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For the most important molecule on the planet, water, break points are at zero and 100 degrees Celsius. To guide them on take-off, pilots have a formula. They calculate a “decision speed†— typically up to 180 miles per hour for the average jetliner and less than half that fast for a light Cessna. There’s also a formula for the “stalling speed,†when an aircraft literally stops flying. But for other, equally important events, there is no known level or formula. Geological forces build up to a break point, ultimately unleashing an earthquake or a volcano. Political pressures rise, ushering in civil eruptions. Deficits and debts pile high, precipitating market breakdowns. With each of these, we know that the break points exist. We know that they hold the key to the timing of fatal dangers or major opportunities. We just can’t pinpoint when or where. Here’s what we do instead: Based on past experience, we describe a typical break-point scenario — much like a doctor with a list of symptoms. Then we monitor the events in real time and try to identify the break, ideally while it’s happening or soon thereafter. That’s what I want to do with you this morning with a series of break points that are likely to change your life, possibly very soon. Some are financial. Some are not. But all could have potentially major impacts on your money. Break Point #1 A country’s currency is its life blood. When it’s strong, it enables its citizens to buy foreign goods cheaply … invest substantial sums overseas and … bid assertively for the best resources in the world — natural or human. When the currency is weak, it has the opposite effect. It makes foreign goods more expensive, inviting inflation. And it can prompt foreign investors to pull their money out, sending the entire economy into a tailspin. Some people say a weak currency helps the country sell its own goods more cheaply and undercut the competition from other countries. But that only works when the country’s citizens are willing to work harder for less — not exactly the current state of affairs in the United States. Indeed, the U.S. dollar weakened dramatically between 2002 and 2004. But it did virtually nothing to help America compete abroad. What’s next for the dollar? The list of symptoms associated with a fatal breakdown is clear: Symptom: Bulging trade deficit. A country with a big trade deficit is like a retail store with low sales. To clear its inventory, it has to slash prices across the board. And the only way a country can run a store-wide sale is to reduce the value of its money. That’s the predicament the United State is in right now. It has a trade deficit surpassing $700 billion — far beyond anything we’ve ever seen in this country, or any other country, in history. How big does the trade deficit have to get before we should start talking about a likely collapse in the dollar? Past experience tells us you should be on high alert once the trade deficit is beyond 5% of GDP. And right now, it’s over 6%. Symptom: Huge foreign debts. After years of trade deficits, the country piles up a waste dump of debts to foreigners. As long as foreigners are willing to dish out more loans, the country goes on. But as soon as they stop, the pile-up becomes an unbearable burden. Today, we have more foreign debt than ever before. We are more dependent on the vagaries of foreign investors to finance our government than at any time since Ben Franklin asked the French to help pay for our war of independence. In a word: The situation stinks. Symptom: Diminishing yield advantage. If foreign investors are paid more for putting their money in dollars, they may hold their nose and ignore the stench. But as soon as the yield advantage of holding dollars starts to diminish, they turn around and run. That’s what’s beginning to happen right now as our major foreign trading partners start jacking up their interest rates. Europe just did. Japan is next. Symptom: Surging world commodities. World commodities — oil, gold, wheat, sugar, you name it — are mostly measured and traded in dollars. So in a dollar-collapse scenario, you’d expect to see all, or nearly all, of these commodities surging — a clear signal that the buying power of the dollar is plunging. That’s exactly what’s been happening, especially in recent months. For months, all these pressures have been building up. And despite the pressures, the dollar continued to rally as foreign investors flocked to the rising yields available in the United States. But no more. The U.S. dollar collapse we’ve been warning about could be beginning right now!
That, in itself, was a critical break point. Now, just in the past few days, we’ve witnessed a new, even more severe plunge in the dollar. This isn’t just a passing blip that should soon be reversed. It’s the second, potentially more damaging phase of an earlier dollar plunge that began back in 2002. This is also not isolated to Europe. The dollar is falling against the Japanese yen, the Korean won and a host of currencies that are tied to commodities, like the Canadian dollar, the Australian dollar and the Brazilian real. Nor is this dollar decline just something that happens overseas with little impact on your daily life. It will drive up the prices of all goods we buy from overseas, including one of the most important imports of all — oil. It will effectively devalue virtually everything you own. Not just your investment portfolio, but also your bank accounts, your real estate, even your insurance policies. And it has severe implications for the future of our nation, its leadership as an innovator, its geopolitical hegemony, even the state of its health and educational systems. Unfortunately, our leaders in Washington and on Wall Street don’t seem to get it. They have been spoiled by the many years of dollar supremacy. They’ve become complacent about our trade deficit, no matter how large it has grown. Plus, all of America has gotten used to living high on the hog despite the rise of other, more competitive economic giants. Now, however, that era may be coming to end. As I’ve just shown you,
I’ll tell you what to do about it in a moment. But first let me bring you up to date with some nonfinancial break points that could impact the dollar and your investments in the months ahead … Break Point #2 Despite its woes, the dollar is still the world’s premier currency. So political stability in the world usually lends a modicum of stability to the dollar markets. Conversely, political instability — especially where the U.S. has a substantial stake — can only hasten the dollar’s long-term decline. Sure, there may be temporary flights to the dollar as a safe haven. But don’t let that fool you. In the long term, an unstable world will usually translate into an unstable dollar. And right now, I find the rapid deterioration in the Middle East — coming precisely as the dollar has turned down in the past few days — especially worrisome. Here’s what’s happening: While Prime Minister Ariel Sharon is still fighting for this life, Israel and the world have already recognized his demise as the region’s last-hope leader for peace. The more critical break point, however, is neither one man’s leadership nor one country’s sorrow. It is a political whirlwind that few anticipated — taking place in the neighboring Gaza and the West Bank. First, there’s a fatal rift within the Palestinian Authority. Second, there’s chaos on the streets of Gaza in the wake of the Israeli departure last year. Third, and, most alarming of all… The armed Palestinian terrorist group — Hamas Hamas is the Palestinians’ largest and most influential Muslim fundamentalist movement. It has an extensive social service network which it has used effectively to gain widespread support among Palestinians. Plus it has a terrorist wing used to carry out hundreds of suicide bombings and attacks throughout the region. Hamas’ founding charter is committed to the destruction of Israel and the replacement of the Palestinian Authority with an Islamist state on the West Bank and Gaza. It considers suicide attacks the “F-16†of the Palestinian people. It will do everything in its power to sabotage a negotiated peace with Israel. Most worrisome of all for American efforts in the region, Hamas is also the organization with the most direct financial support from Iran, another critical dot I will connect in just a moment. All this has been known for some time, with the consequences largely expected. What was not expected is the fact that, in addition to its power as a terrorist force, Hamas has gained such broad political support.
At the very minimum, that would be the coup de grace for the already-dying “road map for peace.†At worst, it could be the spark of an outright war between Israel and a new, Hamas-influenced Palestinian Authority. Mark January 25 on your calendar. Unless they’re canceled, the elections could be another major break point in the chaos now spreading throughout the region. Break Point #3 Iraq is already being torn apart by a hidden civil war. Instead of open combat with defined battlefields, the war is being waged through suicide bombings … kidnappings … assassinations … vengeance killings … violence by armed gangs infiltrating local police forces … and torture by militias that have taken over divisions of the Iraqi military. That’s why American commanders on the ground in Iraq have turned so pessimistic. That’s why the recent Iraqi election, hailed as a milestone, was split almost entirely according to ethnic lines, with virtually no crossover voting. That’s why even Iraq’s mixed neighborhoods are splitting apart — Shiites moving to cities with Shiite majorities and Sunnis moving to areas dominated by Sunnis. Worst, that’s why the entire country is moving quickly toward another break:
The dominant Shiite political party, the one that won the single largest block of votes in the coalition-sponsored elections was none other than the same group that’s most directly supported by Iran, much like Hamas. When this group decides to fight back, the outright civil war in Iraq will begin. Fortunately, that has not yet happened. The Shiites have mostly refrained from retaliating against the massive suicide attacks against their people. But with every new attack, they mourn the growing number of victims in their ranks with greater and greater anger. They will not continue to turn the other cheek for much longer. The only hope to avert disaster: If the coalition forces can somehow exploit a rift that’s emerged between local Iraqi insurgents that oppose the attacks on civilians and foreign jihadists such as Al Qaeda, that’s pursuing those attacks. I pray they will. If so, it will be a critical break point in the right direction for a change. Regardless of the final outcome, however, at this juncture, the rapid deterioration in Iraq, like in Palestine, is also bad for the U.S. dollar. It reduces America’s stature in the eyes of investors. And it’s directly tied to America’s influence over some of the world’s most critical resources, especially in the Persian Gulf. Break Point #4 Gold reflects all these crises. And it usually rises as the dollar falls. Once yellow metal blasted through the critical barrier of $500 per ounce, the die was cast. The key fact to remember: Gold was surging higher even before the dollar turned down last month. Now, with the dollar in tailspin, gold could jump upward at an even faster pace. Last week, it quickly challenged its quarter-century highs. In the weeks ahead, it could blow right through them. Break Point #5 Normally, long-term rates are higher. That makes sense because the longer the time commitment you want to lock in for a loan at a fixed rate, the more you should have to pay. But in certain abnormal times, the demand for quick cash can be so intense, borrowers are willing to pay almost any price to get their money. Result: The rate on overnight borrowings surges well above the rate on 30-year loans. Warning: Don’t prematurely anticipate this break point. Although some shorter term rates have eclipsed some longer term ones by a small margin, and although this is going to hurt the banking business, the real crunch for the economy may still be some distance away. Break Point #6 The break point that could spark a worldwide pandemic will come when the most deadly strain of the avian flu virus, known as H5N1, develops the capacity to transmit itself from human to human. Fortunately, this, too, has not yet happened. But it will. It’s only a question of when. On Friday, Turkey reported the first avian flu deaths in Europe, putting the entire continent on high alert. Was it caused by the long-feared human contagion that will spark the worldwide pandemic? Probably not. The deaths seem due to direct contact with diseased animals. But scientists agree that the fateful day is approaching. When it comes, investors, heretofore oblivious to the threat, will suddenly wake up to its economic consequences. Investors will recognize that an avian flu pandemic can have far more economic impact than recent epidemics, such as SARS. They will anticipate the resulting disruptions to world trade and the likely bottlenecks of critical natural resources, especially in farm products. And they will move their money accordingly. Result: Panicky explosions in the price of agricultural commodities … an even greater flight to gold … and more declines in the dollar. Protection and Profit Don’t turn your financial life upside down by selling all your dollar-denominated assets and shifting to foreign currencies. You don’t want to do that. And you don’t have to. Instead, allocate a portion of your portfolio to investments that tend to rise when the dollar falls. Three prominent examples:
Highest potential of all: The three small-cap energy companies that our associate Sean Brodrick is recommending to his subscribers tomorrow. These stocks are already moving higher. As the dollar falls and commodities soar, they’re bound to rise even more. Aim to turn less than a $6,000 total investment into over $22,000, minus any broker commissions. Your risk? Strictly limited to the small amounts invested. The number to call is 800-400-6916. The sign-up deadline for his three energy recommendations: Midnight tonight. Good luck and God bless! Martin About MONEY AND MARKETS MONEY AND MARKETS (MAM) is published by Weiss Research, Inc. and written by Martin D. Weiss along with Larry Edelson, Tony Sagami and other contributors. To avoid conflicts of interest, Weiss Research and its staff do not hold positions in companies recommended in MAM. Nor do we accept any compensation for such recommendations. The comments, graphs, forecasts, and indices published in MAM are based upon data whose accuracy is deemed reliable but not guaranteed. Performance returns cited are derived from our best estimates but must be considered hypothetical inasmuch as we do not track the actual prices investors pay or receive. Contributors include Marie Albin, John Burke, Michael Burnick, Beth Cain, Amber Dakar, Scot Galvin, Michael Larson, Monica Lewman-Garcia, Julie Trudeau and others. © 2006 by Weiss Research, Inc. All rights reserved. |
Break Points
Everything in nature has a break point — an invisible threshold beyond which a new force prevails or a transformation occurs. 
The current phase of the decline began last month, when the dollar started falling against the euro, ending a long multi-month rally. 
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