Wednesday, August 18, 2010

THIRD TIME IS A CHARM? VIETNAM TRIES DEVALUATION AGAIN!

When the idea of having a healthy economy with low debt and low expenses is out of reach, what else can a country do?  Devalue your currency of course!

VIETNAM DEVALUES ITS CURRENCY FOR THE THIRD TIME THIS YEAR

The wiggle room for global governments is quickly disappearing and these countries are competitively attempting to make their currencies worthless.  (These meaning all countries - don't think the US isn't really doing this.)

Since January 1st, Vietnam has devalued two other times and Venezuela has also devalued.  What does this mean to their citizens?  Basically any good that they bought from outside the country is immediately more expensive.  Think paying 10% or 20% more for gas or imported goods overnight.

WHY DEVALUE?
Governments want to devalue the currency because it provides them two benefits.  Primarily, these exporting nations devalue to make their goods cheaper on the global market.  Since Vietnam makes cheap plastic stuff when they devalue, a foreign countries buyers can buy more cheap plastic junk.  Take comfort in the fact that the $1.00 store in your neighborhood can buy more crap for less dollars and sell it to you!  A second reason that governments might devalue is to cheapen the value of the debt that they owe to foreigners if they are able to repay in their own sovereign currency.  Clearly they would not want to devalue if they had to pay back creditors in a foreign currency.  Many countries must weigh the benefits between cheapening their exports and the added cost of borrowing if the debt is priced in another currency. 

ANYONE ELSE IN THE RACE?
Look for other nations to follow suit as the race to zero heats up.  We will begin seeing talk of Japan trying to intervene in its currency, (although I don't expect them to do an outright devaluation yet - give it 2 years tops), and they will begin by selling yen to attempt to reduce the value of their currency.  As an example of why Japan must consider this - Toyota's have become more expensive in the world as people outside Japan must pay for cars with more of their currency.  This is exactly why Toyota makes cars in the US because it is attempting to regulate the impact of the currency differential as the yen can goes higher versus the US dollar.

TRADING IMPACT
The risk of holding an ETF that focuses on these emerging countries like Vietnam is that you deal with market, political, interest rate, economic, and currency risks.  Today's action by Vietnam brings the last risk into focus.  When the government devalues the currency there should be an immediate decline in the value of the stocks in the stock market relative to the US dollar ETF.  As I look at the etf for Vietnam (VNM) it is down about 2% today.  Year to date the etf is down around 7%.  You must keep these risks in mind when investing in any foreign investment.  Speaking specifically to the strategies I've discussed where we would invest outside of the US due to a low growth rate and poor political policies, we must endure these risks, but ultimately the growth potential outside the US is much greater and we obtain more potential for compensation for the risk taken than focusing in our domestic investments.

GOATMUG