By Martin Hutchinson
Mahmoud Ahmadinejad, president of Iran, announced at an Organization of Petroleum Exporting Countries (OPEC) conference over the weekend that dollar-based oil sales were a bad idea since "they get our oil and give us a worthless piece of paper." Although I'm a patriotic American investor, that immediately causes me to wonder: Suppose he's right: What on earth should I do with my money?
At first glance, Ahmadinejad appears to have a point. Our worthless pieces of paper [more widely known as U.S. dollars], buys a fifth as much of his oil as they did five years ago and there seems no immediate prospect of this trend reversing itself. What's more, our worthless pieces of paper buy less in terms of British pounds Sterling, European euros, Australian dollars, Chinese renminbi (Yuan), Indian rupees and even Canadian loonies than they did five years ago. Only the Japanese yen has remained more or less stable against the dollar, having been held down by the mighty, under-rewarded efforts of our noble and gallant U.S. hedge funds.
If current trends continue as they are, Ahmadinejad may become even "more correct" in the very near future. Every time Wall Street sneezes, U.S. Federal Reserve Chairman Ben S. Bernanke lowers interest rates, to prevent Wall Street bonuses from catching a cold.
Not that much of Bernanke's bounty is going to end up with the shareholders of Wall Street banks. According to a Monday report by Bloomberg News, Wall Street investment houses in aggregate intend to pay themselves bonuses totaling $38 billion, while the losses to shareholders are expected to reach $74 billion.
Now THAT's what I call incentive compensation!
Nevertheless, there's 2008 to think about, and if losses come anywhere near this year's totals, Wall Street should surely be able to persuade Bernanke that gloom, doom and disaster is inevitable with interest rates "so high." In Wall Street's view, the central bank maestro should be able to throttle back the benchmark Federal Funds Rate continually until it reaches minus 3% — so that they can all be handsomely paid for maxing out their platinum and titanium credit cards and staying home.
Needless to say, with anything on this side of that minus-3% Fed Funds Rate, inflation could become a serious matter. If that happens, and Bernanke does not raise interest rates quickly, the dollar's decline will accelerate, as big holders like China and Saudi Arabia "diversify" away from the greenback.
At that point, Wall Street bonuses will become worthless, and Ahmadinejad will have proved himself a better investment banker than Goldman Sachs Group Inc. (GS) .
Presumably, common sense will return at some point – and hopefully that point is at least a bit on this side of Ahmadinejad's predicted dollar collapse. Still, there's no sign of a turnabout currently, and Ahmadinejad and his merry oil-exporting cohorts can help the dollar's slide along by exchanging their dollar reserves for euros, renminbi, or even Argentine pesos whenever they wish. So while our green fistfuls still have at least some semblance of value, and can be exchanged for Zambian kwachas at some unsuspecting bank, what should we do with them?
The obvious thing to do is buy gold. This has the advantage of being controlled primarily by South Africa and Russia, who have not yet deigned to express an opinion on the dollar's inferiority. It is also a time-honored inflation hedge. Besides, if the dollar is destined to go south, the catalyst will not be any defect in the continued high productiveness of the U.S. economy [even the over-inflated Wall Street bits of it], but rather will be the rapidly rising inflation set off by the previously over-easy access to credit and the soaring prices of such key commodities as metals and crude oil. So the StreetTracks Gold Shares (GLD) exchange-traded fund (ETF) is a good place to start.
A second possible hedge against Ahmadinejad being right would be an oil source, but not one controlled by Ahmadinejad and his cronies. Fortunately good old Canada has one in Suncor Energy Inc. (SU), a major producer of oil from the Athabasca tar sands, which hold more oil than the whole of the Middle East. At a forward Price/Earnings ratio of only 15, Suncor is even beginning to look cheap.
There's also Brazil's Petroleo Brasileiro SA, better-known as Petrobras (PBR), with a slightly higher P/E ratio of 18, but with a beautiful light crude offshore oil field containing 5 billion to 8 billion barrels of crude oil, worth at least half of $500-800 billion at an oil price of $100 per barrel. I'm not a great fan of Brazil's government – besides, President Luis Inacio (Lula) da Silva is a Socialist – but at least in his five years in office he has never gratuitously insulted the United States, or its currency, as both Hugo Chavez of Venezuela and Ahmadinejad do repeatedly.
It's nice not to be insulted. So maybe we'll look carefully at Lula's oil company. After reading more about Ahmadinejad, Brazilian Real assets look a pretty solid bet.