Lombardi: Stock Market Commentary & Forecasts, Financial & Economic Analysis Since 1986

Currency Wars to Create More Troubles Ahead

Wednesday, January 16th, 2013
By for Profit Confidential

It’s quite a race…

As countries around the world struggle to grow in 2013, central banks in the global economy are in a race to devalue their currencies. This is one race I predict will end with a bunch of losers.

The central bank of Japan has gained some extra attention lately due to its increased printing activities. The Prime Minister of Japan, Shinzo Abe, made an announcement last week about a new 10.3-trillion yen spending spree to boost Japan’s economic growth. (Source: Financial Times, January 11, 2013.)

But Japan is not the only country involved in printing and devaluing its currency. Other countries in the global economy are doing the same. The central banks of Switzerland, Brazil, and China have taken steps to devalue their currencies. It’s an outright currency war amongst central banks.

Even Russia is getting into the currency devaluation race. The central bank of Russia has been actively buying foreign currencies. It bought 4.83 billion worth of foreign currencies so far in January and purchased 5.15 billion Russian rubles worth of foreign currencies in December of 2012, as the rising ruble has been hurting exporters. (Source: Bloomberg, January 11, 2013.)

But how useful is the ploy of devaluing currency to stimulate economic growth? Philadelphia Federal Reserve Bank President Charles Plosser recently explained that currency devaluation has no benefit to the global economy. He said, “So central banks and governments need to be cautious about allowing us to slip into a regime like that because that would not be healthy for world trade or for the economies.” (Source: Reuters, “Fed official warns about slipping into currency wars,” January 11, 2013.)

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Dear reader, my concern is that there are too many central banks involved in this new (but really old) phenomenon of printing money to lower currency values and stimulate economic growth. If all central banks work to devalue their currencies at the same time, will it work?

Right now, the reason for central banks to print money is declining exports. But I don’t think they realize how bad the situation is on the demand side. Once demands picks up, export growth will eventually follow. Printing more money devalues currencies, but won’t increase demand; rather, the more money printed, the greater chances of inflation and the more expensive exports become—a classic double-edged sword.

Where the Market Stands; Where it’s Headed:

As I have been predicting in these pages, I believe 2013 will be the year the bear market rally in stocks that started in March of 2009 comes to an end. And it may end earlier in the year than most analysts think possible. The stock market is close to its top.

What He Said:

“Many of today’s consumers have purchased properties with very little down payment. They’ve been enticed by nothing-down, interest-only, second and third mortgages. Bottom line: the low interest rate environment sucked consumers into the housing market big-time. And that will eventually cause us all problems.” Michael Lombardi in Profit Confidential, June 22, 2005. Michael started warning about the crisis coming in the U.S. real estate market right at the peak of the boom, now widely believed to be 2005.

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Michael Lombardi - Economist, Financial AdvisorMichael bought his first stock when he was 17 years old. He quickly saw $2,000 of savings from summer jobs turn into $1,000. Determined not to lose money again on a stock, Michael started researching the market intensely, reading every book he could find on the topic and taking every course he could afford. It didn’t take long for Michael to start making money with stocks, and that led Michael to launch a newsletter on the stock market. Some of the stock recommendations in Michael's various financial newsletters have posted gains in excess of 500%! Michael has authored and published over one thousand articles on investment and money management. Michael became an active investor in real estate, art, precious metals and various businesses. Readers of the daily Profit Confidential e-letter are offered the benefit of the expertise Michael has gained in these sectors. Michael believes in successful stock picking as an important wealth accumulation tool. Married with two children, Michael received his Chartered Financial Planner designation from the Financial Planners Standards Council of Canada and his MBA from the Graduate Business School, Heriot-Watt University, Edinburgh, Scotland. Follow Michael and the latest from Profit Confidential on Twitter or Add Michael Lombardi to your Google+ circles

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