Sell the weak dollar; buy tangible assets
Chris Mayer - Wed 03 Jan, 2007
...Eventually, all paper currencies find their true level at the zero mark. Thats bad news for dollar-holders, but good news for the holders of gold, commodities and tangible assets of all sorts...
- "The dollar's weakness is definitely a factor for stocks right now. The good news is we don't think it will get much worse from here." - Elizabeth Weymouth, global investment specialist, J.P. Morgan.
- Ha! Don’t count on it!
- The world’s dollar-holders are in the process of revolting against the dollar’s reserve currency status. So far this "quiet revolution" has caused very little blood-letting...and very little consternation in the US financial markets. But as the revolution progresses, things might get a little bloodier.
- The human mind is often quick to dismiss impending disaster. "It's not so bad," we humans seem so quick to tell ourselves. Like the officers on the deck of the Titanic meeting to report to the captain. "Ah yeah, small rupture in the hull," they say. "Definitely a factor. The good news is we don't think it will get much worse from here."
- Or like Napoleon's great push into Russia. His normally reliable marshals gather after the first snowstorm. "Yes, the snow will slow us down. Definitely a factor," they say with a certain nonchalance, drawing their cloaks in closer. "The good news is we don't think it will get much worse from here."
- And so it is with the dollar. The market seemed to shrug it off, "Just a flesh wound. Rub a little dirt on it and keep going."
- I had to chuckle when I read Weymouth's precise forecast. According to the Journal, "Ms Weymouth says her firm expects the dollar won't fall much below 74 European cents in the next few months."
- What is the dollar worth now, after the most recent bloodletting? A mere 76 European cents - down 10% on the year and at lows not seen since March 2005. Not a lot of room for error in that forecast. And what proprietary measures went into such a forecast? A bunch of highly compensated individuals sitting around a room tossing out guesses? "Well, it's at 76 cents now," someone says. "Let's say it won't go below 74 cents."
- It's a comic old world. The prestigious Financial Times, arriving every morning as it does, all dressed in pink, offered its own upbeat thoughts on the dollar. The old editorial crew, though, must've been out to lunch at the local pub. Or perhaps it was the hot toddies talking. In any case, the headline boldly declared, "A Lower Dollar Helps the Global Economy."
Sell the weak dollar; buy tangible assets: Obliterate the dollar!
- Wow! So why don't we just obliterate the dollar and grind it to powder? Let's keep making the dollar worth less and less.
- Oh wait; we're already doing that. The surest bet in all of finance is that the dollar will lose value over time. The dollar’s value has dropped more than 95% since the creation of the Federal Reserve in 1913, which is very ironic when one considers that the Federal Reserve is the government agency responsible for safeguarding the dollar’s value. Ever since the severance of the link between the dollar and gold in 1971, dollars are no harder to create than pressing a few buttons.
- Of course, the picture is more complex than "strong dollar good" and "weak dollar bad." There are nuances...
Let us think about the consumer. The average consumer labours under higher energy prices on the doorsteps of winter. He works to stay ahead of rising costs for health care and medicines. The stock market, despite recent strength, is not much higher than it was six years ago. So no help from the old portfolio.
- Plus, as we have seen, the consumer finds his house is suddenly not worth as much as it was last year. This house, remember, is the cherished asset that has been climbing in value every year, and that has become a kind of bottomless piggy bank. For years, every time the homeowner wanted a few extra bucks, he simply refinanced and "extracted equity" from his house. But today, when he sticks his hand into the piggy bank, he wiggles his fingers around finds nothing at all to extract.
- And now he finds his dollars do not go as far as they once did. Buying the stuff that the rest of the world makes costs more today than it did last year. The slide in the dollar, therefore, is a tax on the purchasing power of American consumers.
- However, there are a few folks who benefit from a weaker dollar – mostly foreign tourists and US exporters. Suddenly, American-made wares look a little cheaper in the eyes of that buyer from London, that bargain hunter from Brussels, that eager shopper from Toulouse.
- Not that the euro is such a hot currency. It is the dollar's sickly sister. What's to like about the euro? It, too, is a product of governments - none of which can control how much they spend. Some might make the case that the European economies are stronger than America's. Perhaps.
- But in the matter of paper currencies, it is mostly a race to the bottom. Eventually, all paper currencies find their true level at the zero mark. That’s bad news for dollar-holders, but good news for the holders of gold, commodities and tangible assets of all sorts. We are tempted, therefore, to say, "Join the New Year’s revolution. Sell dollars; buy tangible assets."
- Happy New Year!
Regards,
Chris Mayer
for The Daily Reckoning
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