In our opinion, investors are looking for a way out of European currencies and into the Canadian, Australian, and even the U.S. currency. This is why European money continues to flow into these sectors.

Europeans are seeking better returns in non-European currencies and in non-European bonds and stocks.


Many European investors are becoming aware that although the Euro could rally at anytime, the current structure of the European community makes it almost impossible for weak countries such as Greece, Spain, Ireland, and Portugal to improve their fortunes.

They cannot devalue their currencies to export more because the Euro’s value is in great part determined by the financial condition of the stronger members such as Germany, France and Netherlands. The ECB [European Central Bank] has no choice but to keep supplying liquidity to help the weak countries.

In November 2009, both Germany and the U.S. were paying about 3.25% on their 10 year government bonds. Today, Germany pays 3.15% and the U.S. pays 3.64%. While the excess liquidity that the ECB supplies is lowering interest rates in Germany, fears of big budget deficits is raising interest rates in the U.S.

Bonds in Canada, Australia, Brazil, and many Asian countries are also providing superior returns and stronger currencies. Investors watch relative returns on comparable investments, and when doing so they choose the higher return if other variables are somewhat equal. Thus, it is no surprise that investors are moving out of Euros and into higher returns abroad.

It is no secret that Asian countries and Brazil are enjoying more rapid economic growth than Europe. Stock market investors move to markets where corporate profits, and thus stock prices rise more rapidly. Since many economies, including the U.S. are growing faster than Europe, stock market money is gravitating from Europe to many other parts of the globe.

Many European banks have been weakened by lending to weak European community members, which has undermined their ability to help strong members of the community, and thus stunted European growth. Combine this with a debt bubble deleveraging in Europe, and one could anticipate this trend to continue for some time.

As every experienced investor knows, commodities are a tried and true alternative to a weak currency, especially if the commodity is denominated in a stronger currency. Since most world commodities are denominated in U.S. dollars, a great deal of European money is finding its way into commodities, particularly gold and oil.

Weren’t we just saying on these pages a few months ago that the U.S. dollar was weakly managed and would eventually lose its reserve currency status? Yes, we were. We continue to believe that a downward trend will be the long-term outcome, but, as we have frequently stated, it may take some time to happen. Here is what the head of the IMF has proposed in the press recently. The article below is taken from the New York Times. It seems that we are not the only ones seeing the inevitable handwriting on the wall.
I.M.F. Chief Suggests Look at New Reserve
February 26, 2010

WASHINGTON — The chief of the International Monetary Fund said Friday that the organization should reorient itself to better detect systemic risks to the global economy and quickly step in with emergency loans when financial crises emerge.

The I.M.F. leader, Dominique Strauss-Kahn, also floated the idea of creating a global reserve currency that could serve as an alternative to the dollar.

After a speech at the I.M.F. headquarters, Mr. Strauss-Kahn said in response to a question about the fiscal crisis in Greece that the fund would be “happy to help if asked” but that the European Union appeared able to resolve the crisis on its own.

“The Europeans, especially the members of the euro zone, want to try to deal with the problems themselves,” Mr. Strauss-Kahn, a former French finance minister, said. “I perfectly respect this.”

The I.M.F. has collaborated with the European Union and the European Central Bank in recent days, sending experts to Athens, but the Europeans have taken the lead on demanding that the Greek government impose cuts in public spending and other austerity measures.

In his speech, Mr. Strauss-Kahn called for a “renewed vision” for the I.M.F., which was part of the global financial architecture created in Bretton Woods, N.H., in 1944, but which faced grave questions about its relevance and survival by the time Mr. Strauss-Kahn took over in 2007.

The global financial crisis quickly turned things around. Coffers at the fund, which has 186 member nations, grew to $850 billion in the last year, an amount that Mr. Strauss-Kahn described as “sufficient to meet demand in the coming period.”

He called for the fund to improve its tools for financial surveillance and to “construct a global risk map” of nascent systemic risks. And while noting that the Federal Reserve and other central banks provided liquidity swaps during the worst of the crisis, he said that the I.M.F. should explore options like short-term credit lines for extending emergency lending in future crises.

He said the fund planned to triple its lending in low-income countries and to waive interest on loans to poor countries until 2012.

Mr. Strauss-Kahn also said it would be “intellectually healthy to explore” the creation of a new global reserve currency.

The governor of China’s central bank made a similar proposal in March 2009, arguing that “special drawing rights” — baskets of currencies issued by the I.M.F. and made up of the euro, yen, pound and dollar that have served as reserve assets — would be more stable and viable than the dollar. China’s huge holdings of dollar reserves in the form of Treasury securities have become a concern for officials on both sides of the Pacific.

Mr. Strauss-Kahn said that a new reserve currency could limit dependence on the policies and conditions of a single, though dominant, country. Few economists say they believe that the dollar’s status as the dominant foreign exchange reserve will change anytime soon. Mr. Strauss-Kahn said that while the fund might be called upon to provide a globally issued reserve asset some day, “that day has not yet come.”

Kenneth S. Rogoff, a Harvard professor and a former chief economist at the I.M.F., said the idea had been a “perennial big-think question” for decades but remained mostly hypothetical. “At the end of the day, you can’t have a currency without a fiscal policy underlying it,” he said in an interview.

Asked for a response to the remarks, the Treasury Department pointed to its most recent semiannual foreign exchange report, released in October. That report said that “as long as the United States maintains sound macroeconomic policies and deep, liquid, and open financial markets, the dollar will continue to be the major reserve currency.”

We are not confident that a cobbled-together currency that represents a basket of value of various currencies can work, but it is nonetheless interesting that Strauss-Kahn is broaching the subject.

In the most recent issue of Foreign Affairs, Harvard professor, Niall Ferguson discusses how rapidly complex systems can unravel. His thesis is that the more complex the system, the harder it is to predict behavior of the system when it loses equilibrium.

Empires are complex systems. The Roman Empire, which had stood unequalled for many hundred years, unraveled in about 50 years. The U.S. has enjoyed unequalled influence and power for less than 100 years, and it already looks as if its power has peaked. The U.S. has become more complex politically, economically, demographically, etc. The bottom line of professor Ferguson’s essay is that the unraveling of our complex system could be much more rapid than people want to believe.

From our perspective, it is an evolutionary process, a cycle. It will be damaging to some, yet at the same time, the cycle creates wonderful opportunities for those in the right place at the right time, especially for alert investors.


As we stated at the outset, we believe that the rally in gold and stocks in many parts of the world will continue for some time. We own shares in U.S., Canada, China, Malaysia, Thailand, Indonesia, Brazil, and Poland, as well as special situations in various other parts of the world.

For our clients who sell short, we have been short the Euro against the Australian dollar.

Thanks for listening.

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