Why Surging Global Capital Flows
will Give the Yen a Shot in the Arm
Today's comment is by Jack Crooks, Editor of World Currency Options and President of Black Swan Capital.
Dear A-Letter Reader,
It's often been said that when the U.S. sneezes, economies around the world catch a cold.
But even as health warnings of a 'superbug' staph infection spread across the U.S., our weakened economy appears much less contagious to the outside world than it has in years past.
I attribute this to two reasons.
First, economic power continues to shift from the West to the East.
Second, foreign powers are now more willing to inoculate themselves from weakness in the United States. They're doing this by establishing Sovereign Wealth Funds (SWFs), or government-sponsored investment companies.
Together, these two forces are going to reshape the investing landscape. Specifically, they're going to push the dollar lower and currencies like the yen higher.
I'll get to the specific details on SWFs and their impact on currencies in a moment. Let's start by talking about why.
Overseas Growth Is a Shot in the Arm
for the Global Economy
Globalization is the medicine the world's been searching for. It's what keeps a U.S. economic virus from infecting everybody else. For many years, globalization has been just a distant dream. But this cure is finally becoming a reality.
We've seen strong, healthy economies spring up around the globe. As expected, they're acting as the antidote to the slowdown happening in the United States.
China is at the forefront. This economic powerhouse should continue growing for years to come. The country notched an 11.5% growth rate for the three months ending in September - the third quarter in a row of 11%+ expansion.
Meanwhile, China has brought a lot of other economies along for the ride. We've seen the emergence of role-playing economies like Singapore, Thailand and Malaysia. These less-talked-about players are also injecting the world with newfound growth.
All of these countries are exporting more goods, and receiving substantial cash in return.
Plus, they are creating tremendous demand for all sorts of commodities. Prices are rising across the board, and countries rich with natural resources are raking in big money.
End result: New trade relationships are being forged, and economies around the world are gaining immunity from weakness in the U.S.
Investors are sitting up and taking notice, which is why ...
Money Is Flowing into Foreign
Economies from All Sides!
According to the International Monetary Fund, financial flows into emerging markets in the first half of 2007 surpassed the total financial flows for all of last year!
In fact, emerging market economies have DOUBLED their reserves just since 2004 to an estimated US$4.1 trillion!
This is just the beginning, in my opinion. After all, it's one thing when handfuls of individual investors are using focused investments to target emerging market economies. It's radically different when enormous waves of capital are about to flow into emerging market currencies.
Remember, these new economic juggernauts are sitting on mounds of cash. They have money coming in from all sides. They're raking in money from the goods they're exporting, from the commodities they're selling, and from investors who are pouring more and more funds into both their companies and their bonds.
In the past, they might have just kept all this money in U.S. Treasuries, and other dollar-denominated investments. But no longer!
Cash-Rich Emerging Economies Are
Establishing Sovereign Wealth Funds
And Moving Away from the Dollar
Booming countries - including major oil producers in the Gulf States as well as Russia - are going to make major changes to the way they invest. And Sovereign Wealth Funds are the vehicles they'll use.
Nations use these government-owned investment corporations to invest surplus reserves. They're rapidly becoming a popular way for central banks to get rid of their U.S. dollar investments, which are plunging in value on almost a daily basis.
It's estimated that SWFs currently have more than US$2 TRILLION in assets under management. That's quite a chunk of change! However, they are expected to exceed US$13 trillion in assets just 10 years from now.
Already, we've seen these investment funds move money into other more stable currencies such as euros and British pounds. But I think they'll get even more aggressive, which means currencies of other nations will get bid up in the process.
I believe the Japanese yen is one currency that will benefit greatly from this trend!
See, SWFs are going to allocate a much greater share of their investments to Asia. For some countries, it will amount to investing in their home region. For others, it will simply be going where the growth is. But all of them are likely to gravitate toward Japan, which is the second-largest economy in the world.
End result: We will see more dollars being converted into the yen and other Asian currencies.
Now, it will require time before everyone notices the full effects of these SWFs. But those who are ready and waiting will be well rewarded.
If you're already on board with investments that are designed to profit from a surging yen, great! If not, now's a good time to position yourself for what will certainly be massive moves in the currency markets.
JACK CROOKS, Editor of
World Currency Options
EDITOR'S NOTE: As nations around the world pour their SWF assets into Asia, select Asian currencies like the yen will rally hard. Like Jack, you could use this rising trend for double or triple-digit profits with the right well-timed currency options. These strategic vehicles give you the right, but not the obligation to buy certain currencies for a particular period of time. They're quick, easy ways to tap into the currency markets. Best of all, no matter what happens, you never lose more than your original investment - but your profit potential is nearly unlimited. Click here to find out if currency options are for you.
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