I just arrived in Singapore, one of the hottest Asian economies.
But every time I try to buy something for my wife and three kids back home, I’m reminded of just how badly things are going for the U.S. dollar.
The Singapore dollar has just hit a nine-year high. The cost of everything here is high for residents, outrageous for Americans.
If you’re not abroad, you don’t feel this immediately. But just wait. You soon will.
The dollar’s decline I’m feeling right now in Singapore is a decline in the dollar’s purchasing power that’s going to soon hit your pocketbook and investments in the U.S.
Nor is this just a one-time event. It’s a continuous, accelerating phenomenon with no end in sight. Consider Singapore’s economy, for example, one of the crown jewels of Asia:
- Singapore’s GDP rose 8.5% in the first quarter of 2006.
- Manufacturing gained 13.8%.
- Exports were up 12.5%.
- Retail sales increased 12.3%.
- Per-capita GDP is nearly $30,000 per year, second only to Japan.
Next week, I head back to Shanghai. Then Bangkok. Then home. Everywhere I go, I see the same thing. This tells me …
The dollar is heading much lower against all of the world’s major currencies … igniting a frightening inflationary cycle … driving gold and other natural resources skyward … and setting off a new surge in interest rates.
My reasons are not just rooted in the picturesque sights and exotic sounds that flood my mind as I stroll the streets of Asia. I’m also looking at powerful forces that are jumping out of my charts and my research.
Force #1. The So-Called “Big†U.S.
Dollar Rally Has Faded and Fizzled
I told you that the dollar was weak at the knees, that any rally would be nothing more than a temporary bounce. Now, this year’s action has panned out exactly as I expected.
When the dollar bounced off its low point in January, the pundits again started touting “the end of the bear market in the dollar.â€
It traded in a tight range until the middle of April.
But now it has been plunging — from a high of 89.51 on the Dollar Index to as low as 83.55: A smashing loss of 6.5% in just 5 weeks!
Looking back, the so-called “big†dollar rally was nothing more than a temporary bounce.
And looking ahead, there’s nothing on the economic horizon that will change its direction, which leads me to …
Force #2. Our Huge Trade Deficit
Is Hitting at Precisely the Wrong Time.
Despite two months of minor improvements, the U.S. trade deficit hit $196.2 billion in the first quarter of 2006 — a frightening 6% of GDP.
That puts it on track to reach nearly $800 billion by the end of the year, over double the $497 billion of just three short years ago.
But this is not just a problem of buying more goods from overseas than we’re selling. For the U.S. dollar, there’s also the far more serious danger that we have lost control over the flow of U.S. dollars moving overseas.
Look. Some people seem to think that when foreigners wind up with excess dollars, they have some sort of obligation to invest them back in the United States. Not so.
Sure, if their confidence in the U.S. is high, the may do so. But as soon as those investors choose to diversify their hoard of dollars into other currencies and assets (like gold), it’s going to feel like falling off a cliff.
In that scenario, not only will we be losing dollars because of our big trade deficit … but we will also be losing dollars because investors are pulling out. Suddenly, our economy will be drained of cash, and to offset it, the Fed will have to pump in even more money.
No matter which way you cut it — a falling dollar or the Fed’s money pumping — it means only one thing: Much more inflation.
Force #3. A Rapid Decline in
Confidence in U.S. Investments
You’ve heard about this before. You know what I’m talking about. But there’s nothing like being out here, talking to investors, and seeing how it really feels. That’s what I’ve been doing for the past several weeks.
Every day, I put myself in their shoes. Then I look back at the United States from their eyes. If you were here with me, you could do the same …
- The first thing you’d see is the biggest budget deficit in the history of industrialized society. For a country that’s supposedly one of the most prosperous in the world … which is not in recession and not suffering falling tax revenues … that’s already shocking.
- Second, you’d see another $45 trillion in unfunded liabilities in social security, Medicare, and government pensions. If the U.S. were a heavily indebted developing country, you might understand. But such a huge debt pyramid in America? Hard to believe. Harder to understand.
- Next, you’d see a new Fed Chairman who’s afraid to lift a finger … who’s falling way behind the curve in raising interest rates … and who seems willing to let it roar out of its cage like a wild lion.
Finally, you’d see President Bush appoint an outright dollar dove to be the new Treasury Secretary, someone who’s apparently more willing to let the dollar sink than any of his recent predecessors.
So is this the country and the currency you want to invest in?
Hardly. More so than ever before in modern history, you’re going to be anxious to dump your dollars and move your money elsewhere.
Force #4. Asian Central Banks
Also Starting to Dump Dollars
If you think the dollar’s vulnerable to big selling by private Asian investors, wait till you see the danger of big selling by Asian central banks!
So far, most Wall Street analysts assume their bark is louder than their bite: The foreign central banks, say they, merely talk about dumping the dollar. But they never really do it.
True? No.
According to the latest data from the Bank of International Settlements (BIS), back in 2001, for every dollar of reserves, Asian central banks held 81 cents in U.S. dollars. Now, they’re down to just 67 cents.
India was the country that made the biggest shift, slashing its dollar assets from 68% of total reserves to 43%.
And China trimmed its massive hoard of dollars from 83% to 68%.
Recently, other influential holders of U.S. dollar reserves — Korea, Sweden, Kuwait, Qatar, the United Arab Emirates, and Russia — signaled they may also start cutting back their dollars.
If just a few of these central banks start pulling out of the dollar, that alone will spell disaster.
What happens when the dollar plunges? Here are the likely consequences:
Consequence #1
Rampant Inflation
There’s no way you can have the dollar crack wide open and NOT get a tidal wave of inflation.
And sure enough, inflation has already been ticking higher, more than doubling in the past year and a half. But I think that’s just the kick-off phase.
Heck, even without a further dollar decline, you can still expect inflation to go on a tear for the simple reason that companies are starting to force on their higher raw material costs.
Don’t forget:
- Oil is still hovering at $70 a barrel.
- Steel demand is up 48% in one year.
- Aluminum prices have nearly doubled in 18 months.
- Copper prices have tripled in three years.
But so far, you’ve barely begun to see these higher costs get passed along to consumers.
My forecast: These inflationary pressures are going to create a ripple effect that surges through the rest of the economy, feeding on itself.
Consequence #2
Soaring Interest Rates
Since the beginning of the year, the U.S. 30-year Treasury bond has plunged nearly seven full points. That means a $7,000 loss for every $100,000 of face value in bonds.
It’s one of the worst bond market declines in years. But I think the bond market has a long way to go on the downside, meaning interest rates are about to rocket even higher.
There are just too many supplies of new bonds in the U.S. — and too little savings in the U.S. — to buy them with.
There are too many investors here in Asia anxious to dump the U.S. bonds they already own.
And there are far too many holes in the technical picture for bonds as well. Indeed,
Bond prices are now firmly entrenched in a sharp downtrend, with no major support in the market for at least another nine points.
All of this leads me to conclude that interest rates could jump at an alarming pace in the months ahead …
Steps to Take Before
The Next Inflation and
Interest Rate Stampede
The good news is that you’re not helpless. If you’ve been following my Real Wealth recommendations, you’re largely prepared.
Nevertheless, since we are now on the doorsteps of a financial crisis, it’s absolutely critical that you make additional moves to prepare for the coming stampede of rising inflation and soaring interest rates.
Don’t wait — inflation could bust loose on the upside any day. When it does, it’s going to catch a lot of people by surprise. So consider these steps …
Step 1: If you’re still in them, get out of long-term bonds immediately! That includes Treasury bonds, corporate bonds, mortgage bonds or municipal bonds. If they’re long term, they’re going south, in my view.
Their market price is heading into crash mode, and interest rates are about to skyrocket. So why lose money? And why get trapped into low-yielding bonds of falling value … when you’ll be able to lock in much higher yields later?
Step 2: To hedge against a declining dollar, one investment you may want to consider is the Falling U.S. Dollar ProFund (FDPIX). It’s one of the only mutual funds that’s designed to go up when the dollar goes down. It seeks investment results that correspond to the inverse of the performance of the U.S. Dollar Index, representing 6 major foreign currencies.
Step 3: Make sure you have your core gold holdings in order. For more specific information, see the latest issue of my Real Wealth Report.
Step 4: For some of the greatest leverage you’ll ever see, with strictly limited risk on the downside, consider specialized put options on interest-rate instruments. These provide up to 2,000-to-1 leverage. And they’re available to individual investors for as little as $500.
Martin provides the details in his latest report, “New Treasury Secretary! Here are the Consequences,†which he just posted on the Web last night.
Best wishes for your health and wealth,
Larry
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About MONEY AND MARKETS
MONEY AND MARKETS (MaM) is published by Weiss Research, Inc. and written by Martin D. Weiss along with Sean Brodrick, Larry Edelson, Michael Larson, Nilus Mattive, and Tony Sagami. 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. Regular contributors and staff include John Burke, Colleen Collins, Amber Dakar, Ekaterina Evseeva, Monica Lewman-Garcia, Wendy Montes de Oca, Jennifer Moran, Red Morgan, and Julie Trudeau.
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