The Big Picture for the Week of October 25, 2009

Ambrose Evans-Pritchard has a post about the US dollar's hegemonic status that knocks it out of the park. The long and short of it is that the dollar will not lose its reserve status during this century, China faces some demographic issues in another decade or so and he also believes that at some point the water quality becomes a big problem too. He expects the growth and other good things that people are so excited about to continue somewhat unabated over the next decade with China moving closer to the US but that the obstacles he cites will then come into play down the road.

This is not to say he is bullish on the dollar but that he is not in the death blow camp because of the problems the other big currencies have. Japan has bigger problems, a lot of debt and a bigger demographic problem, and the euro has problems galore as well.

As opposed to trying to sort out whether he is correct or not it might make more sense to sort out what to do assuming he is correct and I would add that if his thesis is correct it will play out very slowly giving time for recognition and implementation.

I am likely to have Chinese equity exposure more often than not for a long time to come. Plenty has occurred there already but there is still plenty more. The country is going to move up the chain and life in the ground there is going to improve substantially but of course there will be cyclicality, the occasional policy mistake and other growing pains but China is one spot where it is happening. That said, I doubt my exposure will ever exceed 6-7% of the portfolio.

If we do get to a point where the world is trying to sort out between the USD, JPY, EUR, CNY or some basket dominated by those four I think I would rather sidestep that (mostly) and favor currencies, and by extension equities from those countries, that can grow and thrive irrespective of the world reserve issue.

This line of thinking leads me to quite a few familiar (to long time readers) countries but it makes sense to expect the list to evolve over time. In no particular order Canada, Australia, Norway, Chile, Israel, New Zealand (at some point), Brazil, Vietnam and Singapore (if there were ever to be a pan Asian currency it would be based on SGD and it is not clear to me if that would be a good thing or not).

In the future there would probably be some additions from Africa (Egypt has an interesting story but is difficult to access), Kazakhstan (resources galore and corruption galore), some of the Arabic countries pegged to the USD will probably have to break the peg at some point due to inflation threats and maybe some place like Peru should be part of the conversation. Feel free to add others as you think of them.

These types of countries, regardless of which ones really should be thought of in this context the idea is to gravitate to smaller, hopefully simpler countries that are either in their own world, can sell things that the big dogs have to buy or some combo of the two.

As has been a common refrain around here this would require more work not less but if the hegemony debate really devolves into who is the least unhealthy wouldn't you want to seek out the healthier countries anyway?

The picture is from in the hoodoos at Bryce on the Navajo Loop.