Caution: Currency Crisis
Defending the Indefensible
"Markets are constantly in a state of uncertainty and flux and money is made
by discounting the obvious and betting on the unexpected."
— George Soros
The last global currency crisis was in 1998.
It caused havoc, destroyed governments, and fiscally ruined billions of people around the world.
It also made a few people a lot of money...
A true currency crisis allows you to not only buy stocks at a tremendous discount, like in you see in Greece today, but it also allows you to buy using a greatly inflated U.S. dollar.
You make money two ways: one, when the stock goes back up; and two, when the currency goes back up.
I remember when Indonesia was hit by a currency crisis. Its currency, the rupiah, was tied to the U.S. dollar at one dollar to 2,436 rupiah on July 11, 2007. By January 15, 2008 — just six months later — the rupiah had stopped trading after it passed 15,000 to the dollar. No one wanted it. It was worthless.
Due to regulations meant to safeguard the rupiah, the little guy couldn't move his money into a more stable currency. An entire generation saw their life savings wiped out and watched as the rich and connected moved their cash overseas.
The people were angry. They took to the streets, burned cars, and tore down the government.
In God We Trust
Like so much in modern global finance, a currency is a matter of faith and fashion. Currencies fall when the herd stops believing in them.
You lose faith when you lose trust. Trust departs due to a series of debt problems, corruption, scandals, and war.
When a currency of a sovereign nation starts to slip, it has the tendency to gain speed and escalate very quickly. The smart money sees it coming and pulls out well beforehand.
When the people realize what's going on, they head for the door all at once. Many don't make it out...
They end up holding billions in worthless government bonds and settling for pennies on the dollar after the new government gets up and running.
Wall Street folks are still trying to settle debt from the Argentina currency crisis fifteen years ago.
Peugeot in Flames
Right now, there are a lot of cars burning around the world.
The smart money is starting to pull money out of unstable places. This is evidenced by currency drops.
The Turkish lira is in a free-fall. Brazil has defended the real twice. The Reserve Bank of India recently bought rupiah and instituted new rules to curb speculation. The Korean won, Colombian peso, Thai baht, and Mexican peso also fell.
Defending the Indefensible
History tells us that when a central banker says the currency will remain strong and he will defend it, it's a lie.
This is the time to short said currency.
When politicians start railing about evil foreign fund managers, it is time to get out.
When they put in new regulations to stop short selling and disallow price discovery, the end arrives with ferocious speed and stomach churning drops.
I'm not sure where or when the currency crisis will start (perhaps it already has?), but I do know it's inevitable...
The trigger could be a bus fair hike in Brazil or a gasoline price hike in Egypt. Japan, China, India, Russia, Australia, Canada, and the UK are all suspect. The spark could arise out of any number of countries in the Eurozone. Heck, South Africa is looking rather bleak these days.
Mad central bankers have been holding off the inevitable for six years now. The scam was to print money and push problems down the road for another day.
This sounds good until that other day arrives...
And it always does.
Since 1995, Christian DeHaemer has specialized in frontier market opportunities. He has traveled extensively and invested in places as varied as Cuba, Mongolia, and Kenya. Chris believes the best way to make money is to get there first with the most. Christian is the founder of Crisis & Opportunity and Managing Director of Wealth Daily. He is also a contributor for Energy & Capital. For more on Christian, see his editor's page.