Editor’s Note: Our
executive publisher, Addison Wiggin, is here to give you a stark
analysis on the “world’s number one currency” (note the sarcasm).
Enjoy this rare Penny Sleuth exclusive…
By Addison Wiggin
August 5, 2008
In 2004, then Treasury Secretary John Snow was traipsing about the
globe trying to “talk the dollar down.” Why? In a word: debt. At the
time, our debt stood at $7 trillion, with interest payments in fiscal
2003 totaling $318 billion. But now the U.S. national debt stands
above $9 trillion, with interest payments in fiscal 2007 adding $1.4
billion a day.
But the Fed and Treasury have engineered a
strategy to pay off the debt with weaker and weaker dollars. And guess
what? So far, so good. Since November 2002, the dollar has fallen
against the euro more than 50 percent since its high in October 2000.
Of course, this is not the first time we’ve gone through a managed
devaluation of the currency. In the 34-year period since Nixon slammed
the gold window shut and subsequently ended the Bretton Woods exchange
rate mechanism, we’ve had only five major currency trends:
-
Weak dollar 1972–1978 (7 years)
-
Strong dollar 1979–1985 (7 years)
-
Weak dollar 1986–1995 (10 years)
-
Strong dollar 1996–2001 (6 years)
-
Weak dollar 2002– (? years)
The most notable period spanned the 10 years
from 1986 through 1995. Then as now, the United States was fighting a
historic current account deficit through managed debasement of its
currency. But because the present bear market only began in February
2002, the current cycle looks like it still has a number of years to
run.
In the best-case scenario, if the current
bear market follows the trajectory set by the 1986 — 1995 slump, we
could see a weakening dollar for up to 10 years. This presents an
opportunity for selling the dollar in one of four ways: direct and
indirect speculations, using short- and long-term options for each.
These plays will help you safely position your money outside the
dollar bear market. And you stand to make a fair amount of money, too.
*************************************
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But there is great danger ahead. Since the
trade deficit passed the $759 billion mark — 6.3 percent of GDP —
foreigners now must shell out about $1.5 billion a day just to keep
the dollar afloat. And even during the managed dollar decline of 2003,
the trade imbalance continued to grow. In 2005, Stephen Roach, Morgan
Stanley’s chief global strategist, predicted that the current account
deficit at the time was on course to reach $710 billion — 6.5 percent
of GDP. He was short by only a few billion.
Herein lies the drama. The Bank of Japan
spent the equivalent of $187 billion in 2003 — and $67 billion in
January 2004 alone — in a bid to prevent its strengthening currency
from choking off the country’s export-led recovery. In dollar terms,
the Bank of Japan is now spending more than $1.5 billion every day
trying to keep the yen from strengthening against the greenback.
Over a four-week period in the fall of 2003,
combined foreign central bank purchases of U.S. securities topped $40
billion, more than $2 billion every trading day. Yet these central
bank billions managed merely to limit the greenback’s decline to just
2.3 percent over the same period. Can you imagine what would have
happened if the banks hadn’t pumped that money into the Fed’s
reserves? One former currency trader has asked, “If $40 billion cannot
bring about even a minor rally, just how weak and despised is the once
— almighty dollar?”
We have relied on the kindness of strangers
for too long. “We’re like the untrustworthy brother-in-law who keeps
borrowing money, promising to pay it back, but can never seem to get
out of debt,” Jim Rogers writes. “Eventually, people cut that guy
off.”
There is no way the United States can
possibly pay off its creditors should they decide to cash in their
IOUs. Right now, the United States holds only about $70 billion in
reserves against its obligations — much less than 2005’s $87 billion.
That would last about three minutes should creditors begin to sell the
dollar, rather than trying to support it.
It’s hard to imagine, isn’t it? The world’s
reserve currency spiraling downward, out of control. But then, that’s
what the British must have thought in 1992 when they attempted to
manage a devaluation of the pound. Despite the Bank of England’s best
efforts, sterling got away from them; the currency collapsed and
Britain was kicked out of the Exchange Rate Mechanism (ERM)
established to pave the way for the euro. On that day, known as Black
Wednesday in Britain, currency speculator George Soros is rumored to
have made as much as $2 billion. Don’t be surprised if more fortunes
emerge in the future as the dollar slips dangerously close to free
fall.
By flooding the system with liquidity, the
Fed cannot control the value of the U.S. dollar against foreign
currencies; nor can they control its purchasing power — at least not
indefinitely. The Fed’s current policies can “give the majority of
investors the illusion of wealth as asset markets appreciate,” wrote
Marc Faber in November 2003, “while the loss of the currency’s
purchasing power is hardly noticed. This is particularly true of a
society that has a very large domestic market, where 90 percent of the
people don’t have a passport and therefore know little about what is
going on outside their own continent. And where the import prices of
manufactured goods are in continuous decline because of the entry of
China, as a huge new supplier of products with an extremely low cost
structure, into the global market economy.” If that’s the case, you
should look at any declines in the dollar as an opportunity to make
some money.
The dollar is the single biggest element of
risk in the world of finance today. Rearrange the current system of
world finance ever so slightly, let confidence in the greenback
falter, and the mighty dollar could go up in flames. There are many
ways to hedge against this risk. Better still, there are many ways to
profit from the likelihood the dollar will fall. Some methods are
direct, some indirect. Some are leveraged, some unleveraged. There is
a methodology for every taste, but before explaining the specifics, we
ask: What ails the dollar?
The dollar is a victim of its own success.
It is America’s most successful export ever — more successful than
chewing gum, Levi’s, Coca-Cola, or even Elvis Presley, Britney Spears,
and Madonna put together. Trillions of dollars flow through the global
financial markets every week, and they are readily accepted at large
and small — and clandestine — business establishments from Kiev to
Karachi.
Today, there are simply too many dollars in
circulation for the currency’s own good. Why? Americans have been
living beyond their means for more than two decades. The U.S. dollar’s
problems stem from a single cause. “If there’s a bubble,” wrote David
Rosenberg, chief economist at Merrill Lynch,” it’s in this four-letter
word: debt. The U.S. economy is just awash in it.”
You’ve seen it firsthand: John Q. Public now
holds more credit cards and outstanding loans — with a higher and
higher total debt load — than ever before. Outstanding consumer
credit, including mortgage and other debt, reached $9.3 trillion in
April 2003 — a significant increase from its $7 trillion total in
January 2000 — but by the third quarter of 2007, debt had nearly
doubled since 2000, to $13.7 trillion. With consumer spending alone
responsible for approximately 70 percent of U.S. GDP, that’s quite a
hefty personal debt load.
The corporate debt picture is no better.
American companies have never depended so much on sales of their
corporate bonds. Between 2002-2007, investment-grade corporate bond
sales increased nearly 60 percent, growing from $598 billion to $951
billion. But junk bond sales for that same period broke the bank,
surging from $57 billion to $133 billion.
The third leg of the debt problem, following
consumer and business debt, is Uncle Sam. Government debt as of
November 7, 2007, officially passed $9,000,000,000,000. That’s about
$30,000 for every man, woman, and child in the country. This total
includes debt owned by many types of investors, from individuals to
corporations to Federal Reserve banks and especially to foreign
interests. (By 2004, foreign central banks had stockpiled more than
$1.3 trillion worth of dollar-denominated Treasury bonds and agency
bonds at the Federal Reserve. By 2007, foreign debt had nearly
doubled, to $2.033 trillion.)
What the $7.8 trillion figure does not
account for are items like the gap between the government’s Social
Security and Medicare commitments and the money put aside to pay for
them. If these items are factored in, the government debt burden for
every American rises to well over $175,000. In 2005, the Methuselah of
investment mavens, Sir John Templeton, then 93, said you should get
out of U.S. stocks, the U.S. dollar, and excess residential real
estate. Templeton believed the dollar would fall 40 percent against
other major currencies, and that this would lead the nation’s major
creditors — notably Japan and China — to dump their U.S. bonds, which
would cause interest rates to run up, thus beginning a long period of
stagflation. He was right.
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The Slow-Motion “Black Monday” Ahead
Here’s a picture for you: If the market
today falls as fast and as far as it did in 1987, you’ll see more than
3,000 points erased from the Dow alone. In a single day.
Could it happen?
Banks hold the same blue chip shares you’ll
find parked in your retirement fund. When the “level three” losses get
declared, those same banks might have to start dumping those shares to
raise cash. And that could send these blue chips...along with most
of the rest of the stock market...into full-scale collapse.
I urge you to take the seven steps outlined
for you in your free Strategic Financial Survival Library.
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*****************************************
Don’t let his age fool you — Templeton was
still sharp in 1999 when the financial industry hacks in Florida were
urging their customers to buy more tech stocks. Templeton warned that
the bubble would soon burst. He was right; they were wrong. Of course,
he was only 87 back then. He is almost certainly right again. Other
great investors, too, are getting out of the dollar. For the first
time in his life, Warren Buffett is investing in foreign currencies.
George Soros, who made a fortune selling
sterling in the 1992 ERM crisis, warns that the U.S. system could
“blow up” at any time. Richard Russell, the influential editor of the
Dow Theory letters, speaking at the New Orleans Investment Conference,
warned: “If ever there was a crisis that could shake the global
economy — this is it.” Jim Rogers is teaching his daughter to speak
Chinese. When old-timers nod their heads in agreement — especially
when they happen to be the most successful investors in the world —
their advice may be worth listening to.
American consumers, companies, the U.S.
government, and the country as a whole owe more dollars to more people
than ever before. But perhaps the greatest threat to the U.S. economy
is its foreign creditors. There is — or should be — a limit to the
number of dollars foreigners are willing to buy and hold and thus a
limit to their willingness to service our credit habit. Why? Because
the United States, while still the world’s number — one economic
power, is showing itself to be an unreliable steward of its own
currency.
Regards,
Addison Wiggin
Editor’s Note: Be sure to
keep your eyes peeled this afternoon for a special email directly from
Addison. Without giving too much away, you should keep the night of
August 21, 2008 open on your calendars.
