Worrying trend in the global economies

On August 3, 2010, In Thoughts, By Ukey Hoo

As the markets stabilized and economies getting back on track (hopefully), a growing trend is happening that’s creating a discrepancy between eastern and western economies, something that’s starting to create an opportunity for people with my investing profile.

The more prominent currencies in the world namely USD, EUR, GBP, JPY, CAD, AUD, NZD, CHF are mainly western economies. These are also economies with more established financial systems. Based on my opinion, as these economies grew in the past, their currencies also grew stronger as their competitiveness increased. That was in the 20th century. In the 21st century, as these economies struggle to re-invent themselves, they are also undergoing pressure to depreciate their currencies to stay competitive. As such, you can see western (developed) countries trying to debase their currencies to stay competitive in the current easternizing trend.

On the other hand, eastern economies (See China, India, South Korea, Indonesia and other developing Asian countries) are also trying to re-invent themselves by moving up the value chain in the global market. As their share of the global markets expand, their way of making higher profit comes from an appreciating currency. However, as the bulk of their economies are still pretty low in the value chain (see low-mid end products), by appreciating their currencies, their competitiveness in the global economies are also declining.

This said, economies are debasing their own currencies against other currencies, with asian economies debasing at a lower pace than western economies. In this chase for the lowest value, the people who are in winning positions are governments and holders of hard assets. While investment in asia can reap hug returns, how big are the returns in real terms? By holding investments in Western economies, what kind of returns can be expected?

Needless to say, this is a changing investment world, and the debasing of currencies can only go on for so long before it becomes unsustainable. When will this be, I don’t know, but one thing is for sure, I will continue investing in cash flow vehicles, and forgo short term profits so that I can grab hold of the winner of the incoming new regime, whatever it is and whenever it comes.

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