These Four Currencies Will Beat the Dollar

“Always look behind you, kid. Sometimes that’s where the real story is.”

That was the lesson I learned during my days as a photo-journalist back in college, shooting Louisiana State University sports for United Press International. A grizzled veteran from the rival Associated Press was kind enough to share with a youngster some of the tricks that had made him successful.

That was 30 years ago. But I still apply that strategy in my daily life as an investor. In the financial markets, “always look behind you” translates as “look at where the money is not flowing.” That’s where you often find the greatest value. It’s the essence of contrarianism, which I hew to on the theory that the masses are almost always wrong, because they are too often simply following the crowd.

And, today, with the masses flooding into the dollar – for all the wrong reasons – the contrarian play is in foreign currencies.

U.S. Dollar Performance Unmoored From Reality

In the last several months, the U.S. dollar stole center stage from far-worthier candidates. It has done so because Japan is actively – and eagerly – manipulating the yen lower to save itself, temporarily, from a sad, unavoidable fate. Europe, though clearly on the mend, is not yet moving at the same economic pace as the U.S. And as for the U.S. … well, our economy is looking healthier today than it has since 2008.

It didn’t hurt that Federal Reserve Chairman Ben Bernanke uttered the word “taper” in speaking about the Fed’s next move in its long-running Quantitative Easing campaign. That one word sent global markets into paroxysms, and by process of elimination, the greenback – for the time being – reasserted its status as the only girl in the bar at last call.

Ultimately, though, currencies are to countries what share prices are to a public company – a measure of financial health. And in America, we have the financial health of a minimum-wage burger-flipper using an interest-only, adjustable-rate mortgage to buy a mini-mansion with a 3% down-payment.

As a nation, we owe some $17 trillion in national debt, or 107% of our annual GDP. And we owe nearly $125 trillion in unfunded liabilities tied to Social Security, Medicare and Medicare Part D (Prescription Drugs), equivalent to 150% of the world’s annual GDP. We have the luxury of printing dollars when we want, and we have the privilege of providing the world – again, temporarily – with a reserve currency.

But the chart below shows the effect that fiscal anemia historically has on our dollar …

I whip out that chart all the time because it explains, visually, the relationship between the dollar’s direction and America’s fiscal well-being.

The dollar only performs well in periods when America’s finances are healthy or improving … and it performs miserably when America’s finances are weak or declining. And our finances today are fundamentally frail. Given the never-ending spending spree on Capitol Hill – and the widening gulf between the Right and the Left – our national finances will continue to decline until a crisis forces Congress to come together again.

Until then, our dollar will ultimately reacquaint itself with the secular, long-term downtrend it has been in for more than two decades.

And that brings me around to other currencies.

These Four Currencies are Ripe for a Rebound

Because currencies trade in pairs, a strong dollar means another currency is, by definition, weak. But when strength and weakness in any asset class result from exogenous events rather than fundamental trends, opportunity awaits the observant investor.

The dollar’s strength today is clearly tied to exogenous events – the yen manipulation I mentioned previously, the shaky nature of Europe’s recovery and Mr. Bernanke’s “taper” comments.

Each of those is, of course, transitory. None speak to a fundamental reason why the dollar should be strong right now. Many other countries –Singapore, Canada, Norway and Sweden spring to mind – manage their currencies and their economies far better than America, yet currencies from those countries have fallen against the dollar, too, for no fundamental reason.

As a contrarian investor, I want to buy undervalued assets where the rationale for the undervaluation is so clearly flawed. In the case of currencies, I want to own those that have a great likelihood of regaining their upward trajectory, and then accelerating against the dollar over the next few years.

I’m talking about currencies like the Colombian peso, Turkish lira, Indian rupee and Mexican peso.

Those happen to be the four currencies EverBank has wrapped into its new MarketSafe Evolving Economies certificate of deposit, and I was glad I had the chance to consult with Chuck Butler on that CD.

With investments spanning all six habitable continents, I pay attention to currencies and economies the world around. And I have a keen interest, especially, in economies where a newly prosperous middle class is rising up, because rising prosperity is hard proof of a strengthening economy, and a strengthening economy, as my chart above shows, undergirds a stronger currency over time.

The Colombian peso has spent the better part of 10 years gaining ground on the dollar. That reversed course in May simply because Mr. Bernanke chose to use the word “taper.” The Mexican peso has been strengthening nicely since the end of the global financial crisis. And the lira and the rupee have bounced around a narrow range over the past decade, but, again because of Mr. Bernanke, investors have pushed both currencies well outside of their normal, decade-long bands.

And why?

Again – no fundamental reason. Those four currencies simply moved in knee-jerk reaction with every other currency, though nothing changed negatively in those economies the day Mr. Bernanke spoke. (Yes, Turkey has a bit of a political issue, but that, too, is a fleeting worry.)

Having traveled through more than 40 countries to research economies and public companies, I am confident these four emerging-economy currencies will win big against the dollar. Colombia – where I most-recently traveled – and Mexico will regain their longer-term upward trajectory because of the structural changes reshaping those economies for the better. I am certain Turkey will win big because of the benefits that are accruing within that country’s economy and the political and legal systems in the run-up to inclusion within the European Union.

India, meanwhile, is the wildcard. I’ve traveled to India multiple times (my mom owns an apartment there, oddly enough), and it’s clear the country has sizeable opportunities. As the government strives to improve poverty and to improve transportation efficiency through modern infrastructure – a process I’ve seen firsthand traveling through even the remote regions of northeastern India – the economy will blossom. And the rupee will strengthen once again.

Like that AP photographer told me years ago: Sometimes you have to look behind you, at what no one else is paying attention to. Based on market moves in the last few months, it’s plain to see that currency investors are paying no attention to anything but the dollar. They’re missing the big opportunities that exist elsewhere.

Until next time, stay Sovereign …

Jeff D. Opdyke