In a surprise move by Lazard Asset Management’s “The World Trust Fund” as dumped the USD as its primary currency in favor of the Sterling. Typically these funds trade in the USD, but the fund’s board apparently felt pressure from shareholders and investors to change its primary currency from the USD to the Sterling, one can imagine it is because of the recent slide of the USD from 89 to 75 in recent months impact the real return of the fund’s performance.
In the filing the fund stated that; “In response to comments from a number of shareholders and potential investors in the Fund about the liquidity of the Fund’s shares, the Board, having consulted with the Fund’s brokers, Arbuthnot Securities, believes that having a larger number of shares in issue with a lower share price than at present and changing the currency in which the shares are traded from US dollars to Sterling, should assist in improving the marketability and liquidity of the Fund’s shares and support the attraction and retention of a diverse shareholder base.”
That is a stunning statement to read and is a possible sign of the times as the USD is under pressure from every direction and in jeopardy of losing its reserve currency status. Lazard Asset Management is a rather prestigious firm and to make such a drastic move is shocking to say the least. Will other asset managers follow suit? More than likely, but only time will tell. However, if they do this will cause unneeded selling in the USD that could cause further declines given the large holdings of international mutual funds within the US.
This is something that I am keeping a close eye on and I suggest you do the same. As I have state before, much of your real return in the markets has been phantom returns because of the decline in the dollar and the same can be said about international returns as your assets are priced in the USD. If your international assets were priced in foreign currencies you would have had substantial returns this year, i.e. Brazil’s Real appreciated 32% against the USD, so if you invested in the BOVESPA in the Real you would have had an outstanding year. Of course, if the currency went the other way the opposite would be true, but given the fiscal largesse the US is under it is unlikely the USD will have any meaningful lang-term strength, apparently Lazard feels the same way.
There is no question that the cheap dollar has had its benefits for the US in the short-term. It has propelled earnings higher for most firms who deal internationally, narrowed the trade deficit and pushed stocks higher at the expense of our buying power. It has also pushed oil and commodity prices, mainly gold and other metals higher, as well as the dollar continues to touch new 52 week lows.
There is a point where the cheap dollar begins to lose its appeal and begins to concern traders and we have to wonder if we are there yet. After we breached the 76 level on the DXY I actually expected to see a rebound in the greenback simply because it is such a crowded trade and other countries have also printed vast amounts of their currencies as well. However, this seems to not be happening and we are at the point where the 75 handle is in jeopardy of being breached.
Frankly, at this rate we are heading right to the 2008 lows of the 71-72 levels and there is not much there to stop it from going lower. All I have to say is if you thought $147 barrel oil was bad, try $200 or more a barrel. Yes, it could get that bad and food prices could go up as well, even though we technically have deflation energy prices would and could create inflation. This would be catastrophic considering we have massive wage deflation and a huge unemployment problem right now. I am inclined to believe that the treasury or the Fed would intervene if we breached those levels, but my faith is not strong and given the trading programs and deep pockets of the banks, ironically, because of the Fed it could become a crisis.
The odds are against this happening, but it does exist. If this does happen it would also not be good for stocks as there is a difference between cheap money and worthless money. It is not like I am the first to warn of such a problem, Jim Rodgers warned of this type of currency crisis in the recent past and thought it could be either the USD or the Sterling, since we both started down the same destructive paths. I will say that I believe the next 2 weeks will be critical for the greenback and everyone should keep an eye on it for an indication of its direction. A steep move in either direction would mean a selloff in equities.
The internet is riddled with rumors of the imminent collapse of the US dollar with time frames ranging from hours to months away. Now, there are legitimate concerns over the value of our currency and clearly the only thing that has buoyed its value is the entire globe has printed money on a colossal scale. However, we have certainly done more than most when it comes to printing currency with our super bailouts and mammoth stimulus projects.
The question is when will the dollar collapse? There is no real answer to this question and that is the beauty of free market capitalism. The one thing I can say is this, on the short-term I am probably more bullish than I am bearish on the US dollar simply because everyone and their grandmother is short the USD and if/when US equities head south people will run to the dollar for safety. Proof of this was last year when the markets crashed and we saw the DXY climb to the high 80’s. However, I don’t think we will see that type of rally again if we see the markets tank this time around because the fundamentals are far worse than they were last year and the dollar is far more diluted.
On a longer term basis I am very bearish on the dollar and I believe when we see the Chinese Yuan or RMB float or if we see the IMF SDR issued in greater quantities we could see the US dollar lose its reserve currency status. Those who think that this cannot happen need to learn their history as it happened to the British and many other nations in the past and the US is no different. Given our debt load and the current administration’s willingness to spend money like it’s going out of style, on top of our staggering existing liabilities, we are in serious trouble. Not only has that, but the rebalancing of central banks as of right now proved that they are not comfortable holding vast quantities of US dollars.
The question that remains is whether there will be an orderly or disorderly exit out of the dollar. This is a tough question for anyone to answer and there are a ton of variables to calculate in. For example, we have 2 wars that could escalate and possibly a third with, pick your axis of evil country, we could have another trillion dollar stimulus package, heath care reform could get passed and it could end up adding a trillion a year to the deficit, programmed trading could cause a precipitous drop in the currency and the list goes on. At this point in time I would say it is 51 to 49% in favor of a disorderly drop in the currency versus an orderly drop in the currency. Mainly because Ben thinks he can actually control the devaluation process, which no government in history has ever been able to do.
There is no doubt that this is a scary topic and that we should al be concerned about this issue on a longer term basis. Do I think we need to worry about this happening this month or year? No. However, this could happen within a 12 month period of time very easily, but again, I think it is unlikely. We know that the name of the game is supposed to be a slow devaluation of the currency, but, as I just said, no country has ever been able to actually control the devaluation process and with computerized trading this is more dangerous than ever. A few things need to happen before we see a total failure of the currency and as of right now these events are not happening.
For example, I often talk about the treasury bubble of the late 1970’s when the US suffered from inflation and dollar devaluation. There was a buying spree and a bubble in long-term treasuries and when Volker became the Fed Chairman he was charged with stomping out inflation. He did not know there was a bubble and let the market raise rates for him, which was odd, but it worked. Unfortunately, it basically almost put out of business most of the primary government bond dealers and led to credit controls. What it did was save the currency and stopped inflation cold, along with economic growth.
Many people familiar with that story seem to think we are close to that scenario today, effectively failed treasury auctions, which is not true. We have a long way to go and many more steps to go before that happens, but those steps could come fast and furious. Unlike the late 1970’s the dollar is falling a lot faster now than it did then, but the buying in the treasury market is a lot more fierce now and on the shorter end of the yield curve, unlike then when we saw it on the longer end of the curve. So, we will see what happens, but things move so fast in today’s market anything is possible and this boom bust economy cyclical period is getting shorter and much more severe. The signs are coming for a currency crisis, but not in the immediate future.
A lot is made of the dollar’s value lately, even I make a big deal over it, and we should be concerned, but I believe it is an ego thing more than a reality thing. It is tough to see the most powerful nation in the world currency lose its value, but I actually believe this may be the goal of the Federal Reserve and the current administration. Now bear with my before you tune me out as a lunatic.
We owe a lot of money, mostly in unfunded liabilities, and that number varies wildly between $55T and $77T. Those numbers include Social Security, Medicare and, of course, our National Debt. No matter how we cut it we cannot pay that amount off, even if we raised taxes to the moon, which would stifle growth, and we certainly cannot grow our way out of this mess. The logical way out is to devalue our currency which makes perfect sense, albeit severely painful and extremely unfair to the population.
By devaluing the currency we are essentially inflating our way out of debt which is dishonest at best, but is considered “legitimate” from a political prospective because they are not officially raising taxes. Of course, those Americans who do not prepare by buying things that react to dollar devaluation, i.e. precious metals, will get hurt badly as their savings will be devastated it is probably the only feasible way to save face long-term. Worst of all, we know it is coming as the Fed as all but admitted that this is the plan, as in Ben’s recent Congressional testimony he stated that the declining dollar is not an immediate problem, but a long-term issue.
I am not advocating this method, just saying that it makes logical sense since our political structure lacks a backbone to make tough decisions or face the facts of our situation. Some potential benefits would be improved manufacturing as countries like China, after they freely float their currency, would likely become net importers instead of exporters given their size and growing wealth. The same goes for other BRIC countries as well as they continue to grow. This is all hypothetical at this point in time, but it does look like a reality as the Fed has no real plan on defending the dollar.
One of the major problems with this plan is if the devaluation process goes out of control of the powers that be. Meaning the markets take control and take action prematurely or over devalue the currency. If that were to happen, then the consequences could be severe, but whether it is controlled or uncontrolled it is sure to be ugly for those who are unprepared as we will see actions taken that will be unusual. Such as price controls, which never work, merchants forced to accept dollars and things of that nature. This may be a bit tin foil hat, but there are several people much smarter than I that suggest that the dollar will depreciate by 50% over the next 14 years because, they say, we cannot afford the liabilities we have. They state we can afford some $30T, but not the $55T or so we have to pay for or made promises on.
Based on what the experts have said and what the Chairman has said it is safe to draw your own conclusions, but I believe I am on the right path of dollar devaluation as an official, yet unofficial, policy. It will be ugly, but it may be necessary for America to dig itself out of the hole that we are in. The question you have to ask yourself is how did we get here? The answer is, the politicians you keep electing cycle after cycle is the reason. Until you are willing to face reality and break the cycle of electing the people who got us here we will be doomed to face a future of financial uncertainty.
I have been reading this all over the internet over the past couple of days mostly from folks who receive the Webbot Prediction alert, or whatever it is called. Essentially, this program scans the internet for predictions of the future based on some algorithmic method. It was first developed in the 1990’s to find hot stocks, but then was used for such useful things as finding out the end of the world.
Now, do I believe such predictions? No. Basically, the creator even says its accuracy is as about as good as flipping a coin, so I guess we are all just as good as this multimillion dollar program if we just have a mere quarter in our pocket. Could something happen on October 25, 2009? Sure, who knows. Certainly the news today is not encouraging and the DXY is in dangerous territory again, but a complete collapse is not really likely in the near-term. There is simply too much liquidity in the market right now.
However, the value of that liquidity is a completely different question and issue. The value of the USD can fall to zero in one tick, we know that to be a fact, but even that is unlikely. As stated before, I believe we are in more danger of a bank run than a collapse of the currency in the near-term, but even that seems to have sorted itself out. In fact, what has saved all the currencies of the world, including the USD, is the fact that they all printed their way out of this mess almost equally debasing their own currencies. Even though that is a true statement it is also true that the US is definitely guilty of printing more money than most other countries and it is also true that we have poor leadership and dismal fiscal policies which is why the USD is the poster child of a weak currency.
Super power or not, we are in the last throws of glory days thanks to decades of selfishness and political indifference to fiscal sensibility. You cannot borrow and spend your way to prosperity, regardless of what Ben Bernanke, Barney Frank, Nancy Pelosi and Obama thinks. This means that we will eventually suffer the decay of currency collapse, perhaps “soon” and that depends on your definition of soon, but it is unlikely on October 25, 2009.
I would encourage you to be prepared for currency devaluation, because we are experiencing it now in a very small way, by investing in hard assets such as gold, silver, palladium, and platinum. I believe that silver and palladium represent the best value at this time, silver is at $17 when gold just made a fresh high, the last time gold was at $1030 silver was at $20/oz. Palladium could easily be trading higher given the green push we are in and the rarity of the metal. Either way, if you won it and things do get worse and the headlines are true, you will have your wealth preserved and protected.
Be the First to Comment 
Subscribe to Annuity IQ's Feed
