Skip Navigation Links


Bookmark and Share
Danielle Park, Author of ―Juggling Dynamite – The Impacts of Currency on Commodity and Equity Markets

on 8/3/2010

Danielle Park, President and Portfolio Manager for Venable Park Investment Counsel based out of Ontario, is the author of “Juggling Dynamite: An insider‘s wisdom about money management, markets, and wealth that lasts”. She focused on macro turns in the world, credit bubbles and concerns about risk assets and their cycles and talked to us about her thoughts on the current market. In addition, she has a financial blog, jugglingdynamite.com, which has been going strong for four years now.

 

Danielle Park, Author of Juggling Dynamite and President and Portfolio Manager for Venable Park Investment Counsel at the Cambridge House World Resource Investment Conference in June 2010

Danielle Park, President and Portfolio Manager for Venable Park Investment Counsel based out of Ontario, a company that manages money for high networks of individuals with a minimum account size of $1M across North America, is the author of “Juggling Dynamite: An insider‘s wisdom about money management, markets, and wealth that lasts”. She focused on macro turns in the world, credit bubbles and concerns about risk assets and their cycles. In addition, she has a financial blog that was initiated at the time the book came out that has been going strong for four years now, known as jugglingdynamite.com.

We recently had the opportunity to interview Park at a recent convention where she was speaking on the impacts of currency on commodity and equity markets.

The Current State of the Market

During the conference, Park provided an update on where we are in regards to the current cyclical contraction and the pluses and minuses of the current situation.

“We had the expansion that was primarily stimulus-driven March to December 2009. And then year to date in 2010, we‘ve had a correction of some of the over exuberance that went into that initial rebound phase”. She continues, “So,…the correction that‘s taking place is healthy and I think likely to be on- going for some months still.  It is necessary because prices got much higher than they should have, much faster than they should have. Now, the issue is—what will world growth realistically look like now that asset markets have probably significantly overshot that in price and we‘re into this more moderate, slowing period? The question is; what should asset prices reflect in terms of growth expectations, and I think that there are now significant downside risks.”

In speaking with Danielle, one of the key things to watch for, when choosing when and what to invest in, is the equity exposure in relation to the US Dollar.

She explains, “At our firm we were equity buyers in the spring of 2009, and we did make some good money on corporate bonds and equities through 2009. But then in the early part of 2010, in January, we started to note a breakdown in some of the key technical inputs for the stock markets; for commodities – the most relevant thing being that the US dollar, which had fallen in value from March of 2009 all the way to December, began to break out again against the basket of world currencies. And that is one of the key things we watch for, because when that happens, you tend to see capital flowing back out of risk assets; back to safe havens, which tends to be very negative for equities and commodities.”

More on the US Dollar

Park explains that the US dollar tends to move in what she describes as legs, where there are distinct bottoms and then upward moves, or recovery phases. She explains, “We saw a three-leg bottom-- three distinct down legs in the US dollar in 1990, 1992 and 1994. And then, we had a similar pattern this time with the bottom in 2002 and then 2009, and then now, we have a recovery phase again.” She continues, “So, if this is the third up-leg in this pattern, we could see it continue for a while here. And even if it doesn‘t go back to the highs of 2001-- I don‘t see a lot of reason for it to go back to prior highs, --but just moving back towards the long-term support could be quite devastating for overpriced assets in the world.

Being in Tune with Currency

In her keynote speech at the conference, Park discussed the fact that people don‘t pay enough attention to currencies which is not a positive thing, because in her opinion, “currency is the ―share price of a country”. Thus, investors should make strategic investment decisions around foreign currencies when making investment choices. She provides an example of this strategy by using the US Dollar and Canadian investors in the following statement:

“It‘s relative performance. If you‘re a Canadian-based investor for example, then you should have most of your wealth in the Canadian dollar, but you can make strategic allocations to foreign currencies as an investment decision. And in fact, if you don‘t pay attention to things like what the currencies are doing, it can have a very frustrating effect on your investment results…, she continues, “…As an example–Gold is priced in US dollars. As a Canadian investing in gold for the last two years, if you sort of held it since 2008, about 3%, which is a lot less than people would have made if they were US-based investors. Because the US currency fell, it was a great thing for US investors to hold gold. But from a Canadian perspective, it‘s been lots of volatility and poor returns.

Park emphasizes her point, “So, currency matters a lot, and I think too many people have formed the opinion in the last few years that the US had too much debt and too many problems and that its currency would perpetually weaken. And my sort of caution on that was; it never does go down in a straight line. It always has moved in legs, and it‘s those interim rebounds or rallies back to support that can be very devastating for people who haven‘t factored that into their investment plan.

When asked to provide examples of the type of situation Park‘s describing above, she used the specific examples of oil and copper, both of which are priced in US dollars.

“Specific examples of this are in oil and copper.  If you look at (these), both things are priced in US dollars. If you look at the infusion of the stimulus that came in March of ‘09, world governments started spending trillions of dollars trying to stop the contraction from happening, and while they did, hot capital if you will, speculative capital went flowing into other things like copper and oil. So, you saw this enormous rebound in those commodities which was not based on world consumption demand; it was based on investment demand or investment flow. And if you look at ETFs, for example, of commodities, which are the sort of new instrument that has come out in the last few years for people to gain exposure to commodities as an asset class, the problem is that investment demand is not disconnected with the real demand cycle. So, you get a situation like presently where investment demand — commodity futures and ETF’s, that sort of thing—is 13 times the size of the physical demand market in the world. Physical demand went up steadily in 2009, but not nearly as much as prices suggested. So, you get a lot of capital moving prices in big extremes. So, from $4 to $1.37 for copper and then back to $3.68 in 2009, and now it‘s correcting again it could retest that long term support at the $1.40 level,” she continues, “So, if you are trying to invest in these areas…but you‘re not aware that currency and investment funds are having a huge impact on price, then you‘re riding this very scary sort of roller coaster, and you don‘t know why it‘s reacting the way it is, and you‘re losing money routinely.

Market Timing is Important

Park shares that in our current economic environment an investor needs market timing, and in addition, needs to be cautious not to be passive about allocating funds for the long-term.

―Too many people have been sort of trained on this idea about passive allocations, that you can just put a certain amount of money in this asset class, or that sector, and you can just leave it there long-term. And my point would be that that‘s not productive because you‘re going to suffer through these enormous price swings, a lot of quick capital moving around, a lot of up and down, a lot of nervousness or sleepless nights and not actually get anywhere over time. So, we have to be patient and disciplined in our investment process:  when things get overpriced, we have to avoid them or sell them and wait again in cash until we get an opportunity to buy something again, she continues, “It‘s not the kind of thing that investors like to hear. Investors like to hear that you buy good companies, good management—all that sort of thing. My point would be those are not the capital markets that we live in. The capital markets we live in are manic places, which are driven by currency traders and proprietary trading desks, and 20-year-olds that are throwing around other people‘s money. It‘s literally that kind of an environment. You will continue to get huge swings in prices which have nothing to do with global demand in a consumption sense. And it complicates your ability to make investment calls if you‘re not paying attention to your price pain points.

Advice for the Average Investor

Park‘s advice for investors is to steer clear of any type of investing into equities or commodities if you do not have a discipline for timing when to buy and sell.

“…for the most part, I honestly think people would be better off to avoid trying to do any kind of investing into equities or commodities or any of these sectors if you don‘t have a discipline for determining where to buy them and where to sell them, because it‘s too dangerous to your capital to just plop it in and hope it works out.  Or you have to have somebody who‘s doing the management for you and who is not constantly long…

When discussing the indicators to look for to know when to buy and sell, Park advocates that one needs to develop a set of filters and rules, whether they‘re macro or fundamental or technical, we need them well defined and executed in order to navigate the complex picture we‘re in today in the world. Park shares, ―As I say, capital flows globally. The correlation between commodities and equity markets is hugely positive there is no diversity benefit in passively holding a bit of this and a bit of that. If you don‘t have a system, you‘d be better to just stick with Guaranteed Investment Certificates (GIC’s).

Park explains that although GIC’s are not paying much interest today, those without appropriate investment rules, will do better keeping their money there than passively allocating it to world investment markets.

Final Thoughts and Advice

Park advises to keep in mind that the investment environment we‘re in today is a secular roller coaster not a smooth mountain climb:

“The sale side of the industry will try and convince us that it‘s a mountain that we‘re climbing, that the mountain has some nooks and crannies but ultimately the peak is going to be much higher than where we‘re standing today. I‘d like to suggest to people that from where we are today prices are not necessarily going up over time. They are going up and down in a secular trading range. For the TSX, for example, it might be something like 8000 to 12000, back to 8000 to 12000, and it‘s been doing this already since 2000, and it may well keep it up for another 7 to 10 years, as secular bear cycles tend to run at total of 17 years in length and we are about half way through this one...in the meantime investing is not sailing on a calm lake with the sun in the sky. It‘s a hurricane; be extremely cautious…

Devise a practical plan:  what will you do to protect your capital and how much exposure should you have to volatile assets in a storm?

For more information about Danielle Park and Venable Park, visit www.venablepark.com or www.jugglingdyanmite.com



Disclaimer | Terms Of Use And Privacy Statement


© Metals News. All rights reserved.