“Governments do the right thing in the end, but only after exhausting all other options.”
Right now, politicians and central bankers are living up to expectations. Today, all other options include quantitative easing, zero interest rate policy and currency exchange controls.
And now World War has broken out in the currency markets. For the hoi polloi in the ‘real world’ life carries on as normal. But things can change quickly when a war is raging, so be ready.
In the next three minutes, I’ll show you how to shield yourself from the experiments of central bankers as they exhaust every policy option.
Liquidity is going everywhere – except where its needed
The politicians and central banks are still busy ‘saving the world’. The economic texts they’ve read say there’s an easy way to get your economy out of a slump. And all they’ve got to do is create a load of money – liquidity – and spend it in the financial markets. Then, as if by magic, the economy will spring back to life.
But as I argued a couple of weeks ago, this simply isn’t working. The money created stays in the financial markets. It doesn’t get to the man on the street.
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In fact, the only person to get a sniff of this newly created loot is the man on Wall Street or in the City – which suits them just fine.
But the bottom line is that all this liquidity is wreaking havoc.
The emerging economies get flooded
The finance men have got their free gambling chips. So where have they been placing their bets?
For starters, they want a yield; they want to earn interest. And seeing as the West isn’t paying any, they’ve been flipping their chips into Brazilian reals, Aussie dollars, even Indian rupees. These currencies are all paying better yields than the pound, the greenback or the euro. So the gamblers get a return on their cash.
The only problem is that as this wall of money migrates, it’s pushing up local currencies as it goes. This is a disaster for exporting nations like Brazil, making their exports dearer.
Brazil’s finance minister says there’s an international currency war on. The Brazilians are coming out fighting. They’re introducing currency controls and taking measures to beat their currency back down.
And Japan recently took the markets by surprise and announced zero interest rates (which were practically zero before) and more quantitative easing. They hate it that their yen has been rising for the last few months; they need it slashed if they’re ever going to export their way out of trouble.
If you can’t beat them, join them
This is the classic currency ‘race to the bottom’. If you don’t join the club, then you suddenly end up with everyone else’s newly minted money on your doorstep pulling your currency higher.
You might think, well that’s okay, it’s all relative isn’t it? If everyone’s debasing their currency then it all ends up the same in the end, doesn’t it?
No, it doesn’t. There are some things that cannot be debased. You get no interest on commodities – so it started on zero – you can’t bring that down! And you certainly can’t create more commodities with the push of a button.
So it’s little wonder that commodities are rising. Gold, silver, oil; you name it, it’s going up.
Make sure you’re protected by your war bunker
I’ve been extolling the virtues of emerging markets for a while now. As money has been pouring in, they’ve been going up. Take JP Morgan’s emerging market fund (LSE:JMG), which is up some 14% since I tipped it in August (that’s double the gain of the FTSE 100).
Source: JP Morgan Emerging Markets Investment Trust PLC
But if emerging markets start to suffer from currency wars, you might be better to take advantage from rising commodity prices.
I’ve made my views on gold pretty clear. I’ve got a feeling gold’s bull run has got some way to go. As policy makers continue to ‘exhaust every other option’, paper currencies are deteriorating.
What I see is a global dash for gold as all the major (and now emerging) currencies get tampered with.
Whether our global leaders do the right thing in the end remains to be seen. Gold is telling us they’re certainly not doing it yet.
• This article was first published on the 6th October in the free investment email The Right side. Sign up to The Right Side here.