...But Here's Why The Dollar Won't Die
Issue #502
By Karim Rahemtulla, Investment Director, Smart Profits Report Get out the defibrillator... the US dollar is dying. You don't have to look very far these days to find someone sounding the death knell for the dollar. And when you have a Federal Reserve in the middle of a no-holds-barred interest rate-cutting crusade, it's hardly surprising. Paper currencies backed by little other than the full faith of the government printing presses will always head in one direction over the long-term. And that direction is down. It matters little whether you're talking about the pound, the yen, the euro or the US dollar. Printing presses are not made to sit idle. They are meant to print. And governments are more than happy to spend - and spend mightily. The net result is that fiat currencies will go lower. But that movement takes time. It doesn't happen overnight. And along the way, there are many uptrends and downtrends. Some are scarier than others. Right now, we're in the midst of a scary us dollar downtrend. There is no end in sight for the weak dollar... or is there? Three Pretenders To The Dollar's Crown Globalization. You've probably heard that term before, centering on how economies have closer relationships than ever and much more impact on each other. Debate about how there's a new world order, where the US dollar is no longer king (heck, it's not even in the royal family as far as some are concerned). Instead the Chinese yuan, the Russian ruble and the Indian rupee are the new and up and coming knights. But think about this a little bit... - China: An overpopulated, corrupt regime
- Russia: A benevolent dictatorship
- India: A dysfunctional democracy
Yet all have currencies that are considered more valuable today than the currency of the world's greatest store of wealth! I've visited China, Russia, and India. Sure, all three countries are growing. But they're not countries in whose currency I would want to put my faith. The yuan is subject to currency controls, the ruble is controlled by whim, and the rupee is controlled by protectionism. So how about the pound, euro and yen? The British Are Coming As a frequent traveler, I feel the dollar's fall has taken much more of a toll on folks who don't travel outside the U.S. For example, it's painful to buy a Big Mac meal in London for $9, a Coke for $2 and a candy bar for $1.50. Worse, think about a $5 Coke in Geneva at a nice hotel, or a $100 taxi ride from the airport, or $500 per night to stay in a shoebox in Tokyo. So to those asking if there is any end in sight, I say there is. And I've just provided some examples of why. If it costs $9.00 dollars for a Big Mac meal in London, and only $5.00 dollars in the U.S., there will ultimately be a reversal of currency flows. People are not stupid. They will ultimately gravitate to buying goods and services of equal quality at the lowest price. Doing otherwise is economic stupidity. I'm already seeing such a reversal. I live in Central Florida, but if you go to the southern part of my town, it sometimes sounds like England. Both there, and across other parts of the state in general, the British are invading en masse, eager to scoop up cheap Florida real estate, and Big Macs. A 3-bedroom home in South Orlando, near Disney, an hour from the beach, and with a pool, may set you back $250,000. For a Brit, that equates to about £125,000 - about what it would cost to buy a parking spot in London. It's not a hard decision. The same thinking applies to our new friends in the Middle East... In The Words Of Gordon Gekko... "Greed Is Good. Greed Works" America needs oil. The Middle East needs US dollars in order to make its oil worth money. The oilmen can't afford their best customer falling into a long-term financial crisis. So they buy US dollars. This is no different to the Chinese. They sell massive amounts of goods - it's what makes their economy tick. But without American buyers - the biggest buyers of worthless knick-knacks - the Chinese economy would not grow at half its current pace. Like the Middle Easterners, they also need to buy US dollars, or risk a major slowdown. At the end of the day, it really is that simple. Fiat currencies all go to zero sooner or later. But they don't go to zero in a straight line. Along the way, people from other countries step in when they recognize their own greed as an important part of the equation. Right now, that greed is what the U.S. Treasury and Federal Reserve is counting on to stem the US dollar's decline. Europe cannot afford the euro at current levels, just like Britain can't afford a strong pound, or Japan afford a strong yen. It's fine for a little while - but if they want to sell goods to the biggest consumer (the U.S.), they will have to lower their prices. And one way to do that is what the U.S. has done - deflate the currency. Until next time... Karim Rahemtulla Today's Smart Profits Notes: - "The dollar is going to get weaker over time." So says renowned investor and Berkshire Hathaway chief, Warren Buffett. But note his assertion that this will happen "over time" - as we noted above. Buffett says that while Washington rhetoric promotes a strong dollar, government and Fed policies do little to facilitate that. With the euro, pound and yen all enjoyed more gains, the U.S. Dollar Index just hit an all-time low around 73.30
- There could be more downside for the dollar, too. Following more gloomy comments about the real estate market from Fed chairman Ben Bernanke today, the current Fed funds futures suggest there's an 80% chance that the Fed will cut interest rates by 0.75% to 2.25% at its next meeting on March 18. Bernanke called for "a vigorous response" in the wake of an alarmingly high home foreclosure rate that he predicts will continue to rise "for a while longer." Whether those relief measures come directly from the banks and mortgage lenders in the form of debt relief, or from the Fed, remains to be seen. But Bernanke's latest statement seems to reiterate that the Fed is ready to chop again. The market certainly thinks so.
- With the Bank of England having cut the base interest rate from 5.5% to 5.25% on February 7 in the wake of a housing bubble and credit problems there, some feel the bank may need to cut again in the near future. In addition, some believe that the European Central Bank must also aim to bring Eurozone interest rates closer to the U.S. and take some steam out of the euro currency by cutting rates in the spring.
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