Published:
March 10, 2008
Get out the defibrillator... the
U.S. 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 U.S. 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 U.S. 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 U.S. 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 euro, pound and
yen?
How Low Can You Go?
Another day... another new low.
That's the current trend for the
U.S. dollar versus the euro. As the
stock market sank on Friday amid job
woes and another record high for oil
above $106 a barrel, the fragile
dollar responded by slumping to a
record low of $1.5459 against the
euro.
As dollar-denominated oil continues
to soar, it fuels the argument of
those who believe the Fed's interest
rate cutting policy is far from
over. And when rates go down, the
dollar goes down, too.
In addition, because oil provides a
hedge against a falling dollar, many
economists believe the crumbling
dollar/soaring oil relationship is a
big reason why oil prices have
jumped almost +25% over the past few
weeks. A low dollar makes oil less
expensive for foreign investors.
The British Are Coming
As a frequent traveler, I feel the
dollar's fall has taken much more of
a toll on folks who 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 dollars for a Big Mac
meal in London and only $5 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 southern
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 pounds --
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 U.S. dollars in order to make
its oil worth money.
The oilmen can't afford their best
customer to fall into a long-term
financial crisis. So they buy U.S.
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 U.S. 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 U.S.
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
Investment Director, Smart Profits
Report
P.S. "The dollar is going
to get weaker over time." So
says renowned investor (and
America's newly crowned richest man)
Warren Buffett. He says that
although Washington talks about a
strong dollar policy, government and
Fed policies do little to achieve
that. And following more ugly
foreclosure and homeowner equity
figures, 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 18th.
To view the original Smart Profits
Report article titled "The Weak U.S.
Dollar Is Dying... Or Is It?" please
click here.
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About Karim Rahemtulla
Karim Rahemtulla is one of the country's foremost specialists in options
trading, and, along with Executive Director Julia Guth, a principal founder of
Mt. Vernon Research, as well as the founder and editor of The Income
Trader: A Covered Call Strategy, The 400 Report and The Smart
Profits Report.
An internationally renowned options trader who's been dubbed a "Market Maven" by
CNBC, Karim also sits on the Advisory Panel for The Oxford Club, and is a
frequent contributor to The Oxford Club Communiqué. Karim was educated in
England, Canada, and the U.S. and is fluent in several languages. He travels the
world regularly to find the best investment opportunities for our members.
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