Any rational person wants the buying power of their money to go up, but all you ever hear from Australia’s political class is how they want the Aussie dollar to go down. The Reserve Bank of Australia’s Glenn Stevens got his wish this week after the Aussie dropped back, especially after he revealed he was ‘open-minded about intervention in the currency market.‘ Too bad about the purchasing power of your money.
It seems so simple, doesn’t it? Depreciate the currency and wait for the magic to weave its way through the economy. Too bad the evidence seems to suggest it never works in the long term. Take Britain, for example. It’s practically devalued the pound at every chance since the First World War on its long slide from the number one economy in the world. It hit a rather disagreeable bump when the country went broke in the 1970’s anyway. Today, its current status is arguably the economy with the dodgiest major currency after the Japanese yen.
And who could forget in the 1980’s the US calling on the Japanese and the Germans to sign on to the Plaza Accord agreement to get the US dollar to depreciate? One of the lobbyists for that particular effort was the US automobile industry trying to win back market share from the rampaging Japanese carmakers at the time. The US automobile industry got its wish and the US dollar devalued against the yen.
Fast forward to today… Detroit is bankrupt and the US Government owns part of General Motors in an effort to save it from insolvency. And let’s not forget that the German carmakers, with their hard deutschmarks and now euro, are still flourishing.
We don’t know what will happen to the Aussie dollar in the near future. But we wouldn’t bank on it being a reliable store of value over the long term, especially when commodities go into one of their regular, long bear markets that last over a decade, even two. When that day comes, we don’t know. We suspect it’s some time off yet. But somewhere in the future all that foreign money flowing into mines and resources will slow, and who’ll need Aussie dollars then?
We think all this bolsters the case for keeping some of your wealth in a foreign currency permanently. It can be part of a wider strategy. Take for example, the Permanent Portfolio fund (PRPFX) in the US, for example. It has a mandate to keep 10% of its funds under management in Swiss franc assets. Over the last decade, that’s been part of the steadying ballast (alongside the precious metal and bond allocations) to the wild ride of US stocks that have mostly gone nowhere for half a generation.
Traditionally, the Swiss franc has been the most trustworthy paper money but it has lost some of its lustre after the Swiss central bank pegged it to the euro a few years ago. The Singapore dollar could be a reasonable bet over the long term. We think there’s a natural hedge there for Aussies too, because Singapore is a finance-based, not resource-based economy. You may remember scuttlebutt about a rivalry between Singapore and Australia as financial centres. In reality, any notion that Australia might win — with its uncompetitive tax and business policies — was a farce from the beginning.
Granted, there is an opportunity cost to a ‘Permanent Portfolio’ style approach to asset allocation. The Permanent Portfolio mandate is inflexible. It gives up a lot of potential profit with its defensive positioning, too. But when you’re trying to navigate your family wealth through the choppy waters of the financial world, it pays to prepare for the worst. Because, eventually, the worst will arrive.
‘Everything the investor is afraid of that might happen, actually does happen.‘ That was one of the takeaways we got from watching our Family Wealth editor Vern Gowdie sit down with Daily Reckoning founder and now family wealth impresario Bill Bonner. They discussed the unique challenges of ‘Family Office’ style of investing.
To be clear, these men are looking past regular cash flow and retirement financing needs to a strategy that can nurture and grow the family capital on to the next generation and the one after that. Their time horizon is a lot longer. That means they don’t need to worry about IF a stock market crash is coming. They’re preparing for WHEN it comes. A crash is always in the future because it’s in the nature of stock markets for people to panic.
But they also deal with the trickier side of the coin. As Bill says, there’s two sides to ‘Family Wealth’. One’s the money, and that may prove to be the easy part. The other is keeping the family from ripping it to shreds over time with poor investments, rivalries, marriage breakdowns, not to mention the greedy claws of the finance industry. You may be a genius stock picker, but what about your children, who couldn’t care less about companies and profits?
Thinking about your wealth need not be a dreary affair. Vern spent the past week in Nicaragua in Central America for a Family Office conference. Check out some of the views from the ranch. Who says finance is boring? If you need to get the conversation going in your family, maybe sweeten the deal. We’re sure it’s a lot more fun with a mojito in hand and views like this…
for The Daily Reckoning Australia