in global markets. And if they are, it’s working. Japanese stocks are going bananas ever since the yen began its downtrend.

Unintended consequences are…well…predictable!

The trouble with currency devaluation is that it cannot create wealth. It can only redistribute it.

Every investor should know that any benefit to one sector must cost someone else.

There is no free lunch.

Frederic Bastiat put it best about 200 years ago:

‘In the economic sphere an act, a habit, an institution, a law produces not only one effect, but a series of effects.

‘Of these effects, the first alone is immediate; it appears simultaneously with its cause; it is seen. The other effects emerge only subsequently; they are not seen; we are fortunate if we foresee them.

‘There is only one difference between a bad economist and a good one: the bad economist confines himself to the visible effect; the good economist takes into account both the effect that can be seen and those effects that must be foreseen.’

Indeed. But how can we take advantage of this currency dynamic happening now?

Personally, I moved to Japan for a few months this year. My wife is Japanese, by the way.

I can tell you that my cost of living has plunged alongside the value of the yen. I earn in Aussie dollars and British pounds so I’m finding everything so much cheaper than Australia, that’s for sure.

Tourism here is booming too. But it’s not all good news…

A canary drops dead in Japan

I’m not so sure that deliberate currency policy is behind the drop in the yen.

The source of currency instability is an unintended consequence of the Bank of Japan’s other policy.

Instead of raising interest rates to rein in inflation, the BoJ decided to keep interest rate low.

To be clear, this is an extraordinary move. Inflation is way above the target. And interest rates are at just 0.1%. It’s a recipe for disaster. So, why the policy?

It's simple. The Japanese government’s debt is so large that the central bank cannot raise interest rates. Not without sending the government broke.

And so the BoJ decided to keep rates on hold while watching the inflation rate soar for Japanese savers. This shows up in foreign exchange rate markets too. Hence the plunge in the yen.

To sum up, someone forgot to tell the Bank of Japan about the unintended consequence of their policy. They can’t support the government financially without trashing the value of the currency. And now the BoJ is having to clean up their own mess to cover it up.

A global problem

Japan may well be the most extreme and obvious example of all this. But it’s the same story in the US, UK, eurozone and many other places around the world.

Government debts are so large that higher interest rates are not affordable. And so central banks might not be able to raise rates far enough to rein in inflation.

That’s why so many countries’ currencies are falling in value. It’s where the unintended consequences of this policy show up.

Where does Australia stand in all this?

Australia’s debt to GDP ratio remains remarkably low. We also have a fiscal surplus. So we’re not stuck in the same interest rate trap.

This means the Reserve Bank of Australia can raise interest rates to reign in inflation. And, I suspect, that’ll be an extreme tailwind to the value of the Aussie dollar in coming years.

If commodity prices turn, we can expect our currency to fly. This will undermine the value of your foreign investments and make life difficult for Aussie exporters.

However, if you fancy a trip to Japan, you’ll be living very well indeed. And any stock that uses a strong Aussie to import – say a retailer, for example…can get better margins too.

It might be time to adjust your portfolio accordingly. For some further ideas to take advantage of the opportunities in today’s market, go here.

Until next time,

Nick Hubble,
Editor, Strategic Intelligence Australia

Nick Hubble found us at Fat Tail Investment Research in 2010 after a stint inside Wall Street’s most notorious bank, Goldman Sachs, during the 2008 GFC. That’s where he saw the true nature of the investment banking business. Since then, he’s been the editor of the Daily Reckoning Australia and the UK-based Fortune & Freedom and Gold Stock Fortunes.

He’s delighted to work as Investment Director and Editor for Jim Rickards’ Strategic Intelligence Australia. Here he helps turn Jim’s big-picture views into specific actionable advice and ideas for Australian investors.

By Bill Bonner Editor, Fat Tail Daily

[3 min read]

‘I have long been convinced that institutions purely democratic must, sooner or later, destroy liberty or civilization or both. Either some Caesar or Napoleon will seize the reins of [the American] government... or your republic will be as fearfully plundered and laid waste by barbarians... as the Roman Empire was... with this difference — that your Huns and Vandals will have been engendered within your own country by your institutions.’

Thomas Babbington Macaulay 

It was a wild ride on Wall Street on Wednesday. In keeping with the chaos caused by the feds, the Dow shot up 500 points after Fed chief Powell said that the next move would be a cut in interest rates. Then, after reconsideration, investors sold... with the Dow giving back most of its gains. 

This commotion had nothing to do with the actual earnings of the actual companies which make up the actual market (aka Wall Street). It was just speculation about what the Fed will do. And it’s another of the markers of change that we’re watching...from a win-win economy, in which success comes by providing goods or services, to a win-lose economy dominated by politics. Perhaps overstating our case, the former is what you have on the way up...the latter is what you get on the way down. 

In other words, there are patterns to everything. What we’ve been looking at for the last few days is the overlap in the pattern of markets — notably the Primary Trend — and the patterns of public policy. Flipping ahead to a conclusion: Federal policies today are increasingly of the win-lose genre, reinforcing the Primary Trend…and setting the US for a real doozy of a downtrend.

We, jolly sorts that we are, take it for granted that politicians and career criminals never go straight. Instead, they always find ways to rip people off. 

Elite Insanity

But there’s a special kind of insanity that besets victorious elites. Corruption — deep, almost invisible, like the dry rot under a fresh coat of paint — distorts their judgement. They think they alone have the secret to success and that no other group could possibly get ahead by doing things differently. That was the idea behind the ‘end of history’ fantasy. Innovation had come to an end. Emulation (of the USA) was the only way forward for developing nations.  

So it comes as a surprise when people with other ideas actually seem to do as well or better. Even when the US and its client kingdom, known collectively as “The West,” try to stop them. The South China Morning Post reports: 

‘Made in China 2025: China meets most targets in manufacturing plan, proving US tariffs and sanctions ineffective 

‘In 2015, China set out on an ambitious 10-year plan – dubbed “Made in China 2025” – to achieve self-reliance, innovation and strength in the manufacturing industry within 10 years. But during that time, a trade war with the United States has done its best to stop China crossing off its list of goals.  

‘In 2018, then-US president Donald Trump tried to upset China’s plan by initiating a trade war. The US government sanctioned Chinese hi-tech enterprises, put up high tariffs and conducted a nationwide investigation of scientists collaborating with China. After Joe Biden took over as US leader in 2021, he went a step further by imposing measures such as a chip ban on China. 

‘Now, with only eight months left until 2025, the South China Morning Post has investigated China’s progress. 

‘And the analysis confirms that more than 86 percent of these goals have been achieved, with some others likely to be completed later this year or next. Meanwhile some of the targets, such as electric vehicles (EV) and renewable energy production, have been well surpassed.’ 

It seems unlikely to us, too, that such a politically sensitive economy could do so well. But there’s always more to the story.   

Italian economist Wilfredo Pareto reminds us that there are always some people who form the elite of a country. Mostly, they are benign and helpful — laying out roads, making sure the plumbing works, settling disputes, and setting civilised standards.

But over time, their little, craven hearts grow dark. Rather than act like an impartial judge, making sure the rules are respected... they make the rules up to suit themselves.  Sanctions, tariffs, regulations, laws, limits on speech, deficits, bombing, killing, subsidies and payoffs — are all parts of the program. 

Power corrupts, as they say. 

The People’s Republic of China is fairly new; it was established only in 1949. Then, America’s economy was 600 times bigger than China’s. America kept growing. But after 1978, China took the capitalist path and now is responsible for 18% of world GDP. In Purchasing Power Parity terms its economy is already bigger than the US, and it is still growing two to three times faster.  

What’s going on?  

Richard Cullen with a disagreeable perspective: 

‘America bombs while China builds 

‘Today... the US is almost always at war with varied enemies right around the globe, which, in each case, delivers rich continuous profits to the US-led, Military-Industrial-Media-Complex (MIMC). However, most unlike the US, China has chosen to avoid warfare almost completely since 1979 (the year of a brief war with Vietnam) as it rebuilds itself. This is largely consistent with over 2000 years of Imperial history, where war-avoidance by China was notably more apparent than in Europe, both before and after the fall of the Roman Empire. At the most fundamental level, China doesn’t bomb — it builds and builds and builds. And the results, which are astonishing, are there for all the world to see.’ 

A different kind of dumb?  Maybe. 

More to come.  

Regards,

Bill Bonner,
For Fat Tail Daily