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No Yen to Imitate Japan
11/12/2009 2:44 pm EST
Currencies are not flags, to be run up the pole and saluted as symbols of national virility. They're means of exchange, not credit scores. Their principal advantage over gold is that, in a pinch, more can be printed.
There's certainly been a lot of pinching and printing going on, so it should hardly come as a surprise that income-producing assets around the world are fetching more fancy paper depicting landmarks and heroes. The surprise is that this should serve as the latest excuse for the massive overdose of public cynicism.
The world economy is starting to fire on most of its cylinders again after last year's breakdown and reconditioning. Growth is much a more natural and stable state of affairs than many people dare to believe after last year's collapse. Investors discounting economic progress (remember when the green shoots were nothing but weeds?) have paid a heavy price for their skepticism.
On the happy side of the ledger, we have a global economic revival, a stronger banking system and indications that the US job market is in the early stages of a turnaround. China’s industrial output is up 16% from last October, matching growth in its retail sales. Australia has just seen a surprise rise in employment. Even in Germany, things are looking up.
On the other hand, public finances are shaky across much of the developed world, with revenue depressed and spending spiraling. The European Commission has just given its members several years to bring their deficits back in line with rules. Credit rater Fitch has warned that the UK's AAA designation may be at risk. But Bank of England Governor Mervyn King sounded more worried about high unemployment and the credit squeeze—to the detriment of the pound.
Fitch and others are even more fidgety about Japan, where the heavily indebted government might one day soon find too few buyers for its low-yielding bonds. For now, though, the bonds are selling because stubborn deflation is making even yields of 1.4% for the next ten years look preferable to spending money. Depending on one's politics and economics, Japan's either a cautionary tale about a government that spends too much or about a central bank that doesn't print enough money. Either way, President Obama's visit this week invites unflattering comparisons of the US to its ailing Pacific ally.
After Japan, it will be on to China for the US president, where he'll urge his hosts to let their currency rise against the greenback. Beijing seems willing to accommodate its best customer eventually, if only to keep domestic inflation in check. And there are other reasons to cooperate. "They have a huge amount of US dollars that they are holding, so our success is important to them," Obama said.
Americans hold plenty of dollars too, and stock investors have been dogged about sending new money overseas at the expense of domestic equity funds. The rationale isn't hard to fathom. As Eoin Treacy writes, "If one defines developed markets as those which have improving standards of governance, budget surpluses, fiscal discipline, firm banking sectors, strong economic growth, improving credit ratings, increasing foreign currency reserves, falling default rates, and improving infrastructure then one would have to make a leap of faith to include the USA, much of Europe, and Japan on that list."
Such reservations have left everyone turning over rocks for mossy treasures like the Israeli IT provider Formula Systems (Nasdaq: FORTY), recently recommended by Carla Pasternak. The possibility of a 20% payout early next year is tempting, to be sure, but with the stock up 50% in two months and overshooting its moving averages by a lot, one might wish to let it wander for a while.
Franco-Nevada Corp (TSX: FNV) and Migao (TSX: MGO) have calmer charts, as well as the allegiance of successful stock pickers who see deep value in these commodity suppliers. Gordon Pape recaps the bullish cases for those stocks, and adds an idea of his own that's already run up quite a bit since it was excerpted here last month.
The dollar's recent weakness has been concentrating minds. Who knows what else they will dig up?
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