Monday, February 27, 2012

Jim Rogers hates stocks, loves currency, and China explains why - NASDAQ

It may seem odd that legendary investor Jim Rogers has been as bullish on Euros and dollars as he is bearish on European and American stocks. But the recent rise of the Euro and the fall of the yuan play to the advantage of China.


About 40% of the gross domestic product of China is geared towards exports to Europe and the United States.  A falling yuan helps China in several ways.


First, it increases the purchasing power of buyers in the United States and Europe.  This allows them to continue to buy goods made in China.  In general, a stronger US dollar and Euro does much for economic growth in these nations.  As Rogers so wisely commented, "A weak currency is a sign of a weak economy, which is a sign of a weak government."


Second, Chinese goods are sold at a discount.   If the Euro and the dollar rise while the yuan decreases, Chinese-made merchandise becomes that much more competitive in international trade.


With $3.2 trillion in foreign reserves, there is much China can do to influence economic policy and development in both the United States and Europe. The vectoring of the PowerShares US Dollar ( UUP , quote ), the Currency Shares Euro Trust, ( FXE , quote ) and the Wisdom Tree Dreyfus Chinese Yuan ( CYB , quote ) reflect this. However, money is not the only tool in China's kit.


China has already backed off from purchases of bonds.  However, it has also indicated an interest in European and American infrastructure projects.  This allows for China to support the United States and Europe with solid investments without holding sovereign debt.  Strengthening the currency for both accomplishes the same goal for China: keep the United States and Europe out of recession so its own economy continues to expand.


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.


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Jim Rogers

Warren Buffett

Nouriel Roubini