A Question of Currency: Should Australians Invest in the Fourth Reich?


The Chinese character for ‘crisis’ is made up of two other characters – ‘danger’ and ‘opportunity’. Europe’s sovereign debt kerfuffle is obviously a crisis, and it sure is dangerous. But is it an opportunity for Australian investors?

The short answer is a definitive ‘maybe’. This Daily Reckoning will explore why. After explaining why we called Europe the ‘Fourth Reich’ in our title.

It’s a term that Adolf Hitler popularised. ‘Reich’ more or less means empire in German. The First Reich being the Holy Roman Empire, the second a German monarchy between 1871 and 1918, and the third Hitler’s own. The Fourth Reich, as you might have guessed, is the European Union.

Who’s in charge this time around? The newly undemocratically elected President is none other than a German who goes by the name ‘Schulz’. Presumably not the one of Hogan’s Heroes fame.

Sergeant Schultz’s personal motto at the POW camp he works at is ‘I know nothing, I see nothing.’ The POWs Schultz guards know how to take advantage of this. In much the same way, the Greeks knew how to take advantage of the same mentality at the EU when it came to deficits.

Anyway, back to investing in the Fourth Reich.

The first thing to think about, if you’re a foreign investor in another region, is currencies. Well, it may not quite be the first thing, but here is why it deserves the top spot in this article: movements in currencies can make or break investment returns. Not just in the sense that you will have to convert your hard won gains or blameless losses in foreign markets back to Aussie dollars at a changing exchange rate.

No, currency moves can strongly influence the actual returns before they’re even converted to your domestic currency. We’ve written about this in the past. The Aussie dollar gold price isn’t up as much as its American equivalent because of the Aussie dollar strength. That’s an example of currency moves determining entirely domestic investment returns for Australians. The ASX200 suffered a similar fate when compared to indices in the UK and US. It underperformed badly, probably because of the Aussie dollar’s rise.

So currency moves can influence your foreign investments in their return and in their conversion back to your own currency. But how do things look between the Euro and Aussie dollar? We asked Slipstream Trader Murray Dawes what he thought about this one year chart of the AUD/EUR.

AUD/EUR 1 Year

AUD/EUR 1 Year

Source: Yahoo Finance

But Murray turned out to be busy taking advantage of the AUD/USD exchange rate in Hawaii. Not that the picture isn’t clear anyway. The Aussie has taken off to the upside since mid December last year. And it’s up around 70% from its low reached during the panic of 2008. So the momentum and trend indicate a strengthening Aussie dollar relative to the Euro. And US dollar, to a lesser extent recently.

What’s odd about this is that, in normal times, this would be interpreted as positive for the Australian stock market. Money flowing into Australia should push up asset prices here. But that’s not what we saw. Instead, asset prices fell to offset the rising Aussie dollar. So perhaps the rising Aussie dollar is really telling us about USD and EUR weakness? Both currencies are being printed at breakneck speeds after all.

If that trend continues, investing in Europe would see you lose some of the value of your Euros once you bring them home to Australia.

The flipside to this is supposed to be that the Aussie dollar could crash if another crisis breaks out. That would enhance your returns in Europe. A 50% fall in the AUD/EUR exchange rate would be a rather nice return. Assuming your investment fell less in Euro terms.

There’s a slight hiccup with this strategy. If Europe and the Euro are the trigger for this crisis, it could see the common currency plummet instead. Perhaps alongside the Aussie dollar. Investing in Europe could turn out to be a lose/lose scenario.

That would be ironic, as our opening statement is supposedly a misconception. The Chinese character for ‘crisis’ is not made up of the characters ‘danger’ and ‘opportunity’. Instead, it features ‘danger’ and a character that ‘means something like incipient moment; crucial point (when something begins or changes)’ according to this website.

In other words, the opportunity you think you have could just be a dangerous crisis.

Playing Devil’s Financial Advisor

Perhaps the best reason to invest in Europe is that it is not Australia. This seems a bit harsh. Especially considering the yarn spun on mainstream news cycles about Europe’s woes. But remember, here at home, we could see a currency crash, a stock market crash, a property crash and the first recession in two decades all at the same time. Throw in a Chinese slowdown and the vast majority of the ASX could go up in smoke. Whereas in Europe, there was plenty of back burning in 2008 to clear out the brush.

Theoretically, much of Europe’s pain is already priced into stock markets. The mathematical inevitability of Europe’s sovereign debt crisis is a pretty big hint. Whereas in Australia, a significant proportion of money managers and private investors don’t remember what a severe recession looks like. If any recession at all.

The big problem with having funds to invest is having to invest them somewhere. (Yes, bank deposits and even cash are investments.) And in a world of deleveraging economies and financial crises, the least bad option is probably the best one.

You have the choice between the illusion of Australian stability and the obvious ‘crisis’ of Europe. Which you prefer is pretty much up to you.

Until next week,

Nickolai Hubble.
The Daily Reckoning Weekend Edition

Nick Hubble
Nick Hubble is a feature editor of The Daily Reckoning and editor of The Money for Life Letter. Having gained degrees in Finance, Economics and Law from the prestigious Bond University, Nick completed an internship at probably the most famous investment bank in the world, where he discovered what the financial world was really like. He then brought his youthful enthusiasm and energy to Port Phillip Publishing, where, instead of telling everyone about The Daily Reckoning, he started writing for it. To follow Nick's financial world view more closely you can you can subscribe to The Daily Reckoning for free here. If you’re already a Daily Reckoning subscriber, then we recommend you also join him on Google+. It's where he shares investment research, commentary and ideas that he can't always fit into his regular Daily Reckoning emails.

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