Moneyization Part Fifteen
Moneyization: The global financial phenomenon of individuals and businesses moving their funds to monies in which they have the highest confidence, or money in which they have a higher store of faith.
Or, Not Everyone Lives in Dollars
On a regular basis, questions arrive worth some time and thought. The motivation for this article is largely those questions from individuals living outside the United States. An attempt will be made to answer some of those questions, but remember this is a short answer quiz not an essay test. While our thinking is largely on the dollar, one can not consider that subject without reflection on the "other side" of the trade. That below are answers that might need modification is expected. Any reader with an idea on any matter discussed is strongly encouraged to send an email with those thoughts. We always like to be more right in the future than at the present. U.S. investors will benefit from understanding the strategies being used to defend against the U.S. dollar's problems, and helping to create them.
How will the dollar's demise affect others nations?
This question is one on which our thinking has changed. Gray(2004) writes of concern over how the U.S. cumulative current account deficit might impact the global economy. In particular, that concern comes from the length of time it has persisted and the size of that annual deficit. One way of thinking about this is to imagine a rectangle with one side the length of time that the U.S. has experienced a current account deficit. The second side is the dollar amount of the annual deficit. Remember, area equals length times height.
This imaginary rectangle gives a picture of the size of the problem. Now picture that rectangle sitting on top of the world's economy, or being held in the hand of Atlas. In 1995, that rectangle would have been far smaller than at the present. The magnitude of the problem was such that remedies would have been easier. Any necessary adjustment in global economic activity then would not have been as large as now required. Global demand would not have been seriously reduced in correcting the situation. However, the debt rectangle is expanding by the product of time and size.
This imaginary debt rectangle is 10-11 times larger, and still growing. The U.S. annual current account deficit is now much larger and has gone on far a long time. The magnitude of the problem is far greater. To rectify the situation, which can not persist indefinitely, will require a massive reduction in U.S. consumer spending. The elimination of this giant "debt rectangle" would require U.S. consumers to reduced their buying of global goods by a tremendous amount, perhaps as much as $700-800 billion a year.
Had action been taken in 1995, the global economy would have experienced a mild case of indigestion. Today, the remedy requires a Great Recession in the U.S. which will then flow around the world in epidemic proportion. No vaccine exists, and those contracting the disease will feel their economic livelihoods threatened. Those nations that have made a living off U.S. consumers will discover the meaning of "contagion effect." The U.S. Great Recession will spread internationally, causing serious hardship in many countries.
Countries like Canada, where trade with the United States is the lifeblood of the economy, could discover the meaning of economic diarrhea. Island nations dependent on U.S. tourism should be deeply concerned. Nations with little or no trade with the U.S. may also feel the effects. If a nation does a lot of business with a nation that relies on the U.S. for business, the ripple effect will be felt. No place to run, no place to hide; as the song goes.
While nations are one dimension, individual situations may be more important. The nation effect is only one aspect. Consideration must be given to individual business situations. Is your company dependent on the U.S. or dependent on a business that is dependent on the U.S.? If the answer to that question is yes, then individual circumstances may dominate and concern should be high.
Should I remain in my national money?
This question came from a Euro resident. That person's situation is much better than most. The Euro is in ascendency to be the new monetary hegemon, replacing the U.S. dollar. Relative to the dollar, the Euro is a preferable currency. Due, however, to issues of political unity in the EU, the ride could be rough at times.
Should the fiat money framework develop serious problems, as expected, all the boats will settle into the water. The Euro is in a positive cycle overlaid on what may be a negative trend for fiat monies. The table below on buying Gold, depending on your currency, should make our views fairly well known. Unless your national money is Euro, yen or renminbi, moving on to Gold and a national money higher up the pyramid would be wise.
|Euro||Buy only on high Euro optimism.|
|Canada*||Strong Buy on any CN $ rally.|
|Australia*||Buy, subject to comments above.|
|UK**||Buy on high Euro optimism.|
|China||Do not buy.|
|Switzerland**||Buy on high Euro optimism.|
|* Money obsolescence a factor. **Will convert to Euro. Monies
convert to Euro are a difficult call, due to unknown conversion values.
Will Gold, and Silver, appreciate in terms of my money?
The table summarizes our view on the wisdom of buying Gold based on your national money. If your national money is not listed, moving to Gold should be done in an expeditious manner. Some national monies, such as Australia, are a difficult call, and are good examples of the complexity of the matter. While longer term the Australian dollar is likely to disappear, what happens between now and then and into what it converts are real questions. Proximity to China should benefit the Australian dollar, perhaps supporting its value in the short-term. If the U.S. Great Recession spreads to demand for Chinese goods and subsequently to demand for Australian output, the situation could deteriorate rapidly. Ultimately, conversion to Chinese renminbi is a possibility. Since markets are aware of this possibility, Aussie dollar may be buoyed somewhat.
Should a Euro citizen buy Gold?
This question is being addressed specifically, despite comments in the table above, as the asker is a Euro citizen. Euro citizens should buy Gold only when optimism over Euro is extremely high, depressing the Euro price of Gold. Too many trends are in place for the Euro's benefit, despite occasional signs of political disunity, to buy Gold without careful attention to timing. For example, even in France the world is changing. During June, the first private freight train since 1938 operated in France (Wright,2004,p.4). Such changes are emotionally painful, and were a factor in the French vote on the EU constitution. Other nations are anxious to enter the Euro, and the citizens of those countries are already voting with their money. To the east lies Russia, with holdings of U.S. dollars second only to the U.S. Given the proximity to the EU, conversion of those dollars to Euros over time seems likely. And that perpetual rumor of Russia pricing energy in Euros rather than dollars persists, and makes reasonable sense.
The first graph plots Euro Gold against a measure of sentiment. The sentiment oscillator is plotted on the right axis, and is inverted to make comparison with Euro Gold easier. That measure runs from maximum optimism at -100% to maximum pessimism at 0%. Currently that measure is well into high negative pessimism and turning down. This condition suggests not buying Gold with Euros at this time. As can be observed in the chart, times of heavy optimism are the time to buy Gold for Euro citizens.
Should we short the dollar?
Most investors should not be short in the financial sector except on rare occasions. Shorting financials requires incredible discipline. Unless one is a truly disciplined investor, the answer is no. Techniques exist to use futures and other derivatives wisely, but few will use them in that way. Inevitably, individuals get greedy and start to believe they are traders. For most people, better to be long something in a disciplined manner than short something in unwise fashion.
Can we buy Chinese renminbi?
Yes, if you are a Chinese citizen living in China. The rest of us have to do something else. Nondeliverable forward contracts exist in the institutional arena, but this market is not suit ed for individuals. Some brokers have developed strategies using deposit arrangements in countries near China where the national money will rise with the Chinese renminbi. Some of these ideas are reasonable and might be considered. See your own broker for ideas.
Should we buy Chinese stocks?
At the racetrack, only winning tickets are talked about. No one wants to brag about a losing ticket. Winning stocks on the China play seem to be well talked about. That vast number that do not work out seem to be ignored. Buying paper assets is appealing and easy, but how much money foreign investors will make still seems a question. When the Chinese renminbi become s fully convertible, buying China stocks will make more sense. After the U.S. Great Recession, Chinese stocks will be a far better buy.
Should we buy Asian investments, as an alternative?
This alternative may make more sense than buying China stocks. What one is looking for is a company that does a lot business with China, and makes money doing so. Research may keep you busy. Remember too that they will be more volatile than the Chinese economy. Same comment reference to U.S. Great Recession applies here.
Should we buy coins or shares?
Gold is the goal, paper is not Gold. Basic source of return in a period of risk for fiat national moneys is the Gold itself. Why would an investor distance themselves from the basic source of the return? Suppose water was in short supply. Would buying stock in a company that makes plastic water bottles be the equivalent? No, of course not. The further distance an investment is from the source of return, the greater will be other factors that dilute or influence returns. Gold is Gold. Gold shares are paper.
An investor should start with a basic position in the metal itself. Benefiting from the likely price appreciation of Gold in terms of your national money is the goal. Before going on to any of the "paper" alternatives, one should have a basic position in Gold, the metal itself. And of course, the same argument applies to Silver. If investing in Silver is your interest, then invest in Silver not plastic water bottles.
Then the question of whether to buy the coins or the bullion arises. This author has a bias toward coins for the average investor. Bullion has issues related to authentication that need not be addressed if investing in coins. That all said, Sanders(2004) points out often, the investor should be attempting to own as many ounces of Gold or Silver as possible. In the end, one wants to own as many ounces of Gold or Silver, as can be achieved with timely purchases and trades. Coins and bullion can sell at varying premiums to each other over time. An investor must seek out a good dealer that can help with wise purchases and trades, selling them what is best for the investor not what is best for the dealer.
For some investors the ownership of the physical metal may be difficult, or simply something the investor does not want to bother with. Those investors should turn to the many forms of Exchange Traded Gold(ETGs) or Gold funds that might be available. These alternatives come in a variety of forms, each with particular advantages and disadvantages. ETGs and Gold funds allow investors to gain the benefits of owning Gold, without dealing with the issues of the physical metal. Perhaps the best attributes of ETGs and Gold funds are speed of execution and ease of purchase. Just click your mouse and you own the benefits of Gold, or Silver soon. In all cases, investors should read the prospectus before buying.
The hierarchy starts with the purchase of the metals, coins or bullion. Second, choice is the ETGs and Gold funds. Only after an investor has these positions should the stocks be considered. Investors need to be willing to expend the time and be willing to lose some money in the education process necessary to become successful at buying the stocks. Therefore, the stocks should be bought only after the basic exposure to Gold and Silver has been created.
What if we have U.S. customers?
We talk little about the needs of businesses in these discussions. Businesses with customers in the U.S. should be moving to a system of invoicing in Euros if possible. Your ability to do so will in part depend on the power relationship between you and the customer. Another problem is that most U.S. banks, unfortunately, are still in the 19th century. Most U.S. banks only offer dollar denominated deposit accounts. U.S.-based customers often do not have the ability to easily pay in Euros. If they do, try for the payment in Euros. In this way, the customer bears the cost of the money conversion. These issues all translate into the final price for the customer, and individual situations should dominate.
What if we have European or other Euro denominated customers?
The problem you face is that your U.S. bank will be a handicap. Most U.S. banks offer deposit accounts denominated only in U.S. dollars. You may have to open a deposit account with a non-U.S. bank with branches in the U.S. What you need is a deposit account denominated in Euros. With a Euro denominated account you can invoice your European customers in Euros, and they can pay in Euros. That way you are not paying money conversion fees except when you want to convert to dollars. Over time the balance remaining in Euros should appreciate against the dollar. That gain on your Euro balances will increase your profit margin.
Should $-based investors be buying Gold?
In the first graph we looked at the recommended action on Gold for Euro denominated investors. As the Euro has been passing through a period of extreme pessimism, the dollar has been the focus of over optimism. Those periods of over optimism on the U.S. dollar provide buying opportunities for $Gold, as shown in the last graph. Investors should be using these periods of price weakness to build positions. Gold and Silver are both poised to move up out of the lateral patterns in which they have been trapped by dollar optimism. That move out of the lateral pattern will create the foundation for Gold to take out the 2004 high, and give Silver an opportunity to assault $9 as fall approaches. $1,300 is still the target for investors, but that will be accomplished one rally at a time.
Gray, H. P.(2004). The exhaustion of the dollar. New York: Palgrave Macmillan.
Sanders, Franklin(2004) Why silver will outperform Gold 400% & The professional trading secrets that will make you the most of your silver and gold investments. Westpoint TN: Moneychanger Publications, 1-888-218-9226.
Wright, R.(2005, June 15). New train shifts inertia of French rail freight. Financial Times, p.4.