TOKYO, JAPAN: Like any Kansas Citian, I’m a beef snob. But as I ate delicious Japanese beef today at lunch, the steak almost melting in my mouth, I felt a bite taken out of my wallet. The dollar drop can make traveling less appetizing, but it makes foreign investing essential!
Since I arrived here in Japan, I’ve been out in the street markets and up in the highest floors of Tokyo skyscrapers, eating everything from mung bean desert cakes to steaks, and meeting with Japanese businessmen from conglomerates and start-up firms alike.
All the time, my country’s currency is sinking like a dead koi fish.
As the goal of my trip is to tie together the ends of the Asian economic spectrum, I’m looking from past to present to future, from Japan to Korea to China and Hong Kong and the opportunities they present. At the most fundamental level, we have to look at local currencies and what each says about the country it represents.
In the case of the United States, the fiscal imbalances of recent years have been a circus, and the arrival of “Helicopter Ben” Bernanke and his anti-deflationary stance leaves no hope that the dollar’s strength will be preserved.
Put simply, a piece of money is something like a stock share in the country that issued it. If Zimbabwe wants to knock a few zeroes off of its currency figures each time the country logs another couple thousand percentage points of inflation, most economists and investors don’t care.
If the world’s reserve currency tanks, though . . . well, it’s no longer an “if.”
Different day, same sh*t
As my day started here in Tokyo, a full fourteen hours ahead of my co-workers back in Baltimore, the greenback began another dismal 24 hours. George Washington should be hiding in a corner as the dollar dives to a record low against the eight-year-old euro and a 26-year nadir versus our old Redcoat rivals in the United Kingdom.
The pound is pounding us, and all fifteen of the world’s other most actively traded currencies are joining in the dogpile.
The European Central Bank is expected to raise interest rates while the Fed sacrifices our bucks at the altar of banking bailouts, ratcheting down our benchmark until the money flows so freely that everyone will forget how deep their debts are because they’re sitting in bathtubs full of legal tender.
Japan’s yen is in a unique position. Since the Japanese economy stood stagnant following the country’s economic crash in the 1990s, interest rates were literally zilch until recently. The official Bank of Japan lending rate is now only half a percentage point, but Japanese investors aren’t going on loan sprees.
Instead, the yen has been used as a sort of anti-reserve currency. It’s the core of the “carry trade,” in which foreign investors and currency speculators borrow in yen to invest in higher-yielding assets and currencies all around the world.
So as the dollar drops, the yen is surging, and it has risen against all of those same currencies that took the dollar behind the woodshed so far this week.
Investors are fleeing those fanciful high yields and getting back into the safety of the yen. Like mashed potatoes, an old pair of sweatpants, or the yen, what’s boring can also be quite comforting.
For investors in Japanese businesses whose income is in yen, the unwinding of the carry trade is far from ho-hum. Currency conversion is a core element of American Depositary Receipt (ADR) investing, the front door to going global. And as the dollar drops, your money can grow–if you’ve correctly diversified your portfolio.
Returning now to my pan-Asian perspective, that favorite 21st-century Far Eastern growth story, China, is threatening to shift its massive currency reserves away from the dollar, as a senior central bank official called the U.S. currency “shaky.”
Either a slowdown in dollar accumulation or a straight-up sale of dollar assets is likely, as Beijing dumps dead dollar weight.
Will you be left holding it?
Regards,
Sam Hopkins
P.S. I’m guiding my Orbus Investor subscribers into not only what’s hot but what’s smart, and this week I’m telling them about my favorite Japanese play. It’s a company in a major turnaround period, ready to capitalize on one of my favorite and most profitable worldwide trends.
I met with their representatives in person today, holding my business card in both hands and bowing according to custom.
Like the delicious steak I ate, this meeting left a good taste in my mouth. I promise you won’t want to miss out on my report.
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