- When dealing with real estate investments, the rule is
location, location, location. With regard to investments in general, the
rule should be TIMING, TIMING, TIMING. The reasons are self-evident. If
one is too early or too late, the results are disastrous. There are, however,
"points of recognition" in any market move which, if acted upon,
remove a great deal of the risk and vastly improve the timing and profitability
of one's investment activities.
- There is a high probability that an implosion is coming
in the US dollar, but before detailing the reasons why this should be so,
let me give the likely "points of recognition". These benchmarks,
when exceeded, will result in a change in the perception of the majority
of investors to the point where they realise that the trend has changed.
For the US dollar these "points of recognition" are a rise by
the Euro to above US96c and a fall by the US dollar index to a level below
108. These points are derived from technical analysis and will be confirmed
by most technical analysts. It is unlikely that you will be reading this
article if the US dollar has not already exceeded the "points of recognition"
of US96c for the Euro and the 108 level for the US dollar index. I do not
expect to hit the "Send Messages" button and publish this article
until those "points of recognition" have been surpassed.
- Why is there going to be an implosion in the US dollar?
For the past 31 years, since the USA closed the "gold window"
and the world embarked upon a worldwide experiment in fiat currencies (money
created by Government decree), the world has existed on a US dollar standard.
Every prior experiment with fiat currencies throughout history has ended
in disaster because Governments could not resist creating ever-increasing
quantities of their fiat currencies, to the point where citizens lost confidence
in those currencies.
- In this, the world's first ever experiment in worldwide
fiat currencies, the US Dollar has been the lynch-pin. It has been the
currency that other countries have been prepared to accept as a "standard",
as a store of value. The result of this universal acceptance is that the
USA has been exempt from the disciplines that are automatically imposed
upon other countries. If country "X" runs a trade deficit, it
has to somehow achieve a capital inflow to counter balance the trade deficit
outflow. It generally does this by a combination of currency depreciation
(which gradually assists in eliminating the trade deficit), higher interest
rates or foreign borrowings. In the case of Argentina, they linked their
currency to the US dollar.
- When Argentina started running trade deficits, instead
of depreciating their currency, they opted for retaining the dollar link
and resorting to foreign borrowings to cover their trade deficit - until
they got to the point where foreigner lenders said "No more".
Now their currency has been forced to depreciate by 66% in a few months
and they are still trying to deal with the necessary social and banking
- The only country exempt from this discipline is the USA
because foreigners have been satisfied to accept US dollars when they have
trade surpluses with the USA. Thus the USA has been able to run a trade
deficit for years and pay for it in US dollars. It doesn't take a rocket
scientist to figure out that this trend is unsustainable. At some point
foreigners will either lose confidence in the US dollar or be unhappy to
purchase US assets with the surplus US dollars that they accumulate or,
worse still, both. At this point there will be an implosion in the US dollar,
the mechanics of which are explained later.
- Which brings us to the inevitable point of TIMING. This
situation of a possible dollar implosion has existed for years. Why should
it have relevance NOW?
- There are a number of reasons, probably the least of
them being the ongoing US trade deficit that is running at US$32 billion
per month or over US$1.0 billion per day. It means that each day there
is US$1.0 billion that requires someone to make a decision upon. Do they
want to hold US dollars and US dollar assets? The two are inseparable.
Someone holding US dollars is obliged to make an investment in US assets.
So the question really is: how good are investments in the USA at this
- This is where foreigners strike some real problems. Equities
on the US stock market are at historically high PE ratios, some 3 times
above the norm and twice the level of PE ratios on foreign stock markets.
Then there is the problem of accounting for profits. Are the already high
PE ratios realistic? Should they not perhaps be even higher when proper
accounting systems are applied?
- These ultra-high PE ratios can only be cured by either:
(i) a very sharp rise in corporate profits; or (ii) sharply lower share
prices, or (iii) a combination of these two options. Whichever way one
looks at the problem, US equities do not look enticing. Interest rates
in the USA are near all time lows. The next sustained move in interest
rates will almost certainly be upward, which will be seriously bad news
for the bond market.
- Real estate is very frothy and looks as if it could be
at a peak. Can one really risk an investment in US real estate, especially
with a rise in interest rates in prospect? Even US bank deposits yielding
less than 2% are unexciting. This is why the "points of recognition"
on the US dollar become so important. Once these points are exceeded, most
people will be convinced that the US dollar is in a down trend. This is
when foreigners will have to seriously consider what to do with their US
dollar based investments.
- Foreigners will, firstly, consider how far the dollar
will depreciate against their home currency over the next 12 months. Could
it be a 10%, 20%, 30% or 40% drop? All of these levels are possible. Assume
that a foreign investor thinks that the US dollar will decline 20% against
his home currency, then the question is: "Can USA assets rise by 20%
to compensate for the currency loss and leave the investor in a level,
no win, no loss situation?" The answer seems to be a clear "No".
- In these circumstances, it is logical and reasonable
to anticipate that the foreign investor will conclude that the sensible
option is to liquidate the US investments and repatriate the funds into
local currency assets or assets in another currency which is firming against
the US dollar.
- The nightmare begins.
- Foreigners own over $8.2 trillion of assets in the USA.
If foreigners holding just 20% of this total decide to liquidate and take
the money home, that means some $1,640 billion of US assets will be sold
and the proceeds transferred into foreign currencies. Add to this the annual
trade deficit of $360 billion that also has to be financed and the imbalance
in financial and foreign exchange markets becomes obvious. A small matter
of $2.0 trillion trying to escape the US dollar!
- The nightmare gets worse.
- If it is reasonable and logical for foreigners to sell
their over-valued US assets and send the money somewhere else, then surely
it must make equally good sense for American investors to do likewise?
And American investors own a much bigger slug of US assets than foreigners
do. It requires only a small fraction of US investors to decide to move
off-shore and their funds will far exceed the amount that foreigners try
- And it is not over yet. There are many extremely intelligent
hedge fund managers who are desperately looking for a good deal to reward
their investors. Borrowing US dollars and investing in foreign assets must
be the next big "play". Some of them will even figure that the
big winner in this whole situation will be gold as it is the ultimate money,
the "final store of value". Most other currencies are suspect
because they are all worthless paper. In these circumstances a dollar implosion
is a very high probability event. It is a question of "WHEN"
not a question of "IF".
- This is why the two levels that I mentioned - the Euro
at above US$96.0c and the US Dollar Index below 108.0 are so important.
Electing these levels will signal that the US dollar trend has turned firmly
down. You will only be reading this article if those levels have already
been exceeded. Once the dollar has surpassed these two "points of
recognition", the "WHEN" will have become "NOW".
- One only needs to look at the Japanese Yen for confirmation.
The Japanese are printing the Yen into oblivion in order to keep the currency
weak and thus protect the Japanese export industries. Despite this wholesale
printing, the Japanese Yen has been rising against the US dollar! What
does that tell one about the current status of the US dollar? Perhaps the
Japanese should employ some ex-Arthur Andersen partners who have demonstrated
an ability to destroy paper.
- While gold will almost certainly be the top investment
in this climate of a sharply declining US dollar, the Euro and Swiss Franc
may also be strong beneficiaries because these countries have large gold
reserves. At some point in the future they will have the ability to restore
gold convertibility to their currencies, albeit at a very much higher gold
price. Secondary beneficiaries will be the currencies of those countries
that produce gold, notably Canada, Australia and South Africa.
- Alf Field
- PS :The closing price for the Euro tonight (20 June 2002)
in New York is US96.51c while the US Dollar Index closed at 108.94. Thus
the Euro has surpassed its "point of recognition" while the Dollar
Index within a point of doing so. It seemed appropriate to click on "Send
- AF June 20, 2002
- Disclosure and Disclaimer: In the interest of full disclosure,
the author advises that he is not a disinterested party in that he has
personal investments in gold and silver bullion and in a selection of gold
and silver mining shares. The author's objective in writing this article
is to invoke an initial interest on the part of potential investors in
this subject to the point that they are encouraged to conduct their own
further diligent research. Neither the information nor the opinions expressed
should be construed as a solicitation to buy or sell any stock or commodity.
Investors are recommended to obtain the advice of a qualified investment
advisor before entering into any transactions. http://www.moneyfiles.org/