Since the emergence of this credit crisis more than 19 months ago, the Japanese yen and the U.S. dollar have charged ahead vis-à-vis all foreign currencies. And over the last 12 months, both currencies are even higher against gold. Recently, the dollar began to rally versus the yen.

Both currencies are also among the most overvalued units in the world, offering almost no yield while intoxicated by high debt levels. In my book, both currencies are short-sale candidates as this credit crisis draws to a conclusion over the next 6-12 months. Once risk aversion returns, the dollar and yen will fall very rapidly.

The death of the carry-trade – borrowing in cheap and low-yielding yen and reinvesting those proceeds into higher yielding currencies – resulted in a wave of yen buying until recently as traders scrambled to reduce risk.

The Japanese economy has slowed sharply over the last six months with double-digit losses recorded in exports, manufacturing, industrial production and Q4 GDP – the worst batch of statistics since the early 1970s. Why would I buy the yen?



Yet unlike the overvalued yen, Japanese stocks are incredibly cheap. Stocks in Tokyo have been cheap for years and keep getting cheaper every day, ravaged by this bear market. Stocks traded on the Topix sell at roughly a 20% discount to book-value and yield almost 3.5%. No other major market offers better value.

But the yen should be avoided. Along with the dollar, both currencies are now in bubble-land, mired by poor economic fundamentals and high debt levels.

The U.S. dollar is the beneficiary of an accounting phenomenon tied to a desperate flight to cash and redemptions by institutional investors. There is no such thing as the dollar being a “safe-haven” currency. Rather, the dollar is at the epicenter of this financial disaster and, I suspect, it will crash once this crisis finally ebbs.

The beginning of the end of American financial hegemony has commenced as the United States emerges as a much weaker economic power since 2008. Gargantuan Treasury issuance, more Obama New Deals, the reluctance to let bad banks fail and poor economic growth for the next several years are a recipe for an eventual dollar crisis.

Since most investment accounts and funds are denominated in dollars worldwide, the crash in global capital markets since late 2007 has accelerated the flight to liquidity; it has nothing to do with a new bull market for the dollar. Historically, bull markets for the dollar or most currencies, for that matter, don’t begin with interest rates at 0%. I can’t think of any other currency in the world that offers such bad economic fundamentals other than the Zimbabwe dollar.

As the dollar eventually heads lower again once this seemingly never-ending global panic concludes, I plan on hedging my dollar-based portfolio into Canadian dollars or Swiss francs. I’m already holding 10% in gold and will increase that position to 15% should it break below $850 on this correction. I have little faith in most currencies, central banks or governments. Indeed, central banks have lost control of the financial system and investors should protect themselves accordingly.