The Rude Awakening
Laguna Beach, California
Tuesday, June 5, 2007 ------------------------- - The long queue to ditch the dollars,
- What if Russia, China and Japan sold out?
- Diversifying into "energy-backed" currencies and plenty more…
------------------------- You are receiving this email as a part of your Subscription to Agora Financial. Should you wish to unsubscribe please follow the instructions at the bottom of this email. ------------------------- Eric Fry, reporting from Laguna Beach, California… "Syria to End Peg to Dollar, Link Currency to IMF Drawing Rights," a Bloomberg News headline declared yesterday. Ten minutes earlier, a seemingly unrelated headline had crossed the Bloomberg News wire, declaring: "Brazil Stocks Surpass $1 Trillion as Metals Rally Drives Profit." Hmmm…These unrelated headlines might not be so unrelated. The dollar's stature might not be eroding in Syria, for example, if the dollar's stature had not been eroding already in the commodity markets…and in the foreign exchange markets…and in the equity markets. Everywhere you look, you see withering greenbacks. But we don't call them that. The polite term for a withering dollar is a "bull market." That's right; a weak dollar is just the flip side of a bull market in gold, and in oil, and in S&P 500 stocks. In dollar terms, commodities have been soaring for quite some time, which has been a direct boon to the resource-based Brazilian stock market. "Brazil's stock market," reports Bloomberg, became the first in Latin America to top the $1 trillion after a record surge in metals prices drove a doubling of corporate profits and a rising currency…" Meanwhile , back in the Middle East, Syria's latest monetary maneuver doesn't really mean much in the broad scheme of things. But this "straw in the sirocco" seems to be part of an intensifying wind of change. "Syria is the second Middle Eastern Country in two weeks to say it will dump it dollar peg," Bloomberg observed, "Kuwait shifted to a currency basket on May 20 [in lieu of a its dollar peg]." Both countries blamed the dollar-peg for promoting inflation within their borders. The Syrian inflation rate topped 10% last year, up from 7.2% in 2005. "The weaker dollar is fueling inflation," says an analyst at ING Bank in London. "We see the United Arab Emirates as the next possible shifter." Syria's announcement merely formalizes a well-established trend, both inside its own central bank and throughout the rest of the world. Let's call that trend, "dollar aversion." In Syria, the central bank had already been purging dollars from its foreign currency reserves, replacing them with gold and euros. But with only a few billion dollars of reserves, Syria's monetary machinations will hardly dent the dollar's stature. The same cannot be said of Syria's neighbors… "The Gulf states have passed China!" proclaimed Capital & Crisis editor, Chris Mayer, yesterday in an e-mail to The 5-Minute Forecast. "Six Persian Gulf States now have almost $1.6 trillion in foreign assets, dwarfing even China's mammoth $1.1 trillion of foreign reserves, according to a new report from the Institute of International Finance," writes Chris. These Gulf States are all members of the so-called Gulf Cooperation Council (GCC). They are Bahrain, Kuwait, Oman, Qatar, Saudi Arabia and the United Arab Emirates.
"There are massive piles of wealth growing in the GCC," Chris observes. "Along with China and other countries, the GCC is increasingly setting aside more and more of these funds to invest abroad -- in stocks, real estate and private businesses. What they buy could have a huge impact on market prices -- and your investments." What these countries SELL might also have a huge impact on your investments…and on your entire net worth. That's because they are selling dollars. These cash-rich foreign nations are using their piles of dollars to buy natural resources and natural resource companies. Welcome to the "stuff-based" monetary system, as Den Denning explains below… --- Outstanding Investments Gold Report --- "Government-Guaranteed Gold" This new U.S. government-backed guarantee lets you own gold with no risk… but with 100% of the gains should gold prices take off. Here's the catch… You must act on this by June 19, 2007… or you risk missing the official deadlineand getting shut out of this forever… Learn more right here: Government-Guaranteed Gold ----------------------------------- Selling Dollars, Buying Stuff
By Dan Denning [Ed. Note: Dan Denning writes for the Daily Reckoning Australia. You can check out his unique brand of commentary from his post down in Melbourne by visiting their website at http://www.dailyreckoning.com.au ] Exchanging U.S. dollars for natural resource assets is quite clearly part of Russian and Chinese national policy. Does this trend signal the end of the world's dollar-based monetary standard? Commodity futures and natural resource shares began outperforming every other asset class since 2003. Does this trend signal the beginning of the "stuff-based" monetary standard? If you're looking for an official frantic rush out of the dollar and into another paper currency, you're looking for the wrong thing. The exodus out of the dollar began nearly four years ago, by foreign investors who saw that it was better to own real tangible assets than the unbacked liability of a bankrupt government. Dollars aren't all bad, of course. But they are just paper. And that particular color and design of paper has been losing value very rapidly against most things that are not paper, as well as a few things that are…like euros and stock certificates. Governments always and everywhere print money they don't have to keep promises they can't meet to voters who pretend not to notice their money is worth less and less each year. The money is corrupted. Savings evaporate. And in response, in nominal and real terms, precious metals re-asset themselves as the best store of value and medium of exchange. But the dollar is not merely losing value against gold, the currency of the ages, it is also losing value against the essential commodities of every day life - things like oil, copper and corn. 
This reality has not been lost on the Chinese or the Russians or on hundreds of millions of investors worldwide. That's why the resource land grab in Australia and elsewhere continues, with active participation from the Chinese and the Russians. In 2002, for example, Putin set up the country's Stabilization Fund, a repository from huge export profits of Russia's oil and natural gas. As of March, the fund - which amounts to a political war chest for investment projects in Russia or abroad - was flush with about US$108 billion. And that's just money squirreled away in the Fund. Officially, Russia has $361 billion in foreign currency reserves, third only to Japan and China. Russia's reserves have benefited from added exposure to the euro and gold. Japan and China, own an awful lot of greenbacks ($1.2 trillion for China and $900 billion for Japan.) If you combine all of these reserves, along with the $1.6 trillion held by the Gulf Cooperation Council, you wind up with about $4 trillion - a staggering sum equal to about one third of US GDP. That's a lot of dollars - more than countries like China and Russia would like to be holding. Maybe that's why these two countries seem so eager to exchange some of their piles of dollars for oil wells and commodity-producing companies. 
Meanwhile, something strange is going on with Team America's financial markets. Financial assets are rising to \ew records, in US dollar terms. But the greenback itself isn't getting any love from international investors. Hmm. Why would that be? Here's the thing. Rising US stock prices don't do foreign investors any good if the currency those stocks are rising in is itself falling. Stocks rise. Dollar falls. If the dollar falls faster than stocks rise, that makes the rise in US stocks irrelevant for international investors looking for a real return on their cash. Or, in plain terms, a falling dollar makes US stocks a losing investment for foreign investors. Why is the dollar falling? You could write a whole book about that. In fact, my colleagues Bill Bonner and Addison Wiggin did! They called it "Empire of Debt," and showed how the US government, through the management of its currency and its balance sheet, has completely undermined global confidence in the dollar. [Ed. Note: You can find Empire of Debt in your local bookshop or just click on the following link to order online from Amazon: Empire of Debt: The Rise of an Epic Financial Crisis] You probably already know this. In fact, everyone in the world seems to know it. But until now, it's been too much trouble for most global investors to do anything about it. Everyone uses dollars. It's the world's reserve currency. Switching to something else is impractical and, as Al Gore might say, inconvenient. But the truth is, holding dollars or pegging your currency to the value of the dollar has caused inflation worldwide. Countries that have pegged their currency to the dollar have essentially imported US monetary policy. If the US increases money supply, dollar-pegged countries must do the same thing to maintain the peg. Thus, when the Fed inflates, China, Syria, and anyone else tied to the dollar inflates too. It's like sympathy binge eating, only with money. Syria has unpegged from the dollar. "The decision is final," said Syria's central bank Governor Adib Mayaleh. No offence to Syria, but it's a bit player on the global monetary scene. It doesn't even have any huge oil surpluses. So why does it matter? The answer comes at the margin. Syria doesn't sell oil or consumer goods to the US. Therefore, Syria has no huge US dollar profits in can recycle back into American markets. Syria, in other words, gets all the inflationary, wealth-destroying ills of being linked to the dollar, and no real benefits. So it's shrugged off the regret you have when you say goodbye to something familiar and moved on. Will the rest of the world follow? Not all at once. According to the International Monetary Fund Data, the dollar accounts for 64.7% of global forex reserves. The euro is barely a third of that. There is no other major contender, although a basket of commodity or energy currencies are certainly attractive (national paper backed, indirectly by revenues from real resource wealth). Truth be told - holding the paper currency issued by a nation state and managed by a central bank may not be the preferred method of storing wealth in the world these days. More and more nation-states are eager to trade paper money for tangible assets. The economic reason is obvious. All nations have economic needs which can only be met by resources like oil, food, steel, water, and other commodities. Now that the global marketplace is open to all customers, you see a whiff of panic stockpiling in the resource markets…and you just might be seeing the start of the "stuff-based" monetary system. Joel's Note: Earning a dollar is hard enough. Watching your savings plummet against other major currencies is almost unbearable. Over here in the U.K., a British Pound costs around two bucks (not good news if you are drawing a dollar-denominated paycheck through a Scottish ATM). Actually, the Pound has been humming along quite nicely against the dollar…as have the Australian and Canadian dollars and the Norwegian Krone. Why have these currencies rallied so hard in recent years? It's got a lot to do with the "stuff," Dan's been talking about. You see, these four energy-rich nations have what our colleague over at the 5-minute Forecast, Addison Wiggin, terms, "an ipso facto energy 'backing.'" England and Norway have mammoth stakes of the North Sea's oil riches, Canada's security lies in her vast Alberta oil sands and tar fields and the Aussies boast the world's largest share of uranium in addition to massive supplies of coal, gas, iron ore…the list goes on. So, if hedging your dollars with these "energy backed" currencies is so easy, why doesn't everyone do it? Well, until recently, currency trading has been the domain of seasoned professionals. But, thanks to our friends over at EverBank, all that has changed. Working in conjunction with Agora Financial, they are now offering a simple way to spread your risk and diversify your holdings into these high-performing currencies. "They call it the World EnergySM Index CD," explains Addison, "And given the way all four have soared lately against the greenback, it might just be the best and easiest way available to both hedge against a falling dollar and profit from a rise in oil, all at the same time." You can learn more about the World EnergySM Index by emailing them at worldmarkets@everbank.com or calling 800-926-4922 and mentioning Agora Financial. Cheers, Joel | 
