A month or so ago I went looking for some interesting items to buy and came across a GBP/USD indicator which had a lot of momentum in its favor. How did it do that? Here’s how:
One of the best things about a currency is how strong it feels when it’s growing strongly. That’s because this is the speed at which demand outstrips supply, and what happens when supply exceeds demand is that the currency value increases.
Another way to appreciate this is that the strength of a currency tells you how much investors think that the country’s economy is likely to grow. The stronger the currency, the more optimistic its people are about the country’s economic future. You’ll find that people with higher expectations tend to invest in high quality companies.
That’s the reason why people flock to nations that are at the top of the economic rankings. An asset can appreciate if the government is paying very high wages or is providing a lot of social benefits for its citizens. Now look at what’s happening in the UK right now – not only is the unemployment rate high but the total number of people employed is very low.
That means that they’re low quality businesses that have lower sales. When they go into bankruptcy, the value of their assets goes down, and when they put their money into other businesses, they buy goods and services at a much higher price.
That’s the essence of “weakness” – when the economy is strong, it will create opportunities for online retailers. When it’s weak, people will be buying the same things they would have been buying anyway. This explains the strength of GBP/USD and the weakness of the US Dollar.
Look at countries that have a strong currency like the US or the UK. They’re low quality businesses, and as a result, the strength of their currencies has not only encouraged them to invest in low quality businesses but also encourages them to spend more in their countries of origin, thus creating a demand for goods and services from those countries.
A weak currency encourages people to invest in nations where they can enjoy a quality of life they could only dream of in their home countries. This creates a huge opportunity for entrepreneurs and online retailers. Here’s what I think will happen in the future.
When people see that their nations have strong economies, they will start investing in these nations to generate revenues that they can then bring home to their home countries to fuel up their economies. These individuals will do everything they can to stimulate the economy of their home nation.
They will try to force through tax increases, perhaps by initiating an audit and forcing the government to introduce big budget cuts, or they will advocate for government intervention into the markets so that the markets will get more favorable in terms of investment. Either way, they will be relentless and creative in ensuring that their investment dollars are well spent.
Now, let’s say that they can’t force their will, or that the government is doing its job by introducing tax hikes and tax cuts. Now they’ll have to work harder because they’ve spent so much already, but the smart investor will look at their balance sheet to see where the liquidity is, and try to put that money into a good, high-quality stock or bond.
What I’ve just told you is the bottom line here, that we live in a world where online retailers like Amazon and Overstock are creating so much demand that the consumer end of this cycle will look like the US dollar. rather than any foreign currency.