Sell the Dollar

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The ground is giving way beneath our feet: Sell the dollar…Sell Treasuries.

People still stand their ground…they do not panic. They do the right thing. But then, they go into work – but find they have no jobs. They look at their pension account – wisely invested in a diversified portfolio – and find that it has lost half its value. And their houses lose 20% of their value. In places such as San Diego, Las Vegas and Miami, the losses are more like 30%- 40%.

The ground gives way…and they find themselves in Hell.

Friday, the Dow registered a 61-point improvement, after much disappointment the day before. Is the rally on or off? We don’t know…

But what MUST happen, WILL happen. Fish gotta swim. Birds gotta fly. And bubbles gotta pop. The bubble in private debt has popped already. And now, the bubble in public debt has to pop too. And the dollar’s got to go down. That’s when the ground will really give way… For many people, the collapse of the dollar will wipe out what is left of their assets. Pension funds and insurance companies will be devastated. Savers will be unsaved.

Investors have rushed from risky investments of all sorts – emerging markets, mature markets, real estate, commodities – into the strong, welcoming arms of the U.S. Treasury market. “Give me your tired, your poor huddled masses of dollars…yearning for protection from capitalism,” says Uncle Sam. “And I’ll give you 2.58% return over 10 years. Give me your money for 91 days, and I’ll give you nothing.”

Is that a good deal, dear reader? It depends on how solid the ground is under the U.S. Treasury market. So far, as the ground gives way under other asset classes, the Treasury market has held solid.

But here is why the word “must” was invented. When something’s gotta happen, it’s gotta happen. The U.S. federal government already has an official national debt over $10 trillion. The deficit for next year will likely exceed $1 trillion…and could reach up to $2 trillion by 2010 – or more than 4 times the biggest deficit the country has ever run…and more than the entire U.S. budget only seven years ago. At this rate, in a couple of years, U.S. debt will exceed US GDP.

Is it likely that the feds can so greatly increase the quantity of U.S. debt without reducing the quality of it? Is it likely that the last IOU issued by the federal government will be as valuable as the first? No, it’s not likely. Something’s gotta give.

And we are talking about big money. A business or a small government can sometimes borrow more than its annual revenues. It’s borrowing can be funded by a small percentage of the world’s reckless savers. Lending to U.S. government on such a scale is another matter. It takes up a large percentage of the world’s total savings, effectively shouldering other borrowers out of the way, and actually reducing the world’s capacity for economic growth.

Everybody, except bankers of course, knows that lending large amounts to a small country is extremely speculative. But lending to the United States for ten years at 2.58% has a nasty stink of certainty about it. You can’t borrow that kind of money without some consequences…and the consequences of that much debt are bound to be bad.

To us, it seems almost inevitable that it will turn out to be a bad place to put your money. Because the ground is almost sure to give way beneath the feet of Treasury-market investors. How so? Ben Bernanke has already told us. When the borrowing gets tough, the Fed will turn to other forms of liquidity – buying U.S. Treasury bonds itself. In other words, instead of borrowing from savers – thus leaving the net money supply unchanged – the Treasury will borrow from the Fed. Where will the Fed get trillions of extra dollars? It will create them out of thin air.

That’s why the dollar has turned down.

“Greenback’s haven status thrown into doubt,” reported the Financial Times.

Last week, the euro jumped to $1.33 – a level it hasn’t seen in many months. And gold keeps edging up. It’s up to $820 an ounce as of last week.

The dollar is Hellbound, dear reader. Sell it. And sell Treasuries too. We might be early with this advice. But we won’t be wrong.

*** “What Hell Really Is…” said the sign in front of a church in Arizona. “Choir practice at 4 PM!” was the next line.

Bill Bonner
for The Daily Reckoning Australia

Bill Bonner

Bill Bonner

Best-selling investment author Bill Bonner is the founder and president of Agora Publishing, one of the world's most successful consumer newsletter companies. Owner of both Fleet Street Publications and MoneyWeek magazine in the UK, he is also author of the free daily e-mail The Daily Reckoning.
Bill Bonner

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Comments

  1. Ok, what I would like to know is, given that the US$ is going down (eventually), and the possibility of default is high, what will happen to other currencies under the scenario do you think? What is likely to happen to the Aussie dollar when the US$ becomes worthless? What about the Yen? If the US goes hyper(inflation) what is the prospect for a similar thing happening here? What is the future for debt-free AU$ savers?

    Regards,
    A worried saver.

    Reply
  2. Will most Gold Juniors go to the wall?

    A post in the Gold Report (which can be viewed at the Bullion Vault link)argues that most juniors will fail. In an Australian context I disagree but the analysis does get the old brain ticking. Key points and my retorts (capitals but no yelling intended) follow:

    1. “Interestingly, many of the pundits and gold bugs who have been warning of the leverage and speculation in the US mortgage/derivatives markets failed to recognize the same risk in the junior gold miner stocks.”

    YES. WE FAILED TO REALISE THAT MANY INVESTORS IN THIS SECTOR WE INVESTING ON LEVERAGE. HOLDINGS CONTINUE TO BE LIQUIDATED AND AS A RESULT THE PRICES WILL REMAIN AT BOTTOM UNTIL MORE CONSERVATIVE “VALUE INVESTORS” IDENTIFY A LOW TO MEDUIM RISK OPPORTUNITY.

    2.” Most also failed to predict the deluge for mining stocks as those loose credit policies were arrested and unwound. Many actually participated in the leverage at the private placement level. Today, they continue to bash the US Dollar although it stubbornly remains the safe haven currency in a financially troubled world.”

    AS OF TODAY THE USD IS IN DROP MODE. IN BILL’S ARTICLE ABOVE HE PROVIDES AN ACCURATE AND TIMELY WARNING ON THIS. US MONEY IS (I SUSPECT) GOING EVERYWHARE AND ANYWHERE – TO THE MARKET, TO METALS TO OTHER CURRENCIES. GOLD IS UP AS I TYPE (BUT WILL REMAIN VOLATILE).

    3. “So where do we go from here and when does the market for junior mining stocks recover? Unfortunately for shareholders, a majority of the companies will never recover. Many are out of cash and have no prospects for additional equity. These will slowly fold and their only legacy will be as historic drill results. Some companies have developed bankable assets and might secure some type of debt financing. The process will be slow and painful, much like mortgage foreclosures. Many cash strapped companies are now in “hunker down” mode. It appears that “hunker down” is mining terminology for “stop all operations and cover G&A as long as possible”.
    When their cash is depleted, many of them will also fold.”

    THE MIXED BAG HER NEEDS TO BE UNTAGLED. YES MANY COMPANIES ARE RUNNING LOW ON CASH. BUT THAT DOESN’T MEAN THEY WILL FOLD IF THEY HAVE NEGLIGABLE (OR ZERO) DEBT. MOST CAN SIT QUITE COMFORTABLY FOR A WHILE. COMPANIES WITH A GOLD BIAS CAN SIT EVEN MORE COMFORTABLY I THINK. IF THE IS NO DEBT WHO IS THERE TO FORCLOSE?

    4 “Unfortunately, even some of the best gold miner juniors failed to focus their resources on a flagship property and advance it into an actual development project. Easy capital enticed them to build a “pipeline” of properties more appropriate for larger companies.”

    THIS IS TRUE BUT NOT QUITE THAT SIMPLE. Because of a mony irons in the fire strategy my remaining (2) gold juniors have a RANGE of development options which may enable organic growth. If the price of Gold increases (say another 20%) against the currency basket and holds there – most Gold juniors with good prospects will be viable. The money will follow!

    5. “Investors were easily swayed with this “irons in the fire” business model. Today the market is seeing these undeveloped properties for what they are, liabilities not assets. There are a few that were smart (and lucky) enough to advance a project that is truly developable. These will receive additional equity, albeit at substantial dilution to existing shareholders. Others will proceed, without shareholders, as debt holders take over the projects. Some will merge. But mergers won’t bail out existing shareholders as few premiums will be paid in the consolidations.”

    THERE IS NOTHING WRONG WITH CONSOLIDATIONS, MERGERS AND TAKEOVERS. SHAREHOLDERS BENEFIT AND WORK CONTINUES. I AGREE THAT MANY GOOD POTENTIAL GOLD PROSPECTS WOULD BECOME LIABILITIES IF THE PRICE OF GOLD FAILS TO FIND A HIGHER LONG TERM FLOOR OR IF THE USD FAILS TO DROP FROM ITS CURRENT HIGH.

    6.” Even the companies with projects nearing production are finding it difficult to finance construction in the current market. Companies with once profitable poly-metallic mines are being forced into “care and maintenance” at current base metal prices.”

    YES BUT…CARE AND MAINTENANCE GOLD MINES WILL REACTIVATE IF A PRICE FLOOR AROUND THE $900 MARK (USD) IS FOUND. READ THIS ABOUT AUSTRALIAN JUNIOR ALKANE
    http://www.aspectfinancial.com.au/asxdata/20081217/pdf/00914129.pdf

    MONEY IS STILL AVAILABLE FOR GOOD COMPANIES WITH GOOD PROSPECTS.

    5.Easy capital is mostly inefficient capital. Looking at mining projects today, it is amazing to see just how little was actually created with the billions invested into the junior sector over the past several years. The capital was simply spread too thin. Way too many companies were created. But, like the mortgage market, it was mostly the securitization process that created profits for insiders, bankers and management.

    THERE IS STILL A RAPIDLY INCREASING GLOBAL POPULATION (A CORE GOLD DEMAND DRIVER) AND THER ARE INSUFFICIENT NEW GOLD PROSPECTS IN THE MEDIUM TO LONG TERM TO FILL THE DEMAND GAP.

    6. “With mortgage backed securities, somewhere underneath all that paper, is a house. The sub-prime analogy stops here. Obviously there will be no bailout for junior mining companies, but there will be survivors. There are some real developable mining assets, under all that paper, that are currently being severely undervalued. Unlike most other assets, gold continues to hold on to the bulk of its gains of the past five years. Base metals appear to be forming a bottom and their current underperformance relative to gold cannot be sustained. “

    YES BUT I’M NOT TALKING ABOUT BASE METALS. WITH GOLD, A GOOD STRIKE REMAINS A GOOD STRIKE!

    6. President-elect Obama has stated that he will develop a series of infrastructure-based jobs programs in the US. This build-out will compete for metals with China, India and other emerging countries as their growth accelerates in a worldwide economic recovery. Money will begin to flow back into commodities and other hard assets as credit market free up, early next year.

    BASE METAL PRODUCERS WILL HAVE TO LIVE THROUGH A COLLAPSE IN PRIVATE CAPITAL EXPENDITURE DURING 2009. PUBLIC SECTOR PROGRAMS WILL NOT COMPENSATE FULLY. I’M BEARISH ABOUT THIS SECTOR BUT WHAT DO I KNOW?

    7 “In this financially challenged market it is still difficult to differentiate the “baby from the bathwater.” Our North American Gold & Silver Explorers Model is currently following 24 companies we believe will survive to drill another day. Companies with cash flow or high cash balances will not only survive, but will be positioned to acquire new assets as other companies fail or drop properties. We are currently positioning our clients for a strong rally beginning in Q1, 2009.”

    OK THEN – THE ARTICLE IS ACTUALLY QUITE BULLISH! MY ANALYSIS OF THE AUSTRALIAN SITUATION IS THAT MANY JUNIORS HAVE EXCELLENT GEVERNANCE ARRANGEMENTS THAT WILL PULL THEM THROUGH IN ONE WAY OR ANOTHER. OVERLEVERAGED COWBOYS (BIG AND SMALL) WILL FAIL BUT THEIR PROSPECTS WILL BE PICKED UP BY OTHERS.

    Coffee Addict
    December 17, 2008
    Reply
  3. My super is in a cash option. How much of that cash option is invested in US dollar securities? I can’t find out. That’s what bothers me.

    Reply
  4. When the USA said strong dollar is good.

    Wouldn’t the US keep printing money and keep buying there own currency until all countries sell it to make a profit?

    It is all electronic so you just keep adding zeros no matter how big the number is

    (Wonder if there is any data to show how much US is buying back)

    I only have a simple mind so I only see things simple!

    Reply
  5. Bill is spot on when he wrote the whole economy was nothing more than a giant pyramid scheme. Isn’t it amazing that over the past 10 or so years business has been determined to squeeze out middle men in pursuit of effeciency and profit only then to give these gains back to other middle men (financial advisors) who have blown it all up!
    Superannuation falls into this category – Would not it be better to have employer superannuation contributions go back into the company as stock entitlements for the employees (public companies) growing the company and jobs rather than some pyramid scheme which is bound to fail later rather than sooner which by then is far to late. In the
    case of private companies employees should be allowed to put their superannuation off against their home mortgage. As it stands now they have a record mortgage and no super – would not it be better to have a managable mortgage and no super!

    Reply
  6. Bill, thank you for your astute comments. I have enjoyed your articles and your books. I have referred my friends to the Daily Reckoning and without exception their response is positive. C. House, California, USA

    Charles House
    December 24, 2008
    Reply

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