For Bernanke Skeptics: A Sound Money ETF

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In the past week, the world has seen an onslaught of rate cuts. The latest cuts follow the lead of most major central banks, which have pursued ultra-easy monetary policy since the financial crisis struck five years ago.

Rate cuts have been standard monetary policy for stimulating short-term growth for decades. However, historically, rates have not been cut to such low levels as they have in recent years

So, some central banks-the Federal Reserve, the European Central Bank and the Bank of Japan-which can't cut further because rates are already near zero, have engaged in quantitative easing, the by-now household word for rampant bond buying that is designed to keep official borrowing rates low by pushing yields on benchmark fixed-income securities ever lower.


This is all well and good for those of a Keynesian persuasion, but for monetarists and sound money advocates in general, the actions of the Fed, the ECB and the BOJ are at best irresponsible and, at worst, malignant.

The "growth-at-all-costs" agenda has made many investors, including myself, concerned about the future and, in particular, about the value of the U.S. dollar. It's not that I think the dollar is doomed, it's just that quantitative easing is a monetary experiment, and I'd prefer it if my retirement account weren't the laboratory.

But just as this play is about to turn from bad to worse, a new player enters the scene:the Pimco Foreign Currency Strategy ETF (NYSEArca:FORX).

FORX is actively managed with a stated objective to provide exposure to foreign currencies that are likely to outperform the dollar over the long term. It has an annual expense ratio of 0.65 percent.

To accomplish that objective, Pimco evaluates "relative interest rates, inflation rates, exchange rates, monetary and fiscal policies, trade and current account balances, legal and political developments, and other specific factors."

Notably absent from FORX's current portfolio are the euro, the yen and the British pound. Those three currencies are the most heavily traded in the world, apart from the dollar, which is excluded by design.

It's no coincidence that those four currencies are also the ones that have "eased" the most, in terms of rate cuts and asset purchases.

The basic point is that investors are increasingly skeptical of central bank actions, especially as the theories behind central bank asset purchases become more convoluted. So, FORX is comfort food for U.S., Japanese and European equity investors.

After all, you don't need a Ph.D. in economics to understand Milton Friedman's basic equation of exchange:MV=PQ (Money Supply * Velocity of Money = Price Level * Real Output).

According the basic equation, if you increase the money supply and hold velocity constant, you'll either increase real output or the price level. If it were possible to increase real output simply by printing money, Zimbabwe and Hungary-two of the worst cases of inflation, ever -would be the prosperity capitals of the world.

The chart below goes a long way toward rationalizing skepticism of the Federal Reserve's actions.

Since we've had hardly any semblance of inflation in the U.S., some "experts" declare that the skepticism is unwarranted. The red line shows the expansion in the money supply since 1995, while the blue line depicts the decline in the velocity of money.

Don't forget to check IndexUniverse.com's ETF Data section.

Copyright ® 2013 IndexUniverse LLC . All Rights Reserved.



The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of The NASDAQ OMX Group, Inc.




This article appears in: Investing , ETFs

Referenced Stocks: FORX

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