September 20, 2009 02:09 by
elysianhen a country's currency rises in value, this tends to be bad for exports - not a good thing for a country in recession. So often countries will take steps to make their currency cheaper, an insight that can lead to some profitable investments in the foreign currency exchange. For more on this, see the following article from Money Morning.
When rumors of the Swiss central bank again intervening to drive down the value of the Swiss franc hit the world’s currency trading desks late last week, it underscored just how hard global governments are fighting against the strong currencies that can derail exports while also blunting consumer demand at home.
In fact, in the face of a stagnant world economy unrivaled since the Great Depression, we’re now looking at an era of competitive currency devaluations - where every country tries to keep its own currency from rising too much.
Far too many investors are either unaware of these efforts, or dismiss these currency strategies as bureaucratic wrangling. But I’ve been watching this unfold for the past eight years, and have made a significant amount of money from this insight.
And there’s still a substantial profit to be made - for those who understand just what’s happening.
When Strength Leads to Weakness
Since about 2001, whenever any currency rises too much, the local manufacturers or farmers - or anyone who lives by exporting - start to scream about it. Their local governments respond by doing all they can to lower the value of that currency, having it fall in value and thus making exports cheaper - all this in the hope that the domestic economy will become better.
Pick any period so far in this young century and you’ll see that this is true. For instance, right now you see it in those countries whose currencies have soared the most in the last few months.
Let’s focus on the recent highest-flying currencies. The New Zealand dollar soared 23.6% against the U.S. dollar from mid-March through mid-June. That’s the best three-month performance for the Kiwi dollar since way back in 1971, when currencies began floating against each other.
And over 2009, as a whole so far, the strongest currency has been the South African rand, which has soared 18.3% against the dollar since Jan.1, the best performer of all the 16 major currencies. Other currencies that have been strong have been the Norwegian krone and the Canadian dollar (both up 13% since 2009 began) and the Australian dollar (up 14.6%).
It should be no surprise that all these countries have been making noises and taking action to try to reverse that trend. Take New Zealand. This is a country that depends on exports, especially agricultural exports. Total export prices have plunged 8.2% from 2008’s last quarter to 2009’s first quarter. This is not an annualized rate, either, but a quarter-to-quarter drop. If continued at that rate, it would mean a 33% fall in export income over the year. According to Fonterra Co-operative Group Ltd., the world’s largest dairy exporter, New Zealand farmers have suffered a 12% drop in milk prices over the last few weeks. The dairy industry accounts for 20% of New Zealand’s export earnings.
As The New Zealand Herald stated in an article on June 16: "That (the plunge in income for New Zealand dairy producers) explains why Reserve Bank Governor Alan Bollard (New Zealand’s counterpart to U.S. Federal Reserve Chairman Ben S. Bernanke) last week called the exchange rate rise against the U.S. dollar ‘unhelpful’ and a ‘real risk to us‘ as the country endures the deepest recession in three decades."
The same article goes on to quote the head of the New Zealand Manufacturers and Exporters Association, John Walley: "We don’t see any green shoots in our markets both at home and abroad. And the high exchange rate is strangling any ’shoots’ that are poking their heads up."
The New Zealand monetary authorities are doing all they can do cheapen their dollar. That includes slashing interest rates to just 2.5%, which is a shock to those of us who remember Kiwi interest rates as being the highest in the world. They are printing money and talking about actively intervening in the currency markets to sell their dollar short. New Zealand’s finance minister, Bill English, just came right out and said that his government would prefer a weaker currency.
I could go on and on. The Australian treasury secretary, Ken Henry, just announced, in language as radical as finance ministers usually get: “If today’s high exchange rates continue, that would imply downside risk to the economy."
However, I don’t sense as grave concern at the rise of the Aussie dollar as I do with the people of New Zealand about their currency. Thus, it would not surprise me to see the Kiwi fall versus the Aussie, or, put another way, the Aussie falling less than the Kiwi.
Additional Global Currency Concerns
Moving on to Canada, we see that its central bank just announced that the "unprecedentedly rapid rise" of the Canadian dollar may "fully offset" any hope for economic recovery.
South Africa’s central bank has just announced that it has a policy of buying U.S. dollars in order to cheapen the rand. That country’s version of Bernanke, Tito Mboweni, said that although he used to be against intervention in the currency markets, the soaring South African rand has caused him to change his mind.
You can see why. Exports and domestic retail sales are plunging due to the high value of the rand. South Africa’s unemployment rate is now 23.5%, the highest of all 61 countries tracked by Bloomberg. Interest rates have been slashed this year from 7.5% to the current 4.5%, but this is not enough for the Union of Metalworkers, which has threatened to strike if interest rates are not cut more.
Finally, let’s look at Norway. Here is a European country, yet it does not use the euro, preferring instead to keep its own currency. This currency has risen by 13% so far this year against both the euro and the U.S. dollar. So are they happy about it in Oslo? Not very.
The strong currency has hit demand for Norway’s exports hard. In response to this, companies have cut staff, which in turn cuts domestic demand. Also, big companies laying people off is a very un-Norwegian thing to do. The world’s second-largest newsprint maker, Norske Skogindistrier ASA just announced job cutbacks. This has been something of a shock, even though the decline of newspapers should have been a warning. Newspapers just don’t want to pay higher prices for newsprint when the currency these products are denominated in has risen so much this year.
Norwegian Prime Minister Jens Stoltenberg, up for re-election this September, has said that supporting the labor market through this crisis - Norway’s first recession in more than 20 years (the last one coming when oil prices plunged back in the 1980s) - is his very top priority. He has pledged whatever money it takes to try to stimulate spending. And though, as far as I know, no one has publicly said that they want a lower krone, the central bank has cut interest rates fully seven times in the last eight months. It is now down to 1.25%, and stands ready to go lower.
One thing that’s important to remember: This is just a snapshot of those currencies that find themselves the strongest risers so far this year. At any given time in the last few years, whichever currencies have been strongest have screamed about their plight.
A year ago, for instance, with a euro at $1.60, Germany - a huge exporting country - basically said it wanted a cheaper euro. It got what it was seeking: The euro fell to $1.23 within months, but is now drifting back up. The United Kingdom wanted its high-flying pound - then at $2`.10 - to fall to boost domestic and foreign demand for its goods. It got its wish: Within months the pound had plunged to $1.45. And on it has gone for a few years now.
A few years ago, Americans were angry that the Chinese had such a cheap currency and forced it to float. In the four years since that happened, China’s yuan has risen about 24% against the dollar and you don’t hear so many American threats. (Of course, this could also be because China owns so much U.S debt and America does not want to antagonize its largest lender).
This article has been reposted from Money Morning. You can view the article on Money Morning's investment news website here.
Buffett Says It's Over
It's over -- according the world's most successful investor. Yesterday, Berkshire Hathaway (NYSE: BRK-A) (NYSE: BRK-B) CEO Warren Buffett effectively called the end of the U.S. recession, saying the economy has "sort of plateaued at the bottom." Only the day before, Fed chairman Ben Bernanke said the recession "was very likely over." How should investors position themselves?
On Tuesday, Buffett said that Berkshire is buying stocks "because I am getting a lot for my money." That sounds encouraging enough, but does it mean that stocks are, in aggregate, undervalued? Unfortunately not.
Buying ... selectively
Buffett isn't an index investor -- he purchases individual securities that he believes are undervalued. Meanwhile, with the S&P 500 rallying 58% from the March 9 market low, the stock market has lived up to its reputation as a leading indicator of the economy and then some, with current valuations suggestive of a robust recovery.
Indeed, the S&P 500 index is currently priced at 19.1 times its cyclically adjusted earnings (average inflation-adjusted earnings over the prior 10 years) -- the long-term historical average is 16.3.
The ol' animal spirits are back
Rising stock prices fuel confidence -- the resurrection of the M&A market is another by-product of that process. On Tuesday, for example, software firm Adobe (Nasdaq: ADBE) announced that it is acquiring Omniture (Nasdaq: OMTR) for $1.8 billion.
Buffett himself highlighted an example of the "animal spirits" returning to the market. Calling Kraft's (NYSE: KFT) bid price forCadbury (NYSE: CSG) "a full price," he added "I've got a lot of confidence in (CEO) Irene Rosenfeld, but they have to do a lot of things right to justify this price." Berkshire Hathaway is Kraft's largest shareholder.
If you want to own equities, focus on individual stocks
The recession may well be over, but that is no reason to buy stocks indiscriminately -- in toto, the market isn't cheap. If you wish to ratchet up your exposure to equities, the best course of action is to focus on individual stocks that meet Buffett's standard -- i.e., make sure you're "getting a lot for your money."
Source: The Motley Fool
How Much Home Can You Afford?
The biggest hassle facing prospective homeowners. The bank asks you all sorts of nosy questions about your income and savings, and after you've poured your heart out and shared all your money secrets, they might not even lend you as much as you need. The nerve!
Of course, they do have a point. Put yourself in the bank's shoes: If you were going to lend people money, what would you want to know about them? Of course you'd want to know whether:
- They make enough money to pay you back.
- They've been trustworthy in the past.
- They have something of value to trade, should they be unable to pay you back.
Congratulations: In financial parlance, you've just been introduced to the concepts of income, credit worthiness, and collateral -- the three main factors that go into the lending decision. Let's look at each one, and how they affect what you can afford.
Do you make enough to pay the lender back?
Your lender will want to know not only how much money you have, but also how much you will likely make over the next 30 years. Also, what are your other debts? Do you owe money for college loans or credit card charges? Do you have any other assets? Things like stocks and mutual funds, or personal property like a boat or a car, are also considered in figuring out how much a bank will lend you.
Ideally, you'll want to come up with at least 20% of the value of your new home as a down payment, to avoid things like mortgage insurance payments (also called private mortgage insurance, or PMI). But you probably qualify for plenty of financing arrangements that will get you into a new home for as little as 3% of the asking price.
The lender will also plug your income numbers into a couple of formulas: the front-end ratio (having to do with your mortgage payments) and the back-end ratio (having to do with your debt).
For instance, let's say your gross income is $4,000 a month, and you have $400 a month in debt payments. A common rule of thumb is that they'll allow you to pay around 30% of your gross income toward your mortgage payment every month. This is known as the front-end ratio. In this example, 30% of $4,000 is $1,200 a month -- so, they'll reason, you can afford put $1,200 toward your mortgage payment.
Your debt ratio, or back-end ratio, on the other hand, is $400/$4,000, or 10%. That's not bad. They don't want more than around 40% of your gross income going to total debt -- mortgage, credit card interest, and other payments -- and in this case, your payments add up to 39%. (These ratios can vary somewhat; the ones given here are just examples).
Have you been trustworthy in the past?
Potential mates aren't the only ones curious about your past. Your lender wants to know your history, too, before deciding whether or not to commit. Your credit report -- a nifty little compilation of your personal financial history -- will reveal whether you have a track record of paying your bills on time. Before you even start shopping around for a loan, pull your reports from the major credit reporting bureaus by going to the AnnualCreditReport.com website. If you see anything unsavory, clean it up to make yourself more attractive to lenders.
Do you have any collateral?
The house you buy will generally be considered collateral for your mortgage. As a result, in case you can't repay the loan, the bank can decide to do something really nasty: foreclose on the mortgage and repossess the house. You will find yourself out on the street -- with your dog, your La-Z-Boy, your collection of unpublished poetry, a couple of suitcases, and your toiletries kit. Your house now belongs to the bank, and it is unlikely that anyone will ever loan you money again. Hot tip: Avoid this scenario at all costs.
Now, let's discuss your needs
How much you make, your creditworthiness, and how much collateral you have are all questions from the bank's point of view, because the amount of house you can afford is largely a question of how big a loan you can afford. Now, let's look at a few things from your point of view.
Your timeline
To determine whether you should buy a new home, think about how long you're planning to stay in it. It generally doesn't make economic sense to buy if you're only planning to stay there for a couple of years. Since you'll be paying fees to buy and then sell your house, it would have to appreciate in value very quickly while you're living there to make the entire deal financially worthwhile.
Your comfort zone
Before you borrow $100,000, $200,000, or whatever you need for your mortgage, figure out whether you can really afford it. Just because the bank will loan it to you doesn't mean that you'll be able to pay it back -- at least, not without cutting into other goals that may be a priority for you. Are you planning to have a big family? Would you rather spend money on travel or spoiling the grandkids?
Remember, your house payment is just one piece of your financial puzzle. Carefully consider what you might need to give up to make that house a reality, and ask yourself whether you're really willing to do it
Source: The Motley Fool
