Risk Aversion, Risk Aversion, and Risk Aversion

September 2, 2011

The risk averse pit into which world financial markets fell some four years ago keeps getting deeper and wider.  Bonds, especially Treasury securities, have benefited paradoxically since excessive sovereign debt is one of the chief sources of concern.  Safe haven demand has supported the dollar at times but not sheltered it from some large losses.  The Swiss franc and yen have advanced 56.4% and 60.6% since mid-2007 against the U.S. currency.  Although the dollar appreciated 2.1% against the euro this past week, it closed 0.2% softer than its value on August 5 when July labor statistics were released.  The U.S. currency traded these past four weeks entirely on the weak side of the 1.4000 per euro threshold.  Over that span, the dollar dropped 1.8% and 1.5% against the Australian and New Zealand dollars.

No paper monies are really adored anymore.  Some investors fear an inflationary end-game as the final solution to excessive public and private debt. Others fear Japan’s experience of low growth with mild deflation on a global scale.  Swiss and Japanese authorities are threatening to escalate actions to counter appreciation in their currencies.  Britain is struggling under the weight of fiscal restraint, and officials there will not be inclined to stop weakness in sterling, which underperformed the dollar both last week and over the past four weeks.  The politics of democracy is failing the tests of the 21st century.  Emerging markets are slowing, too, and no longer seem to offer the solution for advanced economies where domestic demand has floundered.  The timing, rather than the likelihood, of a breakup of the European Monetary System is the main uncertainty in that region. 

Gold and other precious metals have generated the most enthusiasm in this downbeat world.  Their uptrends long ago past through levels that made fundamental sense.  Gold is cherished because it has thrived in previous times of extremely high risk aversion.  However, the 21st century is like no time that came before, and when push comes to shove, gold may prove about as useless as paper for individual survival.  Man is endangered by the proliferation of weapons and by accelerating damage to the environment.  Holdings of gold will not kick-start real economic production.  It increasingly looks like economic problems that communities cannot solve by peaceful compromise are going to be settled eventually by violence.  Then, firearms and essentials like water are going to be commodities that matter much more than gold.

As currency markets head into the third and final trading season of 2011, the period between Labor Day in America and December 31, there are many currency-related issues to monitor.  Here are four.

  • Whether the euro permanently declines through $1.4000 and if that achievement allows a steeper depreciation of the common European currency.
  • How the euro and dollar react if and when the ECB and Fed ease their credit stances.
  • The effectiveness of escalating currency wars.  The Swiss franc and yen are key pressure points but not the only areas of currency conflict.
  • China’s management of the yuan.  The cost-benefit balance seems to be tipping toward a faster rate of appreciation, but a decision in that direction is still ultimately a political one, and the time of such moves is always hard to handicap.

Copyright 2011, Larry Greenberg.  All rights reserved.  No secondary distribution without express permission.


Comments are closed.