Tags: Kotok | dollar | currency | oil

Cumberland's Kotok: Possible Global Currency War Is Not Priced Into Markets

By    |   Tuesday, 09 December 2014 12:14 PM

The biggest negative surprise David Kotok, chief investment officer at Cumberland Advisors, could imagine that is not currently priced into financial markets would be a full-blown global currency war.

In a commentary on Cumberland's website, Kotok wrote, "Coincident with an abrupt oil price decline, violent currency adjustments are taking place (examples are ruble and yen weakness and dollar strength). Emerging markets are impacted, though their debt spreads do not show it yet. In the U.S., high-yield spread widening is limited to the energy patch right now. Is this a warning?"

He said it is unclear what central banks would do if they had to face a full currency war in 2015. "The central banks are already at the zero bound. Collectively, they have already tripled their balance sheets."

However, in his view there is also a potential positive surprise that could come from the currency turmoil fallout of sinking falling oil prices — he predicts it could possibly yield a peace dividend in the form of less global unrest and more weakness for mischief makers that depend on high crude prices.

"The oil price at $60 per barrel impacts the naughty folks more than the friendly folks. The naughty folks — Iran, ISIL, Vladimir Putin, Nicolas Maduro in Venezuela, Al Qaida funding sources and other culprits — are all negatively impacted when oil is at $60 per barrel, if the low price is sustained. Cheap oil denies revenue for many bad actors," he wrote.

"Cheap energy means more economic growth, more jobs, and more spending power in the hands of many. Maybe that lessens violence. We hope the good people win."

MarketWatch reported the stronger dollar is starting to concern both traders and economists, citing a new report from the Bank for International Settlements (BIS).

"While the appreciating dollar might be attractive for Americans traveling overseas, it seriously affects other parts of the world economy, and in particular countries and companies that have taken out loans in dollars. In this regard, emerging markets could be facing a major setback, as they pay back and service the debt they've taken out in the U.S. currency," MarketWatch noted.

The BIS estimated that since the financial crisis, international banks hiked their cross-border loans to emerging market countries to $3.1 trillion — with most of that debt held in U.S. dollars.

That means that if a local currency continues to weaken against the dollar it "could reduce the creditworthiness of many firms, potentially inducing a tightening of financial conditions," the BIS stated, according to MarketWatch.

The rising dollar is harming the returns of U.S. investors who invest in foreign stock funds, The Wall Street Journal reported.

"The performance of the international shares must also be translated back into dollars — unless a fund hedges its currency exposure, which is rare. And because the dollar has generally climbed against other currencies in recent months, a stack of foreign currency typically buys fewer dollars than it used to," The Journal stated.
 

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The biggest negative surprise David Kotok, chief investment officer at Cumberland Advisors, could imagine that is not currently priced into financial markets would be a full-blown global currency war.
Kotok, dollar, currency, oil
491
2014-14-09
Tuesday, 09 December 2014 12:14 PM
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