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
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
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
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
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
-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.
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