"Currencies - The Next New Thing, or Yesterday's"

Sydney M. Williams

Thought of the Day

“Currencies – The Next New Thing, or Yesterday’s?”

November 10, 2010

Niels Jensen writing in his November 2010 “The Absolute Return Letter,” mentioned that earlier this year he had lunch with John Paulson, manager of his eponymous hedge fund. When asked about the next driver for investment returns, Paulson answered “currencies”.

Currencies, in the past few months, have become almost the exclusive focus of analysts, portfolio managers, stock brokers and the media. In the forty-three years I have been in this trade, there has always been something that momentarily assumes monumental importance. In the late 1970s, a rise in gold and silver prices attracted attention and resulted in the bankruptcy of the Hunt Brothers. In the early 1980s it was the money supply numbers that everyone waited for with baited breath on (I believe) Friday afternoon. Tech and internet stocks, where “eyeballs” were counted with exacting precision, sucked in investors and the media in late 1999, just before collapsing into a heap from which they still have not recovered. In June 2008 it was the price of oil, which rose to $140 a barrel, with Goldman Sachs infamously predicting a target of $200.

Today it is currencies and, specifically a supposed race to see which country can debauch their currency the most in the shortest period of time. The United States has done well in this race. Over the past ten years the Dollar, against the basket of currencies that comprise the Dollar Index, has declined 35%, implying a doubling of prices on imported goods every sixteen years. The Federal Reserve may be concerned about deflation, but a weak dollar and rising commodity prices mean that consumers’ income will be purchasing less.

The Group of 20 is meeting now in Seoul. Currencies will be the principal topic of conversation and will be made more interesting given China’s trade surplus for October reaching a new high of $27.1 billion. Less publicized, however, was the news that their imports were up 25.3%. China, in anticipation of the negative publicity their trade surplus would engender, raised bank reserve requirements by fifty basis points.

While concerns of the Dollar are legion, the truth is it is impossible to know what will happen. Jim O’Neill, newly named Chairman of Goldman Sachs Asset Management (and former Head of Global Economics, Commodities and Strategy Research for Goldman) has suggested that China and the United States have entered into a “grand bargain” for the Yuan. The decision to raise reserve requirements is indicative that such a possibility may be in the works. If Mr. O’Neill is correct, we may have to search for another concept on which to focus.

As investors we must always take care that in our daily pursuit of the “next new thing” we do not become myopic of long term opportunities.