I see a boom coming for this Australian asset

Jim Rickards’ message this week Strategic Intelligence Service Australia updating is easy.

Currency wars are not back. They never left us!

His analysis is that we are in a new phase of the currency war, which started in 2010. The past few years have been just a silence.

Countries are once again devaluing their currencies in an attempt to gain an export advantage in global markets.

Of course that’s a fool’s game. Try to produce without importing raw materials. Try to mine resources without importing manufactured goods.

You’ve probably heard about the wild swings in the Japanese currency over the past seven days. First it collapsed, then it recovered its dive. Then it fell again. Then it rose 3% in one day! And who knows what will happen by the time you read this.

It could appear that Japan is trying to devalue its currency to gain a competitive advantage in global markets. And if so, it works. Japanese stocks have been in trouble since the yen started its downward trend.

Unintended consequences are…well…predictable!

The problem with currency devaluation is that it cannot create wealth. It can only redistribute it.

Every investor should know that every benefit to one sector must cost someone else.

There is no free lunch.

Frederic Bastiat said it best about 200 years ago:

‘In economics, an action, a habit, an institution, a law produces not just one consequence, but a series of consequences.

‘Of these effects, only the first is immediate; it appears simultaneously with its cause; it has been seen. The other effects only emerge afterwards; they are not seen; we are lucky if we provide them.

‘There is only one difference between a bad economist and a good one: the bad economist limits himself to the visible effect; the good economist takes into account both the effect that is visible and the effect that must be anticipated.‘

Indeed. But how can we take advantage of this currency dynamic happening now?

Personally, I moved to Japan for a few months this year. By the way, my wife is Japanese.

I can tell you that my cost of living has fallen along with the value of the yen. I earn in Australian dollars and British pounds, so I find everything so much cheaper than in Australia, that’s for sure.

Tourism is also flourishing here. But it’s all good news…

A canary drops dead in Japan

I’m not so sure that deliberate currency policy is behind the yen’s decline.

The source of currency instability is an unintended consequence of the Bank of Japan other policy.

Instead of raising interest rates to keep inflation in check, the BoJ decided to keep interest rates low.

To be clear, this is an extraordinary move. Inflation is well above target. And the interest rate is only 0.1%. It’s a recipe for disaster. So why this policy?

It’s easy. The Japanese government’s debt is so large that the central bank cannot raise interest rates. Not without the government going bankrupt.

And so the BoJ decided to leave interest rates unchanged while watching inflation rise for Japanese savers. This is also evident from the currency markets. Hence the yen’s decline.

In short: someone forgot to tell the Bank of Japan about the unintended consequences of their policies. They cannot financially support the government without destroying the value of the currency. And now the BoJ has to clean up its own mess to cover it up.

A global problem

Japan is perhaps the most extreme and obvious example of all this. But in the US, Britain, the Eurozone and many other places around the world it’s the same story.

The national debts are so large that higher interest rates are not affordable. And so central banks may not be able to raise interest rates far enough to keep inflation in check.

That is why the currencies of so many countries are depreciating. It’s where the unintended consequences of these policies become apparent.

Where does Australia stand in all this?

Australia’s debt ratio remains remarkably low. We also have a budget surplus. So we are not stuck in the same interest rate trap.

This means the Reserve Bank of Australia can raising interest rates to keep inflation under control. And I suspect this will be a huge boost to the value of the Australian dollar in the coming years.

If commodity prices turn, we can expect our currency to fly. This will undermine the value of your foreign investments and make life difficult for Australian exporters.

However, if you fancy a trip to Japan, you will live very well indeed. And any stock that a strong Australian uses to import – a retailer, for example – can also achieve better margins.

It may be time to adjust your portfolio accordingly. For even more ideas on how to take advantage of the opportunities in today’s market, go here.

Until next time,

Nick Hubble,
Editor, Strategic Intelligence Service Australia

All advice is general advice and your personal circumstances have not been taken into account.

Please seek independent financial advice about your own situation or if you have any doubts about the suitability of an investment.

Nick Hubble found us at Fat Tail Investment Research in 2010 after visiting Wall Street’s most infamous bank, Goldman Sachs, during the 2008 GFC. There he saw the true nature of investment banking. Since then he has been editor of the Daily settlement Australia and based in Great Britain Fortune & Freedom And Golden stock fortunes.

He is happy to work as Investment Director and Editor for Strategic Intelligence Australia by Jim Rickards. Here he helps turn Jim’s big picture vision into specific, actionable advice and ideas for Australian investors.