Message from a Hedge Fund Master: Learn About the Currency Market

The crisis in paper money has put currencies in the mainstream spotlight.

If you’ve caught the news lately, you know the Bank of Japan is debasing the yen. Last year it was the crisis in the euro. The Swiss did the unthinkable and devalued the franc. The US dollar’s flaws as an international reserve currency are being exposed.

In other words, there is no sound currency left. Welcome to the largest market in the world: foreign exchange. You must understand this market, according to one of the all-time greats of investing.

It’s the task of today’s Money Weekend to see why…

Jim Rogers: Master of the Hedge Fund

History and philosophy aren’t usually the subjects that spring to mind when you think of investing. But that’s what Wall Street veteran Jim Rogers suggests everybody learns. Rogers first went to Wall Street in 1964. It’s stretching into one long career. Rogers just released his memoir, Street Smarts.

The life of Jim Rogers makes a great story. A poor boy from Alabama now worth millions (maybe billions). If you haven’t heard of him, he founded one of the first international hedge funds with fellow speculator George Soros. In ten years, the fund returned 4,200%.

It doesn’t get better than that. They did it by investing in everything – bonds, currencies, stocks and commodities, both long and short. By the sounds of it, they were leveraged to the hilt the whole time. They got it right and won.

Rogers retired at 37 in 1980 to manage his own money. In 1998 he founded a commodity index, predicting a bull market in natural resources. It’s up 280% since.

Rogers’ not only has a long history of making money, but also a long history of accurate predictions. (For example, if you pick up a copy of Jack Schwager’s 1989 book Market Wizards, Rogers says at the time: ‘I guarantee that the Japanese stock market is going to have a major collapse – possibly within the next year or two.’ It did.)

But for our purposes today, we’ll single out one trend he sees: more turmoil in the currency markets. And for him, that means smart investors can make money. But what does he mean by turmoil?

Ben Bernanke in a Toga

Rogers says that governments will keep printing money to finance their debts. It’s the wrong thing to do, but that won’t stop them.

Here’s the man himself in Street Smarts:

‘When governments run out of money, they do not stop spending. It was no different two thousand years ago than it is today. Politicians know no bounds. If Rome was running out of silver, if its economy was being mismanaged and it was running trade deficits, the only way to keep the good times rolling was to create more money.

‘Think of Ben Bernanke in a toga. Adulterate the coinage, crank up the printing press – only the technology changes. Governments keep running out of money, and as long as that happens, bureaucrats and politicians will keep coming up with ways to create it.’

Governments can do this because they have such a lock on the money market. Legal tender laws make it illegal for competing mediums of exchange.

The right solution is to let the free market decide and get the government out of the market altogether.

Don’t hold your breath.

In the meantime, Rogers predicts currency crises will persist as capital moves around the world, looking for a safe harbour. Enormous debts overhang the major economies of Japan, Europe, and the US. As long as capital can flow freely, it’s going to flow away from places like these as they continue to debase their currencies.

He doesn’t specify, but it’s clear he has in mind places like Singapore, Hong Kong and – eventually – Shanghai becoming the leading financial centres, not London and New York and Zurich.

Different Piggy Banks

Rogers’ position is that American capital will diversify in a big way into foreign currencies (until the government makes it illegal) thanks to the US Fed trashing the US dollar.

Reading between the lines, his outlook is for foreign currencies becoming another asset class for mainstream investors, maybe as common as having a stock portfolio. He points out that in the 1960’s most people would have thought it quite odd to own common stocks. Most people invested in bonds.

So it’s likely that more FX Exchange Traded Funds (ETF’s) will spring up catering for the demand, the way commodity ETF’s and Exchange Traded Notes have sprung up thanks to the bull market in raw materials.

Foreign exchange is already the most popular among CFD (contracts for difference) traders, where it accounts for more than half of all trades.

The implication for Aussies is the Australian dollar stays high, if it stays at the top of the shopping list for international investors…until that is, traders turn bearish, then you could see the Aussie dollar quickly fall.

It will be interesting to see if a trend like this develops in Australia. We know Greg Canavan, editor of Sound Money Sound Investment, took advantage of the strength in the Aussie dollar and extreme pessimism in the euro recently to diversify the portfolio for his subscribers.

Slipstream Trader Murray Dawes analyses the major currencies every week for his traders, watching for significant shifts in capital flows.

Currently, you can get currency exposure via Betashares to the Euro [ASX: EEU], US dollar [ASX: USD] and UK pound [ASX: POU].

Even so, it’s a short list. Hopefully it won’t be long until there are more options for retail investors, especially exposure to currencies in Asia.

Until then, continued currency debasement around the globe keeps a bullish outlook for precious metals, too, if you’re thinking long term.

Callum Newman
Editor, Money Weekend

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Callum is a feature editor for Money Morning. He covers areas of interest arising from world markets and the global economy that could mean new investment opportunities for Aussie investors.

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