Friday, April 21, 2006

A look at the future? Currency issues.

Well, some of the currency worries are now coming to light and beginning to have a perceptible effect on the markets, as noted in a recent posting at, wherein the Swedish central bank publicly stated they'd diminished their reserves of US dollars, in favor of other currencies. This is a trend that can probably only accelerate; one blog (sorry, I couldn't find where I saw this), recently pointed out that the British pound lost 80% of its value as it was replaced as a world currency.

In the interim, the market is still being flooded with liquidity as the Barry Ritholtz at the Big Picture mentions (read as ... "we're cranking up the printing presses, George, as it's the only way out of this pickle").

I've also discussed the effect that the Fed will need to continue rising interest rates, something that'll be needed to protect the currency, and also guard against importing inflation, as the greenback continues its decline against other major world currencies.

In my opinion, these are the early signs of a long future of more of the same, as I've discussed in commentary over here, suggesting that you lock down your adjustable rate mortgages.

The other side of that is, of course, ensuring that all of your own investments aren't denominated in the greenback. This should help "spice up" your returns, as the decline of the USD will aid in boosting returns from foreign stocks and ADRs. This is also part of the reason that well-priced foreign markets will continue to do well for the foreseeable future. While some fret that the mega-returns seen in emerging markets over the past few years is just a prelude to a crash, I don't.

As pointed out in the prior link, many of these emerging economies have moved their public finances to firm footing, their public companies to much more transparent accounting, and their returns on equity are far stronger than ever before. In summary, both the economies and the companies themselves are much more robust than in decades past.

It's my understanding that South Korea is going to be moved out of the "emerging markets" contingent this year - but against that, they still have a very economically-priced stock market, at a 10.5 PE, with projected earnings growth of 15% p.a. for the next two years. Where else can you find a developed country market with these attractive valuation metrics?

Other emerging markets also have attractive valuations too. Against that, the US market offers a relatively high PE, with a very clear deteriorating currency situation possible.

While the over-sized emerging market returns of the past few years may decline somewhat, I think that the overall investing backdrop needs to be considered: Where do you think a rationale investor should park his/her money?


The Confused Capitalist

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