Currency Wars, Winners and Losers

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Are we the only ones getting that sinking feeling? Right now, nations are literally entering a period of fiat insanity. Western nations in hopes of competing with the savers, producers, and creditors of the world (you know those poor countries in Asia) are trying to devalue their way to prosperity. It almost resembles the 1870’s when European economists thought they could somehow keep their grip on global economic dominance. No matter what they did though, the next 100 years inevitably belonged to North America. When you think about the currency war, it is really pathetic.  Here we have the third world saving, producing, and making strategic investments in their future; meanwhile the west is borrowing and printing trying to hold onto the good ole days just a little bit longer. The problem of course is that in any war, both sides take casualties including what could be the next financial capital of the world. Just as London passed the torch to New York, we believe New York will soon pass the torch to Hong Kong.

Hong Kong is literally the world’s freest economy. In fact, according to the Heritage Foundation which ranks economies, Hong Kong has been at the top of the charts for 16 consecutive years. When it comes to trade, economic openness, regulations, and rule of law, Hong Kong is Asia’s shining city on a hill. But, there is this one HUGE problem they currently have-no its not China. 27 years ago in order to bring economic stability, Hong Kong politicians pegged their currency to the U.S. Dollar. This peg has not only placed Hong Kong in the middle of a currency war, but in our opinion it has placed them on the losing side. Hong Kong stock market values, real estate, and local economy are being distorted due to a falling Hong Kong dollar. Even as other Asian currencies appreciate, including the Japanese Yen, the Hong Kong dollar with its 27 year old peg to the greenback is enduring the consequences of quantitative easing and bailouts across the pacific. So the big question is will Hong Kong drop the dollar peg? Today there isn’t even talk about it, politicians still tout that the peg to the U.S. dollar is what gives Hong Kong its financial stability. Surprisingly, as inflation fears rise and more quantitative easing encroaches, no one is mentioning the easy fix for Hong Kong’s currency problem.

Not wanting to disappoint our subscribers, we figured we would take a stab at it. In our opinion, as the currency wars escalate to new levels or should we say lower levels, Hong Kong will have no choice but to de-peg their currency from the U.S. dollar. The people of Hong Kong are not going to watch their savings get destroyed while other nations in the region like Australia, Japan, Philippines, and China see their purchasing power increase. By allowing themselves to become chained to the U.S., the people of Hong Kong will be isolated in Asia as their purchasing power decreases at the same point in time the rest of Asia is on the rise. Currently the loss in purchasing power has been viewed as positive among local economists, since a weakening currency has inflated home prices, stocks, and attracted shoppers from the mainland. But, with QE2 around the corner and the U.S. dollar making multi decade lows, we believe it is only a matter of time before Hong Kong drops the U.S. dollar peg. Prediction A: Hong Kong allows their currency to float on the open market. Prediction B: Hong Kong pegs their currency to the Yuan.  Either way, owning Hong Kong stocks is a good idea for U.S. investors. If we have deflation, then you own stocks in a booming region with a currency pegged to your own. If we have severe inflation, then you own stocks in a booming area with a currency, that if allowed to break away from the U.S., is EXTREMLY undervalued.

Following our mining picks that will be released later this month, we are currently following several Hong Kong stocks traded here in the U.S. We are being cautious and looking for a good entry point in order to give our subscribers maximum profit.

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