This week, the currency war came just that much closer with the SNB deciding to draw a line in the sand at 1.2 Euro. Notes are leaking out that people are Not Happy with Japan acting unilaterally because, hey, everyone thinks they gave them an arm and a leg in trying to help after the earthquake, the least they could do would be to stop whining about their currency and watch the rest of the world effectively do competitive undervaluation, right? To the politicians that are talking about the “market” being the right mechanism to set currency rates: you don’t think it is for bond prices, why would currencies – which, contrary to bonds, can’t even be modelled effectively on a cash-flow or risk basis – be any different? You are all being helped by these markets knowing that you have no clue what you are doing, so the element of self interst definitely is there. The memo must have been: defend the markets when they help you, bash speculators and lack of regulations when they don’t. Whatever the G7 may say, I guess it’s time to draw arms to defend your exports at all costs.
But, we all know about the hypocrisy and sleaziness of politicians. Hopefully we have elected them there to at least keep them occupied enough to not do lasting internal damage to our companies. The really worrying thing for us as market participants is when the analysts start talking like they are crazy. What did they recommend for safe havens after the SNB action? The Scandies!
What’s so bad about countries that look fundamentally good through the scope of low debt, budget surpluses, high export ability, competitiveness, somewhat competent politicians, high growth, and in the case of Norway, natural resources? You might say that this seems like some fairy dreamland to put your money into compared to the rest of the world. It indeed is – in good times.
Just like you and everyone else perhaps do not want to hold particular positions in equity now no matter what the company because the outlook is risky, you do not want to hold this set in bad times. Lets look at this for a while. Basically, the economies of Sweden and Norway (Denmark is euro pegged, keep that in mind!) are good, but for safe haven status, they do not provide much in terms of access. Just from the currency perspective, they contribute about one percent each to global turnover in the currency markets (which puts them just outside of the top 8, perversely), so any larger move out of the dollar, euro or yen would be impossible to absorb by these currencies, even in aggregate, unless volume increases radically. What are the odds of that happening? If we look at the relative totals of currency accessible which are likely to be effectively constant for longer times and can be (very crudely) proxied by relative total GDPs*, these countries compare broadly equivalently to how they did in the turnover comparison with the major top 8, and way less favourably to the major emerging markets.
We deduce that there is not much help there. It gets even worse when you look at what you can actually buy with your newly traded SEKs or NOKs. Bonds? Norway is one of the world’s biggest net creditors! Sweden has gone for a long campaign of limiting their debt, and sits around the 35-40% region in the debt/GDP department, and corporate bond issuance isn’t particularly hot in either place. That leaves equities. Anything major you can find on any of the exchanges? Export driven! That’s the reason why the stock market correlation with the currency is so strong and positive: whenever major companies gain and become attractive to outside investors, these have to buy large amounts of currency to enter the market.
Say you manage to find some way of buying property (physical, paper or cash-flow from loans) in either place? The very reason that the central banks of these places have been so hard at work raising rates over the past two years has been the fear of a bubble there! The talk of the town is housing bubble, which could easily be pricked if exporters aren’t busy pouring in ever increasing amounts of overseas earnings.
In summary, what you and everyone else can reasonably buy is very limited and where possible carries enormous risks from the very things you want to shield yourself from in a crisis scenario. This doesn’t need to be all bad: gold is gaining partially on speculation that emerging market economies and households are taking larger positions, adding an element of risks strongly associated with growth. However, the killing blow is this: gold, the US bond market, for all their faults the yen and euro bond markets as well, are associated with liquid markets on both the underlying and currency exchange side. The British pound and Swiss franc artificially inject liquidity through extreme focus on finance in their economies, something that applies to none of the Scandinavian countries. These markets can and will freeze during a crisis scenario, can and will see a sharp drop in exports on any global deterioration, and can and will see falls in their currency value as soon as anyone thinks they heard “euro zone risk”. Over the long term these currencies are more stable (as in, won’t break up), can be controlled domestically, and have solid fundamentals. Though, that is only good for anything during the best of times. Any liquidity problems appear and all that foreign invested money goes away like a pleasant dream when the alarm clock rings.
The sad part? Look at any chart of the currency values over the 5 years relative the dollar, the euro, or the yen, and you could draw the same conclusion. Thanks for doing your jobs, analysts. My bet is still strongly with safe havens being the yen, gold, and – for the immediate timeframe – US debt. Buy anything you can off China that isn’t equity, but you need to be creative (art/wine/antiques still probably has a bit to go for example) or buy the commodities they buy.
Parting words: at the core, the entire discussion of the Scandies as safe havens underscores just how bad things really are, and how much risk there is throughout the system.
*For quick volume changes, M1 ratios between countries is a better measure of relative tradable currency to move the markets, and total money supply is of huge interest overall and allows us to do better adjustments. For emphasis: ratios are the important things, NOT the actual numbers.