Quotable
“Everything we hear is an opinion, not a fact. Everything we see is a perspective, not the truth.”
– Marcus Aurelius
Commentary & Analysis
The most overvalued currency in the world.
So what is the most overvalued currency in the world? Well, according to the Economist Big Mac index the answer is the Norwegian Krone (see the index readings below from July 13th; the latest index I can find).
The Big Mac index shows the Krone is overvalued by a cool 65% against the US dollar. Okay, so what. This is a long-term measure that is useless from a trading perspective, you might be saying to yourself. But, consider the following…
- The Fed Taper will matter. It is at the margin stuff, but the Fed’s taper will likely matter as it relates to dollar-based credit and high-flying real asset prices (real estate) buoyed by debt. If you couple the taper with the impact of continued deflationary pressures in Europe, as banks there race to fortify their balance sheets, and add in the Bank of England will likely not be adding more juice given the better than expected improvement in the UK, mortgage money will likely become more expensive across Europe.
Above is a chart showing the US Current Account Balance. Though still in deficit, it effectively indicates that global dollar liquidity is draining off the world economies.
- Norway’s housing bubble is losing air fast and consumers are loaded with debt. When it comes to high-flying real assets, nothing has been soaring like the Norwegian real estate. And Norwegians’ have loaded up on housing debt. This is a recipe for a big decline in Norwegian consumption, as households will be forced to retrench as housing prices fall. We have seen this movie before; it’s called the new normal of below capacity economic growth. In short, the deflationary bear is stalking Norway.
From Bloomberg (12 Nov 2013):
“Norway’s housing market, which Nobel Laureate Robert J. Shiller described in 2012 as being in a bubble, is now deflating faster than even the central bank had predicted after regulators introduced a slate of measures to cool demand. After home prices doubled over the past decade, fueled by low interest rates and surging oil wealth, they’ve slid for two consecutive months raising concern that real estate could be in for a hard landing amid record household debt.”
- The bottom for USD/NOK appears in place. As you likely know, my contention/conjecture/guess is the credit crunch was a sea change event in the global economy and marked the beginning of a multi-year bull market in the dollar. The Norwegian Krone seems to have put in a major long-term bottom back in early 2008 as along with many other currencies. Now the pair is channeling nicely higher.
- Yield and yield expectations moving in favor of the United States. I do think yield spreads mater over the intermediate- to long-term now. They didn’t seem to matter much during the era of “risk on” and “risk off.” That era is gone. Now we are in the era of taper. And I think the fundamentals going forward likely favor the US over Norway, as US consumers have done much of the heavy lifting of debt liquidation while Norwegian consumers may be just getting started. If this proves true, it is likely the spreads across the curve will move strongly in favor of the US$.
That’s it in a nutshell. No doubt deflationary pressures are powerful across all countries. But given the catalyst of 1) popping of Norway’s housing bubble; 2) huge debt to income ratios for Norwegian households; it seems the 68% Big Mac overvaluation of the Krone will be eaten away by Mr. Market over time.
Jack Crooks
Black Swan Capital
Twitter: bswancap
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