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Currency

How to Make a Fortune If the Currency Wars Go Atomic


Posted by Shaw Guilani: Capital Wave Strategist

on Wednesday, 27 February 2013 10:28

UnknownThere's a lot of talk about currency wars these days, but very little understanding about what that means for specific countries, economic growth, inflation, and your pocketbook.

Let's fix that.

First of all, there has been no declaration of any currency war. And there likely won't be.

That's because open currency warfare could quickly lead to a mushrooming global crisis.

But that doesn't mean countries aren't already engaged in currency battles; they are. They almost always are.

Here's an over-simplified explanation about how currency wars affect you.

What You Need to Know About Currencies

If Japan exports cars to America and America exports grain to Japan, each has to pay the other. American grain exporters want to get paid in dollars, so they can spend those dollars in the U.S. The Japanese want to get paid in yen so they can pay their workers in yen, pay their taxes in yen, and spend their money in Japan.

Americans (in this example it wouldn't be you, but the cars importers) can "buy" yen with their dollars to pay the Japanese for their cars, or the Japanese can accept dollars as payment and then use those dollars to buy yen themselves.

Of course it works the other way around if you're a grain farmer selling to Japan.

But the value of yen to dollars, or dollars to yen, isn't constant. There is no set exchange rate. Exchange rates are set in open currency trading markets where currencies are bought and sold to the tune of several trillions of dollars a day, every day. One day a dollar might buy 100 yen and the next day it might buy only 98 yen, or it could buy 102 yen.

Lots of factors determine exchange rates, but the biggest, by far, is interest rates. I'll get to that, and then you'll understand the whole currency thing, and never forget it.

Currency wars, which are waged all the time, but not dramatically, are all about the value of your "home" currency relative to other countries' currencies. Our home currency in America is the U.S. dollar, in Japan it's the yen, in the 17-nation euro-currency bloc it's the euro, in Great Britain it's the pound, and so on.

Countries that export a lot of goods want their currency to be "cheap" relative to other countries, especially those countries who are buying the home countries' exported goods.

If the value of American dollars to Japanese yen is strong, meaning a dollar can buy a lot of yen, when you buy a Japanese car, for example, it will take fewer dollars to pay for it. 
If the value of the yen goes up relative to the dollar, that car is going to cost more because your dollars don't buy as many yen as they did before.

Currency exchange rates have nothing to do with what kind of car you are buying from Japan or what features it has; the currency "cost" is a separate component of the cost of that car. That's true for all products imported and exported around the world.

Because Japan exports a lot of cars, not just to America, but around the world, it wants its currency to be "cheaper" than other currencies so it doesn't take as many dollars, or euros, or pounds to buy a Japanese car, or any product exported from Japan.

Here's the problem. America is a huge exporter of goods and services, too. So is Germany, and of course so is China. From a political perspective, all governments want to support their exporting industries. It's about manufacturing and jobs, and revenue and profits, and economic growth and standards of living.

The easiest way to facilitate an export-driven economy, like Japan's, like China's, like Germany's, and like America's (especially lately as domestic demand in the U.S. has softened as a result of the Great Recession) is to keep the home currency "cheap" relative to other currencies.

If exporting countries, especially those that don't have big domestic demand bases, meaning less-developed and "emerging-markets" economies, are all trying to export their way to growth (as is the U.S.) and they all want to have their currencies be "cheap" on a relative basis, that can't happen. Everyone's currency can't be cheap at the same time.

That's what precipitates currency wars. Governments who want to stimulate growth through exports (and who doesn't?) usually subtly, but sometimes overtly, take measures to lower the value of their currencies.

Japan's new Prime Minister, Shinzo Abe, in an unusual exception to the pacifist approach to currency skirmishes, recently fired a shot heard round the world. To lower the value of the yen, Abe is demanding domestic monetary easing, aggressive stimulus, and more dangerously, has openly been talking down the yen.

While Abe's bold-faced rhetoric is provocative, G20 finance ministers and Christine Lagarde, Managing Director of the IMF, have been calmly trying to defuse any mounting tensions that could trigger any country-specific retaliation and a global race to devalue currencies.

Is Japan to blame? No. America really started the latest round of currency battles.

In order to "stimulate" our way out of the Great Recession, which included President Obama's articulated policy of dramatically increasing America's exports, the Federal Reserve, in conjunction with the Administration's wishes and its own interest in re-capitalizing the nation's big banks the Fed is beholden to, has kept interest rates low, as in very low.

One of the ways the Fed has done this is by "printing" money. The Fed has the ability, beyond the reach of Congress or the President, to buy what it wants, which is most often U.S. Treasury government bonds (that pay interest). It pays for what it buys by simply issuing "credits" as payment.

Those credits are turned into money as they are spent by the government whose bonds the Fed buys, or by banks who sell the Fed (on a temporary basis, with the intention of buying them back in the future, usually) their underwater mortgage-backed securities. Thus, the banks supposedly have money to lend.

Here's Where It All Comes Together

Because the Fed has kept interest rates so low in America, investors who want more interest income on their money than they get here are parking their money in other countries where interest rates are higher. In order to put your money into a bank in another country that offers higher interest rates than banks offer in the U.S. you have to first buy that country's currency. And that bids up that country's currency relative to the dollars that you are selling.

In addition to the dollar being weakened, on a relative value basis, by investors selling dollars to buy and invest in other countries currencies, the amount of money being printed by the Fed means that at some point in the future all that money in the system will cause prices to rise.

Inflation is the result of a lot of excess paper money chasing a set amount of goods and services.

Inflation, and just the prospect of inflation, causes the dollar to fall further. And if the dollar is falling relative to the Japanese yen or the euro, other countries who want to grow their exports are going to eventually do what they have to in order to lower the value of their own currencies.

That's how we get into currency wars.

The net result is inflation, which arrives in several different ways.

You'll know when it's starting to spread. Interest rates will start to rise; watch the yield on the U.S. 10-year treasury. Commodity prices will rise; you'll see it in your grocery bills. You may already be seeing the incipient signs.

Stocks will rise at first -- then start to collapse. So, make sure you're in the market but keep raising your protective stops as prices rise.

Buy commodities and gold, but take profits on your commodities as they skyrocket; they won't stay high forever.

Don't pay off your mortgage, make the minimum payments. You can pay it off later with cheaper dollars.

Accumulate as much cash as you can, and when prices crash -- which will include real estate -- be ready to buy, buy, buy.

That's how to turn an atomic implosion that could result from currency wars into a personal fortune.

 

From Executive Editor Bill Patalon: How We Beat Soros By Eight Months on This Currency Call...

One of our promises here at Money Morning is to keep you ahead of the curve - and certainly ahead of Wall Street. Frankly, this is what you come here for, and we take very seriously our responsibility to deliver. So when we succeed, we want to sing it from the rooftops. Like this time...

Money Map Press Chief Investment Strategist Keith Fitz-Gerald was fully eight months ahead of George Soros (and other hedge-fund heavyweights) in identifying this latest currency profit opportunity: the yen.

According to the Wall Street Journal, betting against the Japanese currency "has emerged as the hottest trade on Wall Street over the past three months." That’s when Soros shorted the yen – in November 2012.

But it was February of 2012 when Keith told my Private Briefing subscribers that the yen was headed for big fall - and he even recommended an ETF that would let them profit from his prediction.

The upshot: Keith's recommendation has so far reaped a 44% windfall - which is more than double the 20% yen decline the hedge-fund Johnny-come-latelies have been able to profit on. And there's more to come.

If you would like to join the thousands of investors Private Briefing has already helped to make big money in the markets, you can do it for just 26 cents a day. I'm proud to say that in a little over a year, we've had more than four dozen winners, including four that have doubled and two that have tripled in price. Click here to learn more.

>>Don't miss Is Japan About to Fire the First Shots in a 1930s-Style Currency War?.

 



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Timing & trends

Gold Silver Hyperinflaton & The Golden Rule of Reactions


Posted by Martin Armstrong - Armstrong Economics

on Wednesday, 27 February 2013 09:31

"It is vital to understand that what we face is by no means the plain vanilla version of governments just printing into hyperinflation" (article below-Ed)

The Golden Rule of Reactions

Those who are new readers are probably unfamiliar with what I have called the Golden Rule of Reactions.  When it comes to TIMING, it is vital to understand the basic tenets of cyclical analysis. That fundamental principle is where do we draw the line between a change in trend and a mere reaction. That line is drawn in units of 2 to 3 maximum. In other words, a reaction making a counter-trend move is limited to a maximum unit of time being 3 regardless of the level of time be it daily to yearly. After that period of time, trends then emerge. Right now, we have a 3 day reaction in gold from the low of last week. To establish a change in trend, we must continue BEYOND merely 3 days. Failure to do so warns of only a reaction counter-trend.

Even when there are free markets and a dramatic panic takes place, the same timing emerges during Phase Transitions. We will go over these points at the Princeton Conference. Nevertheless, even look at the Great Depression, you see a 90% decline still contained by the Golden Rule of Reactions – 1929 to 1932.

You must understand......

.....read more HERE

Gold – Silver – Hyperinflation

coreeconomy3It is vital to understand that what we face is by no means the plain vanilla version of governments just printing into hyperinflation. These people are fighting back as is ALWAYS the case with core and major economies. The German hyperinflation took place AFTER a revolution with a unstable government that lacked credit. When there is “credit” then government FIRST tries to keep the game afoot and that means the bankers threaten they will collapse unless debt is serviced. This is why the FIRSTresponse is all out financial war against the people.

Literally, you will PRAY for only hyperinflation. Society CAN survive that.

.....read more HERE 

Gold for Month End

The support for gold in Feb is 1574. The resistance stands at 1667-1690. The support will begin to fade in March and the number to watch will become 1638. The primary support lies at the three Monthly Bearish Reversals. Once they give way, then we can see a real break.

gc0113-m

.....read more HERE



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Bonds & Interest Rates

Why The Insanity Must Be Stopped NOW


Posted by Karl Denninger:The Market Ticker

on Wednesday, 27 February 2013 08:47

Ah, someone appears to have done the arithmetic....

Unknown"Federal Reserve Chairman Ben S. Bernanke’s efforts to rescue the economy could result in more than a half trillion dollars of paper losses on the central bank’s books if interest rates rise abruptly from recent levels.

That sum is the difference between the value of securities in the Fed’s portfolio on Dec. 31 and what they may fetch in three years, according to data compiled by MSCI Inc. of New York for Bloomberg News. MSCI applied scenarios devised by the Fed itself for stress-testing the nation’s 19 largest banks.

MSCI sees the market value of Fed holdings shrinking by $547 billion over three years under an adverse scenario that includes an economic contraction and rising inflation. MSCI puts the Fed’s mark-to-market loss at less than half that, or $216 billion, if the economy performs in line with consensus forecasts of gradually rising growth, inflation and interest rates."

.....more on Interest Rates HERE



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Gold & Precious Metals

A Quiz For Gold Lovers


Posted by Chris Mayer - The Daily Resource Hunter

on Wednesday, 27 February 2013 08:04

Let’s start with a little quiz. See how many you get right:

Who holds the majority of U.S government debt?

a) China
b) Japan
c) USA

What percentage of products consumed in the U.S. are produced in the U.S.?

a) 25.3%
b) 58.6%
c) 88.5%

What percentage of products consumed in the U.S. are produced in China?

a) 78.6%
b) 23.8%
c) 2.7%

Richard Poulden posed these questions in his annual letter. I met Richard for lunch at the Blue Rain restaurant at the Ritz-Carlton in Dubai last week. He is an ace at turning nothing into something in the mining world. Richard built up Sirius Exploration, a potash concern, from a mere $3 million to a company worth over $460 million. Investors made over 800%. Today, he is trying to do it all over again as the founder and executive chairman of Wishbone Gold.

Richard is one of those entrepreneurial characters that one seems to find often in Dubai. My friend Peter Cooper, whom I like to call “our man in Dubai” and who edits ArabianMoney, made the introduction. All three of us sat at a table behind a glass wall situated behind the hotel’s 10-story waterfall and enjoyed excellent Thai food as we talked about the markets.

Poulden has a definite point of view on the markets, which is worth sharing. And that brings us back round to those questions.

The answer is c) in every case.

“China actually holds only around 7.5% of U.S. debt,” Richard writes, anticipating surprise that China isn’t the answer to the first question. “The vast majority is held by U.S. institutions and individuals.”

......read more HERE

 



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Stocks & Equities

Stocks - Buckle Up There's Lotsa Room To Rock & Roll


Posted by Chart of The Day

on Wednesday, 27 February 2013 02:10

Today's chart illustrates the price to earnings ratio (PE ratio) from 1900 to present. Generally speaking, when the PE ratio is high, stocks are considered to be expensive. When the PE ratio is low, stocks are considered to be inexpensive. From 1900 into the mid-1990s, the PE ratio tended to peak in the low to mid-20s (red line) and trough somewhere around seven (green line). The price investors were willing to pay for a dollar of earnings increased during the dot-com boom (late 1990s), surged even higher during the dot-com bust (early 2000s), and spiked to extraordinary levels during the financial crisis (late 2000s). Since the early 2000s, the PE ratio has been trending lower with the very significant but relatively brief exception that was the financial crisis. More recently, the PE ratio has moved slightly higher. It is worth noting, however, that even with this recent uptick, the PE ratio still remains at a level not often seen since 1990.

Notes:
Where should you invest? The answer may surprise you. Find out right now with the exclusive & Barron's recommended charts of Chart of the Day Plus.

20130227

Quote of the Day
"Nowadays, people know the price of everything and the value of nothing." - Oscar Wilde

Events of the Day
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