Currency Wars: Where Investors Are Vulnerable

Where Investors Are Vulnerable“The supreme art of war is to subdue the enemy without fighting.” The author of this quotation is Sun Tzu (544–496 BCE), a Chinese general and the author of The Art of War, the classic manual on warfare tactics.

Eons ago, I had a summer job in golf course construction. It was tough, dirty work, but it was great to learn how a golf course gets made. There was a lot of manual labor, but to move stuff around, my boss bought Kubota tractors. We pounded the daylights out of those machines. They were tough little tractors, for sure.

Kubota Corporation (NYSE/KUB) is, of course, a Japanese outfit. The company’s shares have been soaring on the stock market—a massive breakout after a seven-year consolidation. The entire Japanese stock market has broken out.

Prospects for the Japanese economy are a little brighter, but the soaring Japanese stock market also has to do with the weaker yen. Japanese Prime Minister Shinzo Abe wants to employ massive fiscal and monetary stimulus this year and a weaker yen policy against the U.S. dollar.

Bloomberg quoted Kubota’s President, Yasuo Masumoto,noting the company is expecting an extra 20% gain in revenues starting this fiscal year because of the yen’s drop compared to the U.S. dollar. Kubota’s stock chart is featured below:

KUB Kubota corp stock market chart

Chart courtesy of www.StockCharts.com

Kubota is pining to get into big tractors (those used in agriculture), and management is targeting the U.S. market big-time. Such an outspoken and decisive new policy to weaken the yen versus the U.S. dollar, to sell more tractors, to boost the stock market and everything else, is 100% political.

The U.S. dollar index recently broke out to the upside, but its long-term downtrend is pronounced. Governments around the world are doing anything to bring growth to their economies. One of the worst culprits is China, but they don’t care.

Planned currency devaluations against the U.S. dollar are happening now in Venezuela and Argentina. Russia is banging on the table about weakening the ruble, and Thailand is placing political pressure on its central bank to lower interest rates to help exporters. (See “Two Emerging Markets Stomping U.S. Growth.”) Japan’s move was extremely bold.

There is no other market manipulation worse than currencies. And the U.S. dollar is the main target. So-called currency wars are serious business, and the political manipulation they manifest is contagion-causing. The U.S. dollar has a lot of problems, but it’s still the reserve currency. This is why foreign currency debasement is such a serious threat. And the stock market is vulnerable, too.

Everything is vulnerable with currency instability. Food costs, energy, incomes, the stock market—your entire pocketbook; and it can happen quickly. Long-term currency movements are easier to deal with. It’s the short-term moves against the U.S. dollar that are really destabilizing.

The stock market is looking healthy these days, but currency wars are a growing risk. How can you protect yourself? Be extremely conservative with your investments. Is there anything you can really do about it? No.

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