Throughout the global financial crisis, even as the crisis changed its focus (and name) from the U.S. mortgage-backed securities crisis to the euro debt crisis—the United States could find solace in the strength of the dollar. It may not have been a currency backed by the largest gold reserves or a well-run fiscal policy, but it only needed to be less bad than its global competitors. And up against a euro that threatens to come apart and a yen backed by a Tokyo government with an even bigger debt problem than Washington has, the dollar looked good enough.

For liquidity, for the depth of its markets, for its ease of transfers and payments, the dollar was relatively strong because the competition was relatively weak. The dollar was a global currency without real competition. That’s been critical to allowing U.S. Treasury prices to rally and U.S. yields to fall even as the country lost its AAA credit rating.

The dollar isn’t without long-term competitive threats, however. The most obvious of those has long been the Chinese renminbi or yuan. (China’s currency is named the renminbi. The units of the renminbi are the fen, jiao, and yuan. It takes 10 fen to make a jiao and 10 jiao make a yuan. It’s as if the U.S. currency was named the dollar, but its units were called the George, the Alexander, and the Benjamin.) But that threat, while acknowledged as real, has always seemed very, very distant.

Well, I think it’s time to at least take one of those “very”s off the timeline. China is moving more quickly than expected to turn its currency into a true global alternative. It still remains to be seen if the Beijing government can fully bring itself to give up the kind of control over its currency that would be necessary to turn the renminbi into a real alternative to the dollar. China’s economic policies are so grounded in the government’s ability to control not just the exchange rate but the flow of its currency in and out of the country that the renminbi may never gain the currency market share that China’s economy and reserves could command. But the global financial crisis—and the damage suffered by the euro, which had looked like a true alternative to the dollar before the euro debt crisis—have pushed Beijing into action faster than projected even just one or two years ago.

Any real challenge to the dollar from the renminbi isn’t going to come tomorrow, but I don’t think investors should take the long-term supremacy of the dollar for granted. The likelihood of slippage in the dollar’s global role has implications for global stock and bond markets, for U.S. interest rates, and for U.S. economic growth rates that you should at least consider in formulating any long-term investment plan.

The latest move—announced just last week and planned to take effect in the third quarter of the year—is to me a bombshell that indicates just how surprisingly fast the currency game is changing for the renminbi. (And it even suggests a few stocks you might want to consider for your portfolio to take advantage of the long-term currency trend.)

What happened last week? Read more

So how does this end?

I don’t mean the current Spanish debt crisis or even the euro debt crisis. I think we know what the “solution” will be to that.

And I don’t even mean the U.S. debt crisis or the Chinese debt crisis. I think we know what the “solutions” for those will be as well.

But what about the meta crisis? The one that’s been created by the current round of “solutions?” How does that end?

I’d suggest that we all brush up on Gresham’s Law, the 16^th-century description of what happens to strong currencies when they meet up with bad money. In a nutshell Gresham’s Law says that the bad currencies win. Figuring out what to do about that is important as investors head into an era of bad money as far as the eye can see.

I think it’s clear by this point in the aftermath of the global financial crisis that all the various local crises have been “solved” to date by the creation of vast sums of money essentially out of thin air on the official balance sheets of central banks such as the Federal Reserve and the European Central Bank and on the unofficial balance sheets of, say, China’s banking system. And I think it’s equally clear that, for all the talk about economic reforms creating growth or austerity creating growth or financial market confidence creating growth, the most likely “solution” going forward is the creation of vast sums of money essentially out of thin air.

It’s still an open question if the “solution” will work. In the case of Spain, for example, the European Central Bank fixed the crisis for a while by giving banks access to 1 trillion euros in 3-year loans in December and February, but by late March the crisis was back and the yields on Spanish and Italian government bonds have started to rise again. And now we’re looking at another program of bond buying by the central bank to lower yields or another program of 3-year loans to banks to give them the money to buy more bonds in order to lower yields.

To condense what I wrote in my Friday, April 13 post on the current state-of-the-art in the Spanish crisis http://jubakpicks.com/2012/04/13/the-spanish-debt-crisis-combines-the-worst-of-the-greek-and-irish-crises-in-a-too-big-to-fail-package/ Spain and the EuroZone are likely to fall back on a series of increasingly desperate kludges by the European Central Bank, other global central banks, and finally the International Monetary Fund. Each of those fixes would require somebody to print money—either the European Central Bank, or the International Monetary Fund, or some combination of the Federal Reserve, the Bank of Japan, and the People’s Bank of China. Print enough and the immediate Spanish crisis goes away again as bond yields sink and governments get another breathing space to propose economic reforms and budget cuts.

At some point, though, the bill for these solutions comes due. Read more

Currencies matter.

How much? Well, look at this calculation from the Financial Times. In simple non-adjusted U.S. dollar terms world stocks, as measured by the FTSE All-World Index, are just 7.5% below their post-Lehman crisis high set in the spring of 2011 and just 22% below their all time high. Seems like we’re on the road to recovery in global equities although this rally still has substantial headroom.

But look at the index—tracked by the Vanguard Total World Stock ETF (VT)—in other currencies and the picture looks very, very different. In Swiss francs, not U.S. dollars, the index is still 40% below its all-time high. In Japanese yen the index is still 47% below that high. Measured against the price of gold, the index is down 65% from its all-time peak.

Why does this matter to you right now? Well, we all live in a world where what counts most isn’t nominal dollar values of stocks but the real buying power of our portfolios. Gasoline, to take just the most obvious example, climbs in price when the dollar sinks. So too does the price of copper and iron ore and all other globally traded commodities—and the stuff that’s made out of these raw materials.

In the short-term—let’s say for the remainder of 2012—thanks to the off-again/on-again Greek debt crisis investors are in for some heavy-duty currency volatility.

In the long-term—lets say beginning in 2013—I think investors can “look forward” to steady downward pressure on the dollar (unless you believe our politicians magically turn into adults after the election and come up with a credible program to deal with the U.S. budget deficit.)

All investors should be thinking now about strategies and timing for maximizing their real (instead of dollar-denominated) profits during this period. Your strategy as an investor needs to take both the short-term and the long-term picture into account.

Here’s how I see the short-term volatility for 2012 Read more

The volatility, the geopolitics, the worries over slowing economic growth weren’t bad enough—now we have to keep an eye, like we’ve got one to spare, on currencies.

I’d argue that over the last two weeks to a month, the rising dollar has been the most under-appreciated driver of stock prices. And the weeks ahead are setting up the dollar, the euro, the Chinese renminbi, and the Brazilian real as big market movers. The reversals and the rallies of the next month are likely to signaled by, related to, and amplified by currency moves.

Watch carefully if you want to catch the next rally—and avoid getting blindsided by the next reversal.

Look at the dollar’s climb against global currencies from August 30 to September 27. During those four weeks the dollar gained 7.7% against the euro, 8.8% against the Australian dollar, 9.0% against the Norwegian kroner, and a whopping 15.4% against the Brazilian real. Even the Chinese renminbi lost ground to the dollar, as Beijing let the current slide to a 3.6% decline versus the dollar.

The Why? is pretty simple. Read more

Business as usual: Euro falls, dollar climbs, stocks tumble

Today the euro is down and the dollar up. That means commodities stocks are down.

Yep, the relationship between the euro and the dollar remains the big driver in global financial markets.

Today, May 20, the euro fell against the dollar for the first time in five days. That has put an end to the rally in U.S. stocks that took the Standard & Poor’s 500 from 1328.98 on May 17 to 1343.6 yesterday, May 19. Today the S&P 500 finished down 0.8%.

Today’s big, bad news for the euro comes out of the European Central Bank, the week’s currency Grinch. After throwing a tantrum yesterday over talk of restructuring Greek debt—No, Nein, Non!—another member of the bank’s governing council weighed in with remarks that the bank could stop accepting Greek government debt as collateral for loans to Greek banks in the case of a reprofiling of Greek debt. (In a reprofiling Greece would keep paying interest on its debt but bondholders would agree to stretch out the maturity of that debt. That way Greece would be under less pressure to refinance maturing debt at the punished rates—about 25% for Greek two-year notes–in the financial markets.)

If the European Central Bank stopped accepting Greek government bonds as collateral for loans to Greek banks, those banks would stop buying Greek government debt. And that would produce exactly the kind of financial crisis that the bank says it wants to avoid.

Why the seeming contradiction? Read more