This series of articles focuses on prospective U.S. dollar weakness and how to invest accordingly as a U.S.-based individual. This is Part I, with one or more additional parts to follow. This article originally appeared on EconBlog Review.
I think that most investors based in the U.S. continue to have the vast proportion of their assets tied to the dollar, or naturally so if the holding is real estate based in the U.S. Our dollar has been the reserve currency of the world for everyone’s investment lifetime . . . but it’s been having its ups and downs. Here are some reasons why I have been allocating an increasingly large proportion of my financial assets in non-dollar and anti-dollar vehicles, and commentaries of which vehicles I have chosen.
The case that the U.S. dollar is fundamentally overvalued is well made by John Hussman in a post from a few weeks ago titled “Why Quantitative Easing is Likely to Trigger a Collapse of the U.S. Dollar.”
Please read the discussion as he presents it. My thumbnail summary is that by suppressing the rates on Treasuries below market via its various debt purchases (creating “inflation” in the Austrian sense of the term), the Fed is inducing markets to rapidly and substantially decide to devalue the exchange rate of the U.S. dollar (the “dollar” herein, as opposed to dollars of other countries such as New Zealand). I agree and want to hedge against a de facto dollar devaluation. This multi-part series begins with a mention of gold and then introduces other assets I have been accumulating for at least six months.
The purest way to hedge against the dollar’s decline is by owning currencies against which said decline will occur, as opposed to indirectly doing so by owning stocks of companies doing business in foreign countries.
It appears to me that this trend predicted by Dr. Hussman is playing out quietly under cover of a euro that is at this time even weaker than the dollar. I am not involved in investments that have a short-term focus, however. This is more of an intermediate (months to years) strategy in my mind.
At this juncture in the markets, the ultimate “currency” continues to be gold. Gold has just set what has to be the quietest all-time closing high for a major asset class in memory. I was lucky enough to successfully trade an important intermediate top in gold and described said tactical trades in a post on December 3, 2009. The major reasons for severely lightening up then were that exchange traded gold funds such as Gold-Trust (GTU) had gone to significant premia over net asset value, the pricing appeared extended, and there was lots of excitement about gold on such websites as Zero Hedge.
Now, GTU and the more newly-launched “PHYS” gold ETF are at relatively low premia to NAV and for some time now, there has been little excited talk about gold on Zero Hedge. Compared to December 3, 2009, the metal is much closer to its 200 day moving average and is up year-on-year much less. So I am not inclined to sell any gold. If the comparator investment is a 5-year Treasury yielding almost certainly less than consumer prices will increase, how likely is it that at some point within the next 5 years, gold’s price will allow gold-related investments to be sold at a profit that exceeds the return from that 5-year note? I think the probability is very high.
This series of articles is not going to discuss different ways to invest in gold. That will be addressed in the future.
In addition to gold vehicles, I have identified one other commodity in which I have invested, and three other currencies. The commodity is silver, and the currencies are those of Norway, New Zealand and Brazil.
The chart shown above is an exchange-traded fund that provides the return equal to money market rates available in Brazil (very roughly 10%) minus fund expenses, with full currency risk vs. the dollar. Not shown is a similar ETF for the New Zealand dollar, “BNZ”.
In contrast, the only way I know to invest from America in the Norwegian kroner is by purchasing Norwegian sovereign bonds through a full-service broker.
Norway is in good part an oil-backed country, so I view its kroner as a form of a commodity currency; New Zealand has a large commodity role given how many sheep and cattle it contains per (human) capita; and Brazil is a special case with a strong chart pattern for BZF.
In Part II, I will discuss silver on its own merits and in relation to gold. Discussion of the above-mentioned countries and their currencies will follow.
Dr.,
I note that you say discussion on different ways to own gold will be addressed in the future, so my apologies if this is jumping the gun. But I would be interested to hear (now or later) your perception of the risks associated with the ‘derivative’ nature of bullion ETF’s (in general) versus physical ownership.
Disclosure: Long silver (physical) and loving it.
Buck
The other currencies are dollar derivatives (this is what it means that the dollar is the reserve asset of the other paper fiat currencies). if the dollar is toilet paper, then what does that make the GPD and EUR? Something that it is not polite to say on a public blog.
Gold and silver, of course, are not fiat, not paper, and not derived from the dollar. Those are the only real way to protect yourself in an environment where:
– demand for stuff is collapsing (so much for commodities)
– rising taxes, regulations, litigation, outright confiscations, unionization, etc. (so much for equities)
– massive overbuilding of every kind of real estate, at least in the US, Canada, Australia, etc. (so much for real estate)
– debt is up to unpayable levels for individuals, businesses, and governments at every level (so much for bonds)
I forget who said it, but in a depression everyone loses. The key is to lose less.
As was pointed out in a recent article on Zero Hedge, in the Economic Blogosphere the debate is no longer about whether the monetary system will or will not collapse, but rather what the mechanism of that collapse will be. Specifically, what the various Pundits all are focused on is whether we will have hyper-inflation or hyper-deflation or some obscure variant of the two occurring simultaneously. Here I will pitch in my devalued 2 cents on this topic.
The Chilean econo-blogger Gonzalo Lira comes down on the side of hyper-inflation, citing his experience and understanding of the various currency crises which hit South American countries over the past few decades, going back as far as the 1970s. I can actually cite personal experience with hyper-inflation prior to that, in Brazil of the 1960s. On the other hand, Stoneleigh of Automatic Earth and her partner Ilargi make the best case I have read to date for an unstoppable deflation caused by credit collapse of an overburdened world economy swimming in irredeemable debt. Reading through Antal Fekete’s Gold Bug spin, you get the same idea. Mish comes to the same deflationary conclusions, but his reasoning is specious and he is otherwise a complete idiot so I discount his analysis. To be sure, I find Stoneleigh’s case the most compelling one overall, and I consider it fairly obvious that Deflation as evidenced by credit collapse is the driving force behind the monetary system failure. However, that still doesn’t answer the question of whether we will have an “end game” where the loss of faith in the US Dollar will cause people to en masse try to rid themselves of what worthless toilet paper they have in a mad rush to buy anything still left available to buy. That basically is the case Gonzalo Lira makes, predicated on the assumption that the Fed has already printed enough toilet paper to cause prices to skyrocket to the moon once faith has been lost in this currency.
The fundamental difference between the collapse of the Dollar and that of all prior Fiat currencies going back at least as far as Weimar is its status as World Reserve Currency. Whether it was the Deutch Marks of that era, Brazilian Cruzeiros of the 1960s or Argentinian Pesos circa 2001, once the faith was lost in those currencies, folks with large amounts of money jump ship earliest, and convert to currencies that are retaining value. It might be Swiss Francs or US Dollars or Japanese Yen depending on the particular time period or event, but in all cases there WAS some still functioning Fiat money to convert to, if you converted early enough. After a fairly short period of hyper-inflation though, it might take 1M Cruzeiros to buy a Dollar, so if you didn’t get out of Cruzeiros soon enough you were SOL.
So the question is, once the mega-rich lose faith in the Dollar, exactly WHICH currency will they all flock to? Currently over in Europe, the Illuminati are all running to Swiss Francs from Euros, since the Swiss are such marvelous Banksters and so Honest and Polite too. LOL. This of course is causing the Swiss CB a LOT of problems, because it is artificially over-valuing that currency. Face it, Switzerland is a tiny country with few people and no Oil. They really have very little upon which to collateralize the value of their debt money, mainly they are invested in Eastern European loans that are currently headed South in a big hurry. Are the Swiss going to Repo Romania and sell it off to the Chinese? The Swiss appear Wealthy on paper, but its all based on Mark to Make Believe assets they will NEVER be able to collect on.
Evacuating to Yen is just as stupid as evacuating to Francs. The Japanese economy has been in a Zombie state for nearing 20 years now; they have a massive debt overhang and huge unfunded liabilities in an aging population. Flock to Renminby, aka Chinese Yuan? This is a Joke. The Chinese totally manipulate their currency and artificially peg its value, and moreover they already have nasty inflation problems. Who is going to convert Dollars to Renminby, even assuming you could get the Chinese to accept more Dollars for their worthless Toilet Paper?
So, bottom line here is that in the situation of a Dollar Collapse, there really is no other paper currency for the Illuminati to flock to as a means to preserve wealth, which leaves only commodities and real estate, aka “hard assets”. The main Historical Commodity here which functioned as the traditional store of Wealth is of course GOLD. And yes you do see a steady rise in the nominal value of Gold as measured in Fiat money as Illuminati and some Sovereign Wealth Funds buy up what they can of the shiny yellow metal, not to mention of course the HUGE cadre of Gold Bugs frequenting the pages of Zero Hedge scurrying after a few more Kruggerands. LOL. However, with most of the 200,000 Tonnes of the stuff ever mined up in the hands of a VERY few people, its not going to work too well as a currency medium. Enough of the stuff isn’t circulating to serve as currency in a population of more than 6B worldwide. Even if you happen to have a nice pile of possessible Gold in your basement safe, once you have a global trade collapse exactly how many Twinkies you will be able to get for a Kruggerand depends entirely on how many Twinkies are available in your local area to buy. If someone in your area has some surplus Twinkies and covets some Gold, this person may sell you some Twinkies. However, this person will also be faced with MANY people with no Gold who need a Twinkie and the distinct possibility that said people will only offer Lead in return, coming very fast out of a Steel Cylinder. LOL. So unless said Twinkie holder has his own Private Army, he would be much better off handing over his surplus Twinkies to the Lead Holders than the Gold Holders. This of course seriously devalues Gold with respect to Lead as propelled by Gunpowder. LOL.
Real Estate as a means to preserve wealth in the face of loss in faith of the local currency is also very problematic. We already can see how rapidly RE prices are falling here, despite the continuing efforts of Da Goobermint to prop up those values. RE has a TREMENDOUS liability attached, which is of course PROPERTY TAX. As commerce grinds down to a virtual halt, Goobermints will be forced to raise these taxes, since of course in order to raise money you have to tax people that actually HAVE money, and that would be the few remaining property holders. So unless you are a TBTF Bank that actually IS Da Goobermint, you can’t preserve your wealth by buying RE, since it will just then be confiscated via the Property Tax. TBTF Banks will likely be able to hold property without being taxed on it, since they will buy the legislation necessary to effect that.
So, to return to the original question here, how does the End Game play itself out? My best guess is that you will have Hyper-inflationary events occur in various currencies, but not the Dollar first. Really, the Euro looks most likely for mass evacuation and loss of confidence first at least in the West, but Renminby or Yen could beat it out on the Eastern front. Despite their huge savings and trade imbalance, the Chinese economy is so mal-invested and their resource and population problems so extreme that this House of Cards could collapse at any moment. Japan has even worse population problems by density on their tiny plot of land not to mention the demographic issues, so at some point the Yen will collapse here as well.
Whichever is the FIRST major currency to collapse, the rest of the remaining ones will benefit from that in the short term. On the assumption the first one to collapse will be the Euro, the Dollar is likely to be the major beneficiary of that as Illuminati holding Euro will all be bidding against each other to buy Dollars with rapidly devaluing Euros, thus supporting the value of the Dollar despite endless QE by Helicopter Ben. The FSofA still has the most dominant Military, which makes it a decent bet in the currency collapse lottery. The Chinese Military is pretty good too, but their closed Economic loop totally controlled by their Central Goobermint makes it a bad place to invest money, at least if you are not Han Chinese with a Great Uncle in the Central Committee. When push comes to shove, the Chinese will Nationalize any foreign investments at the drop of a hat (or Nuke) of course.
Of course, any individual collapse of these major currencies starts a Daisy Chain of collapse in the others, so any effect of raising their value is temporary. One after the other will collapse in similar fashion, with the likelihood at the moment being that the Dollar is the last Fiat left standing, at which point it also will collapse. This is the nature of the kind of Cascade Failure we are witnessing, and which has been in effect in earnest since Bear Stearns collapsed (my personal Wake Up call that started my blogging), although in fact it began long before that with the S&L debacle, Enron and in fact of the BKs of SA economies back in the 70s which the TBTF Banks mostly moved off balance sheet. The House of Cards that is Global Finance has been in collapse mode since the FSofA became a net Oil Importer back in the Nixon era, when the Gold Window was slammed shut on France. The imbalances have been shuttled around the Globe and Ponzi Finance has swept this under the rug for 30+ years, but the inability to produce enough energy to maintain Global growth has been persistently undermining the capital base. Most of the pain has been taken by the less developed countries by shifting the burden onto them and raping them for resources. Once Global Peak Oil was reached (sometime in the last 2-3 years), there no longer was a way to shift around the debt to disguise the contraction.
It does remain possible that the Dollar will collapse before some of the other currencies or assets including Gold, however in this scenario you would get a virtually simultaneous collapse of ALL the rest of the currencies. Simply put, since the Dollar serves as Measure for all the rest of the currencies AND Gold, once the Dollar collapses there is no currency means by which to measure the value of anything else. That is the nature of a Reserve currency. On a worldwide basis, if/when this occurs, if there is no plausible replacement of valuation for the Dollar on which everyone can agree (and that is NOT going to happen ex post facto without full scale war), trade must revert to Pure Barter. On a local level inside Nation States (or perhaps regionally) currencies may be issued to facilitate internal trade (assuming Da Goobermints can hold together),but its unlikely that one Nation State would hold the currency or debt of another one in paper form. That trust gets destroyed in this collapse, which as I wrote so long ago on the pages of PeakOil.com amounts to the Greatest Bonfire of Paper Wealth in All of Recorded History.
From the point of view of the Illuminati, they are focused on trying to create some new fiat structure of money which will supplant the Dollar as World Reserve Currency BEFORE the Dollar goes completely worthless. You can see the machinations in progress both with the BRIC countries as well as the move toward SDRs as international currency. Simultaneously, the Cap and Trade Energy taxation being bandied about by the UN is a means to establish a base of value and create money based on energy valuation. None of these systems can really work long term, since they remain entirely based on the concept of Growth and Return on Investment. That is no longer the world we actually live in, at least for the foreseeable future we will be living in a CONTRACTING world, not a GROWING one on an economic level. The world population may grow a while longer on inertia, but not much longer once supply lines begin to fail and trade grinds downward. At some point here in the not too distant future these two mutually exclusive trend lines will cross, and then whole populations around the globe will be at least decimated by famine, if not completely exterminated. Exactly how far down the population will go remains to be seen, but my best guess is a 90% reduction in population over the next Century. This would bring down World Population to around 600M, around the population at the time of the Black Plague. If we are lucky, we may only get 25% reduction, as predicted in Revelation. Unlucky in this Lottery, we will face Extinction as a species.
The only possible Game Changer somewhere along the way would be a major discovery of means to extract the kind of energy we did for the last century out of Oil. This might be possible out of Fusion reactors, but I doubt it. I don’t think Thorium breeders can do the trick either. In both cases ancillary liabilities make it unlikely that you can extract the energy without causing irreparable harm to the environment, and besides we just cannot get there fast enough to overcome the dislocation which will result from the failure of the Oil conduit. Energy starvation will destroy global human population long before its possible to implement any alternative energy plan fast enough to keep pace with the death and destruction.
In the end, Inflation or Deflation is not really important as the vector for collapse of this civilization. In the short term, one of these two destructive monetary phenomena will instigate global conflict, which itself will go a long way toward further destruction of the capital base of the planet. In the longer term, energy starvation will undermine the complex industrial societies which fed on the cheap energy of the early days of Oil exploitation. Our survival as a species will depend wholly upon the ability of individual communities to survive the coming storm by being locally self-sufficient and by being of sufficient size and/or remote enough location to self-protect. Very few places will meet these criteria, but hopefully a few will. I think you will find those places in small valleys and remote islands very far from the centers of current world population. These Valleys will have good water supply and good natural resources of arable land and access to fecund fishery, along with a low population density. Some will be surrounded by Ocean, others will be surrounded by Mountains. Really BIG Mountains. The Great Wall that God Built. Needless to say (though I will anyhow), I practice what I preach and live in such a community about as far out from the center of human population as you can GET and still have a connection to the Internet. The Matanuska-Susitna River Valley of Alaska, population around 60K in an area larger than all of Connecticut. Surrounding that valley, a vast territory with virtually NO population in an area more than twice the size of Texas. The Last Great Frontier. There are some other good places as well, Kiwi Land in NZ is pretty good, some spots on the coast of British Columbia featuring good hydro power have possibilities, Iceland despite their currency collapse has a good fishery and geothermal power and then of course there is always Tristan de Cunha, Edinburgh of the Seven Seas, the most Remote Island on the face of the Earth. No Mountains there, but a huge expanse of Ocean for protection. A bigger Moat you cannot get than the one surrounding Tristan de Cunha. Pick the one that suits you best and RUN AWAY now, RUN AWAY fast. Because really, if you live in or near the big cities you are just a Zombie now, or your children will be. The Walking Dead, just you don’t know it. Yet.
RE
R. E.:
Quite an essay.
Mish is correct about the hyperflation argument. It is a monetary phenomenon, but one that is brought about by politics rather than economics. OTOH, deflation and inflation are monetary phenomena. Deflation occurs because of a fall in money supply which is happening now. The reason is related to debt and the necessity of deleveraging. I am forecasting eventual inflation, perhaps high inflation, and stagnation because I believe the Fed will eventually figure out how to inflate with QE. I don’t see the collapse of civilization, but if you wish to believe in that fantasy, fine. We have enough capital in this country that it will take the government a century of welfare statism to burn up. Europe is declining quite nicely, thank you, and that’s where we are headed.
Thanks, I think, for the (fear mongering) comment.
Even gold has its risk: The risk of confiscatory taxation. If gold goes up to $6000 because the US dollar fell, it doesn’t matter; as far as the government is concerned you made a huge profit and they will want their share.
If you were highly certain that the US dollar was going to depreciate, wouldn’t it make more sense to take out fixed-rate debt at low rates? What is your take on that?
seems to me you are advocating an ivestment in oil, coal and natural gas. if the world’s economy is going to collapse as a result of an energy shortage, along the way energy is going to get very expensive
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