Sweden or Venezuela?

One year ago, a coffee in Venezuela's capital, Caracas, costed 2 300 Bolivar. Today, 12 months later, the same coffee costs 2,500,000 Bolivar, an increase of 108,596 percent, says Bloomberg's "Venezuelan cafe con leche index", a latte index to measure inflation in a country with a regular product. Although the index itself is hardly as sophisticated as the more commonly measured consumer price index, it is still tangible. The price of a latte, at least if the difference is somewhere in the order of 100,000 percent, says a lot about a currency's inflation.

Bloombergs café con leche index

The Turkish lira has also developed badly during the year and by now, the lira is down by 37 percent YTD compared to the USD. Although the Swedish krona is not as bad as the Turkish lira or Venezuela's Bolivar, there is no "lagom" with a development of -10 percent compared with the US dollar this year.

What do all historical currencies have in common? They have been inflated to the point that they have become worthless. What really remains is gold, which can instead be referred to as "real money" rather than a separate currency. Gold is usually called "immune to inflation" and unlike Venezuela's bolivars where inflation has risen by over 100,000 percent in the past year, we can make a similar index of gold and costumes. Three thousand years ago, you could buy a nice toga (the costume of the past) for a gold coin, and today it's about what you pay for a nice suit. The inflation rate in gold is thus exactly 0 percent for several thousand years. It feels more stable than the Bolivar, Turkish lira or our Swedish krona.

Inflation is good, says Stefan Ingves and the Riksbank, setting an inflation target of 2 percent annually. This means that the goal is to make the Swedish krona 2 percent more useless each year. So, what's so good about inflation? Sweden is dependent on exports and today we export goods and services to a value equivalent to 45 percent of GDP. This means that our products must be attractive to our foreign buyers; a highly valued krona makes Swedish export goods more expensive abroad, and therefore it is no more than logical that we strive to lower the value of the SEK for export purposes, or?

When our own currency becomes useless, it is also more expensive for us to import goods and services from other countries. Imports of goods and services in Sweden are slightly lower, corresponding to 41 per cent of GDP.

If exports represent a larger share of GDP than imports, we should reasonably think that a low-valued currency is good, so far so good. The problem is that Sweden has tried this devaluation model earlier. When companies can export goods and services abroad that are perceived as cheap outside Sweden, they basically only need to compete with the price. This leads to the fact that they can sell more and pay their employees in Sweden more without the productivity actually increasing. As companies get lazy, they lose some of their competitiveness. The fact that inflation makes Sweden an attractive country to import goods and services from a cheap currency is thus a good way of short-term stimulating the economy, but a bad way of building real value in the long term.

So what can we do about it? Should we let our entire capital slowly die with the Swedish krona or is there a way to expose to other markets, currencies and assets? Not surprisingly, gold is the answer to the question. If you are afraid that your money will be worthless, it's a good idea to have a small amount of gold in your portfolio as a hedge against worse times. An even easier way, provided you believe in a continued strong USD and a still weak SEK, is simply buying USD. Something else to consider is keeping track of the companies in your stock portfolio. How are they exposed to different currencies? H & M, for example, is negatively affected when the US dollar becomes more expensive in relation to the Swedish krona, and given their other problems, this may be another factor affecting margins in the future.