Count Down to the G20

World Economic Review
Devil: world banks hold most of their reserves in US$-based investments. A lower dollar hurts these banks and puts the world’s shaky banking system at risk again.

Deep Blue Sea: the US economy is the engine that powers the world’s economy. It’s sputtering and coughing right now because of the collapse of the American real estate market. A lower US$ would help the American economy recover because it makes US exports more competitive in other countries.

The May 26 G20 meeting will face this devil-deep dilemma. Let’s see what we can glean from the trend of the US dollar vs. the basket of international currencies. In late April and early May it looked like the banking system was going to be sacrificed to help the US economy because the US dollar kept going down. It was sinking toward the ultra low level it hit when the banking collapse was in full bloom in 2008. Then, seemingly out of no-where, on May 5, 2011, the US dollar rose dramatically and began a zigzagged up trend. Are the economic powers that be trying to control the word’s currencies as May 26 draws near? Will they try to hold the US dollar where it is for the next few weeks?

Let’s review this devil-deep scenario from the Canadian perspective. Canada gets economic enjoyment when America has a modest amount of inflation. Our resource based economy thrives on other nations’ inflation. The 17% decline of the US dollar in the past 50 weeks has been accompanied by a rise in commodities such as grain prices, fuel prices and metals prices. This has been good for Canada. But, some analysts look at the recent collapse of gold and silver prices as a sign that this game is over. And they suggest that the current blow off in gasoline prices will be the final blow-off in the current inflation game. If the commodities inflation game really is over, that would not be a favourable development for Canada. Toronto stock market investors would want to sell their natural resource investments and stock up on health care or consumer staples investments. Yesterday’s leaders, the Canadian resource stocks, would become tomorrow’s trailers, if the US dollar starts to rise and American inflation cools off.

And it’s your portfolio of investments that hangs in the balance. That part of your RRSP or pension fund that is invested in the Canadian stock market depends on the price of the US dollar. In my investment book, Beyond the Bull, I explain the importance of getting experience in the investment world. Getting experience means taking action based on your knowledge of changes in the world’s economic situation. The devil-deep scenario outlined above has been with us for quite a few years now, following the 6-year devaluation of the US dollar from 2002 to 2008. And it’s still with us. But it seems easier to express an opinion about the market than to take action. It’s easy to think about economic things; it’s not so easy to do something in reaction to economic things.

When the financial press starts to report the important news that will flow from the G20 meeting a few weeks, remember how important it is for them to find balance among the various currencies. And remember how important it is for you to take action to protect your own investments in response to G20 currency policy.

To order your copy of Beyond the Bull and the Five Levels of Investor Consciousness CD, or to sign up for Ken’s free monthly webinar, visit www.gobeyondthebull.com (Bullmanship Code = SS32).

Contact Ken directly at ken@castlemoore.com.