Waves

Waves Our family loves going to the ocean—the sun, the beach, the waves. The one thing that has always amazed me is the waves and tide. They never stop. There’s constant movement. There are times when the waves are bigger, others smaller. There are cycles when the tide is coming in and when the tide is going out.

Capital (money) works the same way. Thinking of it that way on a global scale gives us a better picture of the investment climate. Capital seeks relative safety and opportunity and is going to flow to those countries that best provide it. Historically, that’s been the United States and is one reason why the USD has been considered the world’s reserve currency. That’s why commodities like oil have been priced in US dollars.

The capital tides are changing, though. And these changes will have both short-term and long-term implications on where we see opportunity and how we invest. Where the world used to seek safety in Washington and New York, it now seeks safety in Toronto and Vancouver, Sydney and Perth. Water flows toward the lowest point and, likewise, capital flows where risk is lower. When capital flows from the U.S. to Canada, the value of the USD is going to decline while the value of the CDN is going to rise. If money flows from the British Pound to the Australian dollar, the Pound is going to decline and the Aussie dollar rise.

That is what is currently taking place and the pace of this changing tide is worthy of note. For industrialized countries, a move of 10% in their currency is very material, 20% is enormous and 30% is almost beyond belief.

One year ago, it took 2.7 Aussie dollars to buy one Pound Sterling. Now it takes slightly more than 1.78 Aussie dollars to buy one Pound. That means the value of the Pound has declined almost 35% in one year!

The USD has declined 16% over the last 6 months alone relative to the Canadian dollar. These are major moves and are evidence of the shift underway where capital is flowing out of the ‘consuming’ nations and into the ‘producing’ nations. Canada and Australia are natural resource rich countries. They have the things the world needs in order to grow. Australia is particularly well positioned to provide those resources to Asia, where demand is strong and growing.

I believe there are some other reasons that we are seeing capital flow out of the U.S. and Great Britain and into countries like Canada. The U.S. government has gone from right-leaning to left-leaning. As a country, the current administration is moving us from conservative policies to liberal policies. On the other hand, the traditionally left-leaning Canadian and German governments have actually moved more to the right of late. Lastly, recent events (government takeovers of private industry where existing bond covenants were nullified, government mandating salaries, etc.) have caused concern over the safety of our investments—the rule of law.