New Year's Revolution The Rude Awakening
Laguna Beach, California
Friday, December 29, 2006 ------------------------- - Ominous clouds on the beleaguered dollar's horizon,
- The potential perils of dismissing imminent disaster,
- The 2007 profit season begins with a revolution, the Reserve is almost closed and plenty more…
------------------------- Eric Fry, reporting from the stormy shores of Laguna Beach… A dramatic, yet brief, Pacific storm swept through Laguna Beach yesterday. Torrents of rain doused the parched, surrounding hillsides for a few hours, while strong winds danced through the frawns of beachside palm trees. But by mid-morning, the rain had retreated, the sun had re-appeared, and the Ferraris had resumed rolling through downtown. As the sun first emerged from the storm clouds, your editor stepped outside of Starbucks with a triple cappuccino in hand and strolled through the small puddles on the boardwalk. Along the way, he encountered an amorous, 60-something couple. The enraptured man and woman were cooing and kissing on a bench. As your editor approached, the man raised his beaming face and proclaimed, "A little bit of water and a lot of lovin'. Ain't nuthin' wrong with that!" "No sir!" your editor replied. "You should consider this a successful day." A lot of water and a little bit of lovin' isn't so bad either, your editor thought to himself, as he mulled the fact that his girlfriend lives 3,000 miles away in New York City. But as your editor is congenitally incapable of self-pity, his thoughts turned quickly to the beauty of the rain-washed panoramas surrounding him…and then to the fate of the U.S. dollar. He contemplated the dollar's fate, mostly because he was on a deadline to produce today's Rude Awakening column. Otherwise, he might have continued to dwell on the beautiful images that surrounded him. The dollar, the poor unloved dollar, seems likely to become the most important investment story of 2007…or at least, ONE of the most important stories. In fact, in a recent interview, your editor predicted that 2007 would be the "Year of the Dollar," by which he meant, "The Year of the Withering Dollar." But Dan Denning, our colleague down in Australia, reminds us that 2007 will be the Chinese "Year of the Pig." Perhaps we're saying the same thing. The dollar may very well fly like a pig in 2007. Certainly, the dollar is already beginning to emit some porcine aromas. The dollar fell sharply in 2006 against every major world currency and against most major global commodities. In short, it lost a lot of value against almost everything. A rebound, therefore, should be in order. But fleeting short-term strength would not compensate for the greenback's inexorable long-term weakness. Whenever we moisten our virtual index finger and raise it in the air, we discover that the prevailing monetary winds of the world are blowing against the dollar. For starters, America's current account deficit, which exceeds $800 billion a year, equates to an alarming 7% of GDP. This lofty percentage exceeds the levels that have doomed many lesser currencies in the past. Meanwhile, many of the world's largest dollar-holders have declared a desire to hold fewer dollars in the future. Just this week, the United Arab Emirates (U.A.E.) announced that it would convert 8% of its foreign currency reserves from dollars to euros before next September. At present, 98% of the U.A.E.'s reserves are in dollars, while only 2% are in euros. "We will accumulate euros each time the market appears to dip," said Sultan Bin Nasser al-Suwaidi. The U.A.E. joins a growing crowd of oil-producing nations - like Iran, Venezuela and Indonesia - who are looking to shift their currency reserves into euros and/or to sell their oil for euros instead of dollars. "This is not confined to the U.A.E.," observes Simon Williams, economist with HSBC Holdings Plc. "There's a general awareness across the Gulf of the benefits of diversifying currency holdings." To wit, Bloomberg News reports: "The share of foreign-exchange deposits held in dollars by OPEC oil producers, including Saudi Arabia and the U.A.E., fell to a two-year low of 65 percent during the second quarter [of 2006], from 67 percent during the first quarter, Bank of International Settlements figures released earlier this month show." The Chinese are also become less enthusiastic dollar-holders. Amid declarations from numerous Chinese officials that the country's dollar reserves have become too large, China reduced purchases of U.S. Treasuries by 1.7% in the first 10 months of 2006. So far, these "official" dollar sales from the likes of China and the U.A.E. amount to little more than a trickle. But if the trickle becomes a flood, the dollar won't be gettin' any lovin' whatsoever. --- 4 DAYS LEFT! --- Want to Get Your Favorite Agora Newsletter for Free for Life? 4 Days Left to get into the Reserve!
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By Chris Mayer "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 U.S. 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." 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 labors 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 U.S. 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! Joel's Note: Over the last few weeks your junior editor has experienced, first hand, the plight of the once almighty greenback. We have exchanged our diminishing supply of U.S dollars for English pound sterling in the U.K., Euros in France and Ireland, Malaysian ringgit, Thai Baht and, finally, Aussie dollars. Despite our best efforts at utter profligacy the recent decline of the dollar has all but matched our spending by way of its own value erosion. It took a major market collapse in Thailand for us to even break even on our spending there…and things are not notoriously expensive in Thailand. We'll say nothing of the cost of a beer in an English pub or an aperitif in a French bistro. In fact, when we drew our first American paycheck just a few short years back we laughed at the favorable exchange rate we got with the Australian dollar. We could take a vacation Down Under and our spending money would literally double upon reaching our homeland's shores. The Aussie dollar is currently buying close to $0.80. Not too bad for Aussies traveling to the states…not too good for Aussies returning home for Christmas. At the beginning of the year, your senior Rude editor exchanged a few of his own dollars for Euros while on a Rude research trip in France. Eric was there to pick the brain of the most respected classical economist of our times, Dr. Kurt Richebacher. The good Doctor had advised the likes of former Fed Chairman, Paul Volker and has been penning his thoughts on the state of the American economy for a good portion of his 80-odd years. Needless to say, this guy knows his stuff. Unfortunately, the diagnosis from Dr. Richebacher was not pretty. Still, Eric dutifully reported his findings and enjoyed what may have been the last favorable exchange rate in Europe he will get for a while. As the year went on, every dire prediction Dr. Richebacher spoke of came to fruition. From the flailing dollar to the housing crash to the over-extended consumer…he was dead on the money every time. Fortunately for those who read the report, Dr. Richebacher also included two surefire ways to safeguard your wealth against such crisis. Now, standing on the precipice of a foreboding new year, he has issued the only two investments he will recommend in 2007. Your options here are pretty clear…you can read the report and arm yourself with the necessary data to survive the year ahead…or you can dismiss it. Easy. Just in case you chose the former, here it is… The Only Two Investments I'll Make This Year The Richebacher Letter If you chose to discard, please let us know how you've faired by this time next year. 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