Author Chat: Money Morning's Martin Hutchinson Talks About "Alchemists of Loss"
The Nobel Prize panel granted its top award to seven leading economists – whose theories went on to cost investors trillions of dollars in losses.
This story – as well as some of the other top financial fiascos through the ages – is detailed in the new book, "Alchemists of Loss: How Modern Finance and Government Intervention Crashed the Financial System," which was written by Martin Hutchinson, a former merchant banker and Money Morning columnist, and Kevin Dowd, an economist and respected academic.
Money Morning Executive Editor William Patalon III recently sat down with Hutchinson, to talk about the book. Here are some excerpts from that discussion.
Don't Miss Out on the Global Stock Rally
Indices across the world rose last week in what looks to be the beginning of a historic stock rally.
Meanwhile, the iShares Emerging Markets ETF (NYSE: EEM) rose 1.7%, the iShares FTSE/Xinhua China 25 Index (NYSE: FXI) rose 3%, the iShares MSCI Switzerland Index fund (NYSE: EWL) rose 3%, and the iShares MSCI Australia Index Fund (NYSE: EWA) rose 3.6%.
Among our favoried emerging markets and sectors, iShares MSCI Turkey Index Fund (NYSE TUR) blasted 6.5% higher, the Market Vectors Latin American Small Cap Index Fund (NYSE: LATM) rose 3.5% and Market Vectors India Small Cap Index Fund (NYSE: SCIF) rose 2.4%. The SPDR Gold Trust (NYSE: GLD) rose 2.1% and the Market Vectors Junior Gold Miners ETF (NYSE: GDXJ) rose 2.6%.
You Heard It Here First: A Global Currency War is Being Fought – And There Will Be No Victors
Brazil's finance minister, Guido Mantega, recently acknowledged to the global investment community what most trade officials already believed: An "international currency war" has broken out.
And, in this war, there won't be a real victor.
"We're in the midst of an international currency war, a general weakening of currency," Mantega told The Financial Times. "This threatens us because it takes away our competitiveness."
Mantega's comments came just weeks after Japan joined Switzerland in intervening in the foreign-exchange market. But the reality is that the currency war has been under way since 2008.
At least, that's when Money Morning Chief Investment Strategist Keith Fitz-Gerald first warned that countries – most notably the United States – would debase their currencies in a race to boost their exports and keep economic growth afloat.
"The government has adopted a weak-dollar policy," Fitz-Gerald said in an interview in March 2008. "They're sending out a message loud and clear: 'We want you to sell the dollar.'"
By holding the central bank's benchmark lending rate down in a record low range of 0.00% to 0.25% for close to two years now and buying up Treasuries in a policy known as "quantitative easing," the U.S. Federal Reserve is effectively debasing the dollar.
But the U.S. central bank isn't alone.
De-Coupling Back in Vogue as Emerging Economies Outshine the U.S.
While the U.S. economy is struggling to break its slump, growth remains strong in other places around the world – so strong, in fact, that analysts are breaking out a term that's spend much of the past two years on the shelf: De-coupling.
U.S. gross domestic product (GDP) will meandered along with a meager 1.7% expansion in the second quarter and is expected to grow by less than 2% for the full year.
Meanwhile, Brazil's GDP is on pace to expand by 7.5%, India's economy is projected to grow by 8.5% and China's economy is expected to grow by 9.5% this year.
Emerging market economies are moving ahead at such a brisk rate that their combined GDP will be bigger than developed countries by 2015, according to the World Bank.
Now, the biggest Wall Street firms – including Goldman Sachs Group Inc. (NYSE: GS) Credit Suisse Group AG (NYSE ADR: CS) and Bank of America (NYSE: BAC) – are betting that the global economy has de-coupled from the United States, and will shake off any slowdown in the world's largest economy.
Seven Ways to Profit From the Worldwide Currency War
If you're like me, and you spend a lot of time perusing financial Web sites in search of the latest global investing news, you've probably started to see a lot of stories about rapid shifts in foreign exchange rates – including some "currency pairs" that have traditionally been rather slow-moving.
Back during the spring, for instance, the news was full of stories about how Switzerland was buying up European euros in an effort to weaken the strong Swiss franc – only to have that country change course and diversify its holdings by purchasing U.S. dollars.
During the summer, we watched as Japan entered the foreign exchange (or "FX") markets for the first time in nearly a decade in order to buy U.S. dollars.
Even South Korea has been a contestant in the currency-transaction arena, with that Asian tiger working to weaken its currency, the won, in an effort to improve its exports. Just yesterday (Monday), the won rose for the sixth-straight day, its longest winning streak in eight weeks, after the nation's foreign-exchange reserves climbed to a record $290 billion.
These events aren't random. But they are related. They're part of a worldwide currency war that's being waged before our eyes – and that will prove very costly to investors who don't recognize the game that's being played. Fortunately, we do – and we're going to tell you all about it.
To find out about those profit plays, please read on…
China Continues Game-Changing Energy Moves with Sinopec's $7 Billion Brazil Buy
Chinese state oil company China Petroleum & Chemical Corp. (Sinopec) (NYSE ADR: SNP) said Friday that it would invest $7.1 billion in the Brazilian unit of Spain's Repsol YPF S.A. (NYSE ADR: REP) to form one of the largest private energy companies in Latin America.
The investment is the second-largest overseas purchase by a Chinese company and drives the market capitalization of Repsol's Brazilian arm up to $17.8 billion. Analysts estimated the company's value at $10.7 billion earlier this year. Sinopec's investment gives it a 40% stake in Repsol's Brazil business, and access to the highly valued Brazilian offshore sub-salt oil fields.
The move highlights South America's importance to China as the Asian powerhouse goes on a spending spree to meet its fast-growing energy demand.
Controversial House China Tariff Bill Will Take America Down the Wrong Road
The U.S. House of Representatives this week overwhelmingly passed a bill that would enable the Obama administration to impose punitive tariffs on almost all Chinese imports into the United States – a controversial move that's intended to punish China for refusing to revalue its currency.
The House China tariff bill faces opposition in the Senate and from the Obama administration and isn't expected to become law. Let's hope that reluctance continues to hold: This bill is little more than a political con job and is quite possibly the stupidest thing that Washington could do right now.
Not only will this touch off a war the United States literally cannot afford to fight, but it's going to hamstring millions of already cash tight Americans by raising the cost of living dramatically while further eviscerating our already fragile gross domestic product (GDP).
Let me show you why…
More Investors Betting Ireland Will Go the Way of Greece
The cost to insure Irish bonds against a government default jumped to a record yesterday (Tuesday) after Standard & Poor's said the cost of bailing out nationalized lender Anglo Irish Bank Corp. could exceed $47 billion.
Contracts on credit default swaps (CDS) on Anglo Irish bonds rose 1.5 basis points to 937.5, implying a 56% probability of default within five years, after earlier climbing to an all-time high of 960.5.
Credit-default swaps pay the buyer face value in exchange for the underlying securities or the cash equivalent should a borrower fail to adhere to its debt agreements. Increasing prices signal deteriorating credit quality.
Hot Stocks: Southwest Airlines Takes Aim at Bigger Rivals With $1.4 Billion Deal for AirTran
In a deal that turns up the heat on its bigger rivals, Southwest Airlines Co. (NYSE: LUV) yesterday (Monday) announced plans to buy discount carrier AirTran Holdings Inc. (NYSE: AAI) for $1.4 billion.
By nabbing AirTran, Southwest is making a move that supports its long-term growth strategy and targets large network carriers with a large East Coast presence such as Delta Airlines Inc. (NYSE: DAL) and US Airways Group Inc. (NYSE: LCC).
"This absolutely changes things," said Gary Kelly, Southwest's chairman and chief executive officer on a call with analysts.
The deal will allow Southwest to expand into airports serving major hubs like Atlanta, Washington D.C., Boston, Baltimore and New York City, he added.
The move puts Southwest in head-to-head competition with Delta in Delta's home base of Atlanta. The buyout, funded mostly with debt, will also give Southwest a bigger slice of the market in cities like Boston and New York, where it has been expanding.
Eventually, the low-cost carrier will expand into international markets, with flights to Mexico, the Caribbean, Canada and possibly South America, Kelly told CNNMoney.com.
"It will be several years before you see Southwest airplanes in international markets, but it's going to happen," he said.
Four Emerging Markets Making Waves Around the World
I'm focused like a laser beam on emerging markets this year, because there is much more at play than just relative strength. This is where the economic growth in the world is occurring.
I hope you are participating. And if you're not, don't worry – there's still time to get in and make a profit before the mainstream catches on.
Let's take a look at a few of my favorite plays right now, beginning with Singapore and Thailand – two economies I told investors to keep an eye on earlier this month.