Tags: crude oil | investing | stock market | investors | currency war

We Face 'Widespread, Damaging Chaos' From Currency War

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Tuesday, 09 Dec 2014 07:37 AM Current | Bio | Archive

For all investors, these are very unusual times. There are dangerous roads ahead that could cause serious damage in a range of markets all over the globe.

When we look at the losses of a wide range of currencies against the U.S. dollar since July, we get an interesting list of losses that prove there are worrisome "currents" out there in the foreign-exchange market.

Some of those losses against the dollar during the last six months are:
  • Russian rubble down 36.4 percent;
  • Colombian peso down 19 percent;
  • Brazilian real down 14.5 percent;
  • Australian dollar down 14.4 percent;
  • Norwegian krone down 14.4 percent;
  • Euro down 10.4 percent;
  • Mexican peso down 9.9 percent;
  • Chilean peso down 9.6 percent;
  • Japanese yen down 8.9 percent;
  • and Canadian dollar down 8.2 percent.

I don’t include the Chinese renminbi (yuan) for the simple reason the currency is fully under control of the Chinese authorities, which doesn’t mean I don’t expect the Chinese currency to weaken in 2015.

I’m convinced we are bound for a currency war that, if it occurs, will create widespread damaging chaos.

Unfortunately, that stealth war is going on, but nobody is pointing fingers yet. I expect that to change next year.

This brings us back to the actual strong dollar, and using the dollar index (DXY) as reference, we see it has risen from its low of 78.90 on May 8 to 88.80 at the close on Monday, a rise of 12.5 percent in seven months.

Nobody knows if the dollar is bound to continue its strengthening pace at this same rhythm.

Taking into account the U.S. dollar still remains by far the dominating currency in world trade, it's also a fact that many investors seem to have little knowledge about (or seem to overlook) that 63 percent of global debt is issued in U.S. dollars, with a total issued value of about $10 trillion, while 19 percent is issued in euros; 8 percent in British pounds; 3 percent in Japanese yen, 3 percent in Swiss francs and the remaining 4 percent in various currencies.

These proportions explain why roughly 6 trillion in U.S. dollar-denominated debt is a time bomb that could rather quickly become a case of serious systemic risk should the dollar continue its ascent at the same pace as it has performed during the past half year.

All this means that all countries, businesses, individuals, etc., that don’t generate U.S. dollars themselves are facing a substantial direct “cost” shock that isn't over yet and probably will get worse before it gets better and that could continue for several years to come.

Under the worst-case scenario, we’d be bound once again for another series of defaults and debt restructurings.

As a long-term investor, I wouldn’t take this probability (which in my personal opinion a sure thing) lightly.

Yes, in the world of today, governments, companies and households that have borrowed globally the incredible sum of $10 trillion, of which 63 percent is issued in U.S. dollars and has to be paid back in dollars, are at serious risk of a further strengthening of the dollar.

And when we add to that anemic growth in many places all over the world, we could have a major problem on our hands for any long-term investor who doesn’t have their vast majority in the U.S. dollar.

Please don’t misunderstand me, all what I said here before doesn’t mean that we couldn’t have a sizable correction in U.S. markets in the foreseeable future and that the dollar isn’t in overbought territory, which implies in itself a sound pullback is fully in the cards, which should, when it takes place, represent an opportunity to further accumulate U.S. dollars.

For all the reasons mentioned here, I personally prefer to stay away from emerging markets, of which at least some of them will also suffer the curse of lower oil prices, which is certainly is not the case for the United States, on the contrary.

About oil prices, I’d like to add here I still expect crude oil to hit $55 per barrel (bbl) some time in 2015, and this could be important for long-term investors because once the bottom falls out we could easily witness a flash-like downward collapse to the $40/bbl zone, provoked, in part, by forced liquidations or margin calls of highly leveraged positions.

Once we could get in that price range I’d be inclined to place buy orders at convened prices with my intermediary, whoever that may be, as I’m still convinced the present downward oil price development is a supply-driven event and not a demand-driven event.

By the way, the U.S. Drilling Activity Report by the U.S. Energy Information Agency showed U.S. shale oil production from the Bakken, Eagle Ford and Permian Basin is expected to expand further by 103,000 bbl/day during the month of January.

It’s a also a fact most of U.S. oil is produced at a cost between $40 and $80/bbl, which implies that oil could move to the $45-$55/bbl zone, which would be unpleasant for many producers, but wouldn’t mean the end of the world either, notwithstanding that if prices would remain for a prolonged time (1-2 years) at these low levels sizable parts of production would have to be cut and even shut down.

Of course, we aren’t there yet, not by a long shot.

Anyway, whatever comes out, crude oil investing could be on its way to become an interesting investment opportunity.

That said, all interested crude oil price investors should, in my opinion at least, know the rules of the oil price game (extremely important), do their homework, remain patient and at the same time vigilant and, above all, try to avoid getting emotional (optimist as well as pessimist) at any moment. Believe me, that’s not an easy discipline!

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HansParisis
I’m convinced we are bound for a 1930s-style currency war that, if it occurs, will create widespread damaging chaos.
crude oil, investing, stock market, investors, currency war
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2014-37-09
Tuesday, 09 Dec 2014 07:37 AM
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