Move out of both the US and Canadian Dollar?

Sometimes, you've got to recognize good fortune and take advantage of it. Other times, you've got to move to avoid trouble.

For my blog readers, who seem to be mostly a mix of my fellow Canadians, and my "American Cousins" (yes, I really have some), it seems to be a time for both.

Firstly, the Canadian dollar is now trading at high levels, and just today punctured levels not seen since the currency starting floating in 1970. In other words, a modern era record high. So it may seem unusual that now is the time I'd begin suggesting that it's appropriate for my fellow Canadians - likely with much of their wealth invested in Canadian companies - to begin looking outside the country.

However, while I fully expect that the currency may well continue its climb, prudent investing requires re-balancing, particularly when something has appreciated dramatically. A once in a 37 year event (record high currency) qualifies.

So, I'd suggest that many of you start looking at ways to diversify at least some of your investment portfolio outside of Canada. While this might hurt returns over the short term (no one can really "call the top" of any currency assent), it looks to me to be a prudent move over the longer haul. In other words, buying international assets when they look cheap to us.

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Secondly, for my American Cousins, unfortunately, I wouldn't recommend getting more heavily into US assets at this time. Let's face it, the American fiscal situation is a mess, with the national debt at unprecedented levels (roughly $27,000 per person) and projected to continue growing, and many Americans themselves hampered by heavy -unprecendented really - levels of personal and mortgage debt.

Combine these twin bombs of debt, personal and federal, with many recent announcements by central banks the world over that they intend to reduce their holdings of US currency, and where do you think the currency is headed?

Or perhaps another way to put it would be: Do you really think you're smarter than the these central bankers who are leaving the US currency like a plague?

So, to both my fellow Canadians and my American cousins, I think that now is a good time to begin looking at other internationally-denominated investments. Reducing exposure to your Canadian or American assets at this time seems prudent, and likely to boost long-term returns.


JW

The Confused Capitalist

Emerging Markets hold the line in equity decline

Has the egg finally cracked?

I postulated, last year, that emerging markets were a better value proposition that widely acknowledged, with their strong economic fundamentals, and solid government financing, in sharp contrast to most western nations, and particularly the US.

The WS Journal chart below (via Barry Ritholtz's Big Picture), shows that, globally, the emerging markets were the only major stock group to end the week in an up position.

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Perhaps this is the start of the trend I've envisioned, wherein emerging markets, and the developed nations, re-balance to more appropriate valuation ratios, based on the conditions actually in existence today.

Or perhaps this is just a short term blip ...

JW

The Confused Capitalist

The Upside of Declining Consumer Confidence

The Conference Board reported that consumer confidence dropped in August, giving up nearly all of its July gains.

As the Conference Board reported it ...

"A softening in business conditions and labor market conditions has curbed consumers' confidence this month. In addition, the volatility in financial markets and continued sub-prime housing woes may have played a role in dampening consumers' spirits. But, despite less favorable conditions and in spite of all the recent turmoil, consumers still remain confident. And, current Index levels suggest further economic growth in the months ahead."

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It was reported that this was a prime cause of weakness in the stock market today. Despite notions to the contrary, declining consumer confidence is a good, healthy response to the indebtedness of both the consumer, and the federal government.

Acting otherwise would be a denial of reality. For those soundly in the bullish camp, let's review some facts:

1. Household debt at unprecedented levels;
2. A negative household savings rate, something never seen in the midst of an economic expansion;
3. Federal government debt at the highest levels in recent memory, and still growing;
4. The continuing trade deficit;
5. The prospect of a continuing decline in the currency, meaning the Fed has to continue to walk the tightrope between importing inflation on the one hand, and managing the orderly decline of the currency on the other. All the while trying to massage the debacle in the credit markets. An undertaking fraught with short and/or long term risk. Take your pick.

Yes, there's times to be confident, like when things are humming along really well. This isn't one of those times. Then there's the confidence that comes from having been in a place of despair, but when the trends are moving in the right direction. This isn't one of those times either.

Now is a time to make sure you get your own financial house in order.

Start with the basics - your household budget. Review it for unnecessary expenditures. Trim your debt levels, with the most expensive interest rates first. Save some money! Use a high yield account, or find some solid blue-chip stock prospects, or broad-based ETFs. Save (anyone remember the word?) ... save ... save ...

In short, the upside of declining consumer confidence is the ability to not to be a monkey brain - to recognize the potential for trouble (like now), and put some preventative personal actions in place. While the trouble may or may not materialize, planning and acting like this will serve you well in any case. Now isn't the time to be an overconfident consumer - its' the time to be a confident saver!

Don't be blind to reality - open your eyes, look around, think, plan, and act. Are you a monkey?

JW

The Confused Capitalist

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 dismally.com, 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?






JW

The Confused Capitalist

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