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In today's investment landscape, risk can come in all shapes and sizes.
When structuring a stock portfolio most investors try to gauge the risk in
buying particular stocks.
Savvier investors also factor in sector risk, business cycle risk, and
recession risk. Cautious investors may try to mitigate these risks by
favoring bonds over stocks. But even then they must contend with default
risk, interest rate risk, and in the case of sovereign debt, political risk.
However, with central bank monetary policy now an increasing driver of
economic outcomes around the world, there is one risk factor that deserves
more attention:
currency risk. No investment, whether it be in stocks, bonds, real estate, or lemonade stands, can
hold up well if the currency in which it is valued takes a tumble. It always
surprises me that most US investors still fail to take currency into account, and in particular their potentially overweight
exposure to the US dollar.
Many market watchers have justifiably concluded that the spiraling debt
crisis that is now underway could develop into a major currency crisis that
starkly alters exchange rates. Rather than rising above the fray, the US
dollar could be in the center of the storm - especially if its valuable
reserve currency status becomes threatened.
The dollar, which many now regard as the ultimate "safe haven,"
may prove to be a trap for those investors who lack adequate currency
diversification.
In the spirit of sharing our favorite dollar-alternatives, I recently sat
down with Axel Merk, founder and president of Merk Investments, who is a well-known
authority in the international currency arena today. That conversation
resulted in a new report, entitled Peter Schiff's and Axel Merk's Five Favorite Currencies for the Next Five Years,
which is now available for free public download at www.newcurrencyreport.com.
For years, both Axel and I have raised the issue of currency risk, and we
both continue to educate investors on the value of currency diversification.
Although we agree on the big issues, there are differences in how we see the
strengths and weaknesses of various world currencies.
In the report, we contrast our views on such potential safe haven
currencies as the Swiss Franc, Norwegian krone, and Australian dollar. We
discuss in detail the potential collapse, or possible resurgence, of the
embattled euro. And we also spend time evaluating the future prospects for
the Chinese renminbi - a currency that both of us
agree will play a dominant role in the 21st century global economy.
Since the fiat currency game is in the hands of governments, many of our
most interesting disagreements stem from the different odds Axel and I place
on government reform.
Have the Swedes had enough of the welfare state? Will Hong Kong switch
from a US dollar peg to a yuan peg - or will the
Hong Kong dollar one day float on its own?
Are left-wing parties more likely to pass punitive taxes in Australia or
New Zealand, and if so, how will those issues affect their economies? No one
knows for sure how these events will play out, but as investors, we have to
act on the data as we see it - and sometimes even like-minds see it
differently.
Fortunately, Axel and I have drawn similar conclusions about the
macroeconomic picture.
We fundamentally agree on the absurdity of the status quo, which sees the
US offering IOUs to the rest of the world in return for real products. After
the dust settles from what could be a global currency realignment, we believe
that a new faith in sound monetary policy may emerge, which could then lead
to the reestablishment of gold as the ultimate international reserve asset.
But since we believe one's assets should be invested, not simply kept
"under the mattress," Axel and I will continue to invest in
countries with strong national balance sheets, prudent central bankers, and
better-performing economies. We generally agree as to which countries qualify
for such laurels... but narrowing it down to our top five favorites can
result in some interesting discussion.
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