It's Always The Currency Vs Investment | Armstrong Economics

QUESTION: On Friday, the UK FTSE and DAX closed at new all-time highs, so clearly money is flowing into these indices yet euros and Pounds seem to be flying out the door as they prepare for lower lows and thus this seem confusing. Added to the confusion is that Europe is where the sovereign debt crisis SDC) is likely to begin, so why is capital flowing into these markets? I suppose better to hold UK or German equities vs. their sovereign debt and thus will those equity markets continue to rally during the SDC?

ANSWER: A number of questions have been coming in about the European markets. Keep in mind that we are in the throes of geopolitical and political upheavals, not to mention the entry of Trump and his old-school nonsense about lowering the dollar to sell more stuff overseas and imposing tariffs. Those ideas I have dealt with constantly over the course of the past few decades. It is confusing without question. The press does not understand currency, not even those in government. Absolutely everything has an international value, and this has led to the overwhelming majority getting things wrong. Many ask why mainstream media will not interview me on such important topics as this. The reason is simply – it is too confusing for them as well.

I have told the story at conferences about my Ferarri Trade and how I bought a 308 Ferrari when I lived in London in 1985 when the British pound fell to $1.03. The Italians were getting $60,000 for the car in the States back then. It was still priced in pounds when the pound used to be $2.40. I bought the car for about $35,000 when converted. The Italians could no longer sell these Ferarris for such a price in London. Hence, they doubled the price in British pounds based on $1.03.

Over the course of the next couple of years, the pound rallied and went to almost $1.90 again by 1988. I drove the car for 2 years, sold it used for £40,000, and virtually doubled my money. Then, people were buying Ferraris as an investment, thinking it was the car that appreciated when, in fact, it was just a currency play. If you did not look at the currency, you missed the whole point.

In fact, I was buying German cars throughout the 1970s as the dollar was declining. A Porsche was $8,600 in 1970, and by 1980, it was $27,700. I would drive the cars for 2 years and then trade them in and get my money back, so cars never cost me a dime throughout the 1970s. I understood it was all just currency – not the cars themselves. My father took the family to Europe for the summer of 1964, which taught me about currency as we traveled from Sweden to Italy and all around. We had to change currency every time we crossed a border. I learned that CURRENCY was actually a mental language. I would listen to the price in Italian lira and convert that back to dollars in my mind to asses if the value was a fair price.

I was really the only true foreign exchange analyst. I was dealing in billions in the early 1980s. Clients would even put me on a speak in the middle of an OPEC meeting. I was being called in around the world all on currency crises. That’s how I became friends with Margaret Thatcher. I was being touted as the highest-paid analyst in the world, all for currency. When I was opening an office in Geneva in 1985, I was going to use some European names to blend in. I went to lunch with the head of one of the top main banks in Switzerland, who was a client and asked his opinion of what European name to use. He asked me to name one European FOREX analyst. I was embarrassed for I could not. He then explained why everyone was using my firm. He said there were no European analysts because they each would tout their own currency because it was a political issue. He explained everyone was using my firm because I did not care if the dollar went down or up. I said it was just a trade.

By 1985, I was summoned to the US. They were arguing to force the dollar down by 40% to reduce the trade deficit as that theory today is espoused by Trump. That was the Plaza Accord, and I warned that they would cause a crash within two years, and that became the 1987 Crash. The Presidential Commission then called me in for that one. They just do not teach this stuff in school and that seems to be the problem.

In 1997, Robert Rubin, former head of Goldman Sachs, was also trying to talk the dollar down for trade. Again, he did not really understand currency and its impact on markets. He may have been at Goldman, but that was more related to debt. To one person, a stock rally can look like a bull market, and to another, a bear market. When you get into currency swings of 10%-40%, it alters the perception of value because they still do not teach this stuff in school. We are clinging to old theories like Keynesian economics from the period of fixed exchange rates. Politicians are making the wrong decisions and investors are confused because these concepts are never taught.

As the greenback rallies, then the European share prices will appear cheap, just as Ferarri did in 1985 when the pound fell to $1.03. You will have domestic movement away from public assets as we have seen corporate rates move below that of government rates in France. Here is the FTSE in pounds and then in dollars. While you see new highs in pounds, the FTSE has not made new highs in dollars and has backed off, showing that the rally in the FTSE is not keeping pace with the decline in the pound.

This is why, in Socrates, you can plot any instrument in a host of various currencies. The definition of a bull market is something that rallies in terms of all the key currencies. When it is rising only in terms of the local currency, it is simply a domestic shift and not international.