If you want to know why more people are calling for a return to the gold standard, this “history of the gold standard” will explain it all… Read more...
Many have wondered - and rightly so - why the U.S. dollar is rising even though the U.S. Federal Reserve has done just about everything possible to debase the currency over the past five years.
Over the past two years, the U.S. Dollar index, which measures the dollar against a basket of major world currencies, is up by more than 12.6%.
Part of the answer is that most of the world's other central banks have pursued easy money policies similar to the Fed's. In the so-called "currency wars," the U.S. dollar has one major built-in advantage.
"The U.S. has never defaulted," explained Money Morning Chief Investment Strategist Keith Fitz-Gerald. "The world may hate our guts, but when all hell breaks loose, they all love our dollar."
Also helping to explain why the U.S. dollar is rising is that it remains the world's reserve currency - the money a majority of nations use to buy commodities such as oil -- and that the U.S. economy, for all its warts, is in better shape than most of the other developed economies in the world.
"The dollar the best-looking horse in the glue factory," Fitz-Gerald said.
So it wasn't too surprising that when the Fed recently hinted that it might start "tapering" its quantitative easing (bond-buying) policies later this year, the U.S. Dollar index spiked 3.1%.
But Fitz-Gerald said that investors still need to be wary of the stronger U.S. dollar going forward.
This Sept. 2 Event Could Send the U.S. Dollar Crashing
With an economy one-third the size of that of the United States, Japan has committed itself to a fiscal program that's almost double the U.S. Federal Reserve's current $85- billion a month stimulus.
Like any other war, this battle of monetary-easing measures won't end well, but fortunately for Americans, it's looking more and more likely that the dollar will emerge victorious.
"Right now, the U.S. dollar is the 'cleanest dirty shirt in the laundry,' so I'd buy it," said Money Morning Capital Waves Strategist Shah Gilani.
The dollar now stands at 101.93 against the yen, the first time it's broken the 100 mark since 2009, and is up 26.6% in the past six months.
Many experts are now predicting the dollar's climb has just begun and some analysts see the dollar hitting 105 yen this summer and possibly 110 by the end of the year.
"The turn in yen has been dramatic and has proven the importance of momentum when a multi-year cycle turns," Nomura currency expert Jens Nordvig wrote in a note to clients. "A similar dynamic could be in store for the dollar. In the scheme of things, the USD REER [Real Effective Exchange Rates] is still trading close to multi-decade lows. Once the turn is evident, we believe momentum could be powerful."
Here's why the U.S. dollar's run is just beginning.
In the Currency War, the "end game" is a race to the bottom. Because really, under a fiat money system, there's nowhere else to go.
Unfortunately, I believe the U.S. is on the same path.
This was just confirmed by Kyle Bass, founder and principal of Hayman Capital Management, a Dallas hedge fund, who has profited handsomely from prescient calls on events from the subprime mortgage meltdown to Greek sovereign debt restructuring. In a recent discussion with a senior Obama official, Bass disclosed that he asked how the U.S. would be able to grow exports if they don't allow nominal wage deflation. The official's answer: "We're just going to kill the dollar."
There is one way to protect your net worth from all these central bank shenanigans. In my view, the answer is to own and accumulate gold.
So I suggest you ignore what central banks say, and instead do what they do...
The Japanese yen has already fallen by more than 12% against the U.S. dollar since Nov. 1, 2012 - and it could still have further to fall.
That's mainly because the Bank of Japan appears likely to go along with the wishes of the Liberal Democratic Party, led by newly elected Prime Minister Shinzo Abe, and step up its attempts to eliminate deflation by using "unlimited easing" and setting a 2% inflation target.
Most of the Japanese yen's weakness we have seen so far stems from aggressive jawboning by Prime Minister Abe and other LDP leaders. And outgoing Bank of Japan Governor Masaaki Shirakawa has appeared likely to go along with Prime Minister Abe's demands for closer cooperation between the government and the central bank.
The Bank of Japan's Monetary Policy Committee (the Japanese equivalent of the Fed's Federal Open Market Committee) is in the middle of a regularly scheduled two-day meeting. It is widely anticipated that the BOJ will agree to additional easing measures - most likely purchases of Japanese government bonds (JGBs) - and will formally adopt the government's 2% inflation target.
This one came up often when she sensed that world events were about to take a turn for the worse.
You've heard me mention Mimi before. She was widowed at a young age and went on to become a savvy global investor long before people thought to look beyond their own backyard.
Mimi never cared what Wall Street's "Armani Army" had to say.
Instead, she preferred to travel widely to see for herself what the real story was. Having grown up in the midst of the Great Depression, she believed that people were the ultimate indicator and that governments were the penultimate contrarian influence.
If she were still alive today, I think she'd encourage us to take a good hard look in the proverbial "mirror" especially with regard to the looming fiscal cliff making headlines the world over.
And I don't think she'd waste any time with the doom, gloom and boom crowd either.
She was always on the hunt for opportunity when everyone else was running from chaos. Thanks to her, it's a habit that remains firmly ingrained in me today.
Not One but Three Fiscal CliffsAnd that brings me back to the "fiscal cliff."
In my mind, this is a misnomer. There isn't really a singular fiscal cliff . As I explained earlier this summer to Sheryl Nance of Forbes there are actually three.
- The massive adjustments headed our way as tax and spending cuts expire and come into effect beginning in 2013. You may know it as taxmegeddon.
- The debt debacle and the near complete lack of any sort of credible financial consolidation plan that will affect everything from interest rates to collateral requirements and the US credit rating - again.
- And politicians who simply don't understand that issues 1 and 2 are already dramatically impacting the economy long before the theoretical limits of spending come into play. Profits are declining and 61% of companies that have reported through Monday October 22nd have failed to meet expectations. Hiring is slowing and top line revenue is increasingly hard to come by.
Many believe this is a moot point because Congress will get down to business in November after the Presidential Election takes place. The hope is that some sort of budget agreement will be reached and that the US economy will then be positioned for stronger growth in 2013.
Yeah and I suppose the tooth fairy will show up, too.
Speaking last week, the Chief Executive of Goldman Sachs (NYSE: GS) claimed that if the "fiscal cliff" of tax increases and spending cuts go into effect on January 1, the U.S. dollar would lose its reserve currency status.
As the Vampire Squid's representatives often do, Blankfein actually has it backwards.
Contrary to what Blankfein thinks, a legitimate movement to deal with the fiscal cliff would cut the federal deficit in half, make the country more or less solvent and strengthen the dollar.
However, the problem is that the fiscal cliff involves pain. And since politicians like to delay pain as long as possible, the chances are good the fiscal cliff will be postponed again.
Instead, the country will likely continue to run trillion-dollar deficits in the hopes that Ben Bernanke can finance them through even more quantitative easing. It's the only play in the Keynesian playbook.
Unfortunately, that is the policy most likely to crash the dollar -- and it's headed our way.
So what will the world look like when the dollar has crashed, and international investors and traders have lost all of their confidence in the greenback?
The truth is if that happens it won't be like anything we've seen within living memory.
Amid all the talks of fiscal cliff 2013, which we'll hit Jan. 1 if Congress doesn't act, some analysts are warning of the impact on dividend stocks.
That's because some of the tax increases associated with the fiscal cliff could deliver a hefty tax hike to dividend income.
But the possibility of higher dividend taxes doesn't mean you should ignore the sector altogether.
History shows that dividend-paying stocks have outperformed non-dividend shares even at a time when taxes were much higher. For income-seeking investors, any pullback in dividend-paying stocks as the fiscal cliff approaches may just be a buying opportunity.
Investors early to the game will enjoy dividend payments and also benefit from these companies' healthy market performance.
Fiscal Cliff Effect on DividendsIf nothing is resolved before year-end and Congress fails to take action, dividends received will be taxed as ordinary income instead of the current maximum 15%. Ordinary income tax rates are scheduled to revert to pre-2003 levels, with a maximum of 39.6%.
In addition, a new 3.8% tax will be tacked on to help pay for the Affordable Care Act. For some taxpayers, dividend taxes would nearly triple.
But remember, before investors enjoyed the 2003 dividend tax breaks that put dividend taxes on par with capital gains taxes, payouts had been taxed for decades at ordinary income rates. For some, the tax was as much as 91% in the late 1950s and early 1960s, 70% in the 1970s and 50% in the early 1980s.
Despite those lofty tax rates, dividend stocks continued to maintain a prominent position in portfolios of income oriented investors, and these stocks continue to share their wealth with satisfied shareholders.
From the end of 1979 through July 2012, dividend-paying stocks in the Standard & Poor's 500 Index carried an annualized total return of 12.1%. That compares with a 10.7% return for nonpayers, according to data from research firm S&P Capital IQ.
MarketWatch did the math and calculated that an initial investment of $10,000 in the dividend bunch would have morphed to a whopping $408,000 over that time frame compared to $271,000 for the nonpaying group.
The fiscal cliff is the coinciding action of tax increases and spending cuts that will activate on Jan. 1, 2013 unless Congress and the White House take some action to either delay or change them.
Should these two actions combine, you'll watch $7 trillion be tagged onto the nation's debt over the next decade. This would come out to around $500 billion next year,according toCNN.
Not helping matters is that we've unofficially hit the middle of summer; the clock is ticking louder for the fiscal cliff as expectations for political stagnation instead of a resolution have increased ahead of Election 2012.
A recent Morgan Stanley (NYSE: MS) survey highlighted the fiscal cliff concerns.
According to MarketWatch, 65% of global investors - 71% of U.S. respondents - believe that "the fiscal cliff will cause significant uncertainty in markets for the rest of the year, but think policy makers will ultimately agree to extend most or all of the expiring stimulus and tax measures."
But only 24% of global investors believe the risks surrounding it are overblown.
The fiscal cliff is the coinciding action of tax increases and spending cuts that will activate on Jan. 1, 2013, unless Congress and the White House change or at least delay them.
Everyone has an opinion on the matter, and this week the International Monetary Fund added its two cents.
The IMF issued a fresh report Tuesday warning that failure to avoid the fiscal cliff in 2013 could put the brakes on the U.S. growth rate, pushing it under 1%. Such a slowdown poses great risk to economies worldwide.
The IMF said the global implications for early 2013 are a negative growth rate with "significant negative repercussions on an already fragile world economy."
"It is critical to remove the uncertainty created by the "fiscal cliff" well as promptly raise the debt ceiling, pursing a pace of deficit reduction that does not sap the economic recovery," the IMF said in its annual health check of the U.S. economy.
Under current fiscal cliff terms, the proposed spending cuts and tax increases would minimize the deficit by approximately 4% of GDP in 2013.
Lawmakers should, the IMF counseled, replace the fiscal cliff with a program of small deficit reductions in the short-term with a longer term fiscal sustainability program.
Christine Lagarde, IMF Managing Director, said at a press conference Tuesday that a small deficit reduction means cuts amounting to 1% of GDP next year. The downside risks to the U.S. economy as well as worldwide financial systems have deepened, she noted.
"We believe that fiscal consolidation is necessary but not just any fiscal consolidation. It has to be sensible and certainly not excessive," said Lagarde.
In fact, each day that passes brings us closer to what could be the day of reckoning for those holding massive short positions on the ETFs for gold, silver, copper and related investments.
You see, the Federal Reserve Bank of Kansas City in late August will host an economic policy symposium in Jackson Hole, WY. Speaking at the conference, as he did in August of 2010 when he introduced the second round of quantitative easing, will be Federal Reserve Chairman Ben Bernanke.
There is much to believe that QE3 - if not declared sooner - could be announced at Jackson Hole. Should this happen, the prices of gold, silver and copper will likely soar like back in 2010.
That means anyone holding shorts on gold ETFs or similar investments could find themselves scrambling to cover their positions.
While paying for a pizza in London with this foreign cash was difficult, having those "safe-haven" currencies in hand helped me sleep at night.
We've reached that point again. In light of the escalating debt-ceiling debacle that's unfolded in Washington, the potential for a U.S. credit-rating downgrade no matter the outcome, and the likelihood that a long stretch of dollar-killing stagflation is headed our way, it's time to take refuge in today's safe-haven currencies.
And I'm going to show you the safest of those safe havens.
The Battle-Damaged GreenbackI know that many of you are extremely worried about what will happen if Standard & Poor's downgrades U.S. Treasury debt from its top-tier AAA credit rating.
But I'm telling you that there's a much bigger cause for concern. While I concede that having our federal debt lose its top-tier credit rating wouldn't be good, the bigger cause for concern is what happens to us if the U.S. dollar stops being regarded as AAA - meaning it's no longer good for settlement of all international transactions.
If that happens, you have to ask yourself two questions:
- What would be the impact on the U.S. and world economies?
- And, even more importantly, what would investors like us need to do?
With the Aug. 2 deadline for raising the debt ceiling approaching fast, the U.S. dollar took another beating and fell against safe-haven currencies yesterday (Monday), after Washington failed to reach agreement on the nation's $14.3 trillion debt ceiling. The Swiss franc actually reached an all-time high against the dollar, which has slipped 25% against that currency in just the last 12 months.
What a lot of folks don't realize is that the fate of the U.S. dollar is closely tied to that of U.S. Treasury bonds. If U.S. inflation takes off to serious levels - as I'm almost certain it will - both Treasuries (except Treasury Inflation Protected Securities, or TIPS, which are inflation-protected) and the dollar will tank simultaneously.
After all, the United States has been running balance-of-payments deficits of $500 billion or more for almost a decade now - much longer than the country has been running $500 billion budget deficits.
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The U.S. greenback could strengthen in 2011-but only against the European euro and other currencies with heavy exposure to the European debt crisis, including the British pound sterling. Against virtually every other currency, however, the U.S. dollar is likely to be the loser.
In short, the outlook for the dollar in the New Year depends almost entirely on which currencies you're comparing it with.
By itself, this story probably wouldn't be a big deal. But this development is the start of an important new trend in the global currency markets. And the following three factors tell me that we should be taking a close look at why China has decided to dump Japanese debt. For instance:
- Given that the same thing happened in August, September marked the second straight month Beijing has sold more Japanese securities than it purchased.
- This marks the reversal of a seventh-month stretch of China being a net purchaser of Japanese debt.
- The two months of sales nearly wiped out the net surplus of 2.32 trillion yen ($27.86 billion) that China had amassed as a result of seven months of buying Japanese debt.
- Finally, the 2.02 trillion yen ($24.26 billion) worth of Japanese debt that China sold in August was China's single-largest monthly sale of Japan government bonds since 1995, when these statistics first started being recorded.
Let me explain....
In a cash and stock deal, Singapore's stock market operator is offering A$48 (U.S. $47.11) for each ASX share, consisting of A$22 in cash and 3.743 SGX shares per ASX share. The offer is at a 37% premium to what ASX shares traded on Friday.
"The combination of ASX and SGX, offering innovative new products and services to the market, will allow customers to maximize future opportunities, where Asia Pacific takes center stage globally as the source for capital, wealth creation and trading opportunities," SGX Chief Executive Officer Magnus Bocker said in a joint statement.