Rumors were circulating in the Valley on Wednesday, March 12th, 2008, that Bear Stearns was facing near insolvency, and those rumors proved to be true today. In addition, the Fed pumping $200 billion of liquidity into the market was supposed to help Bear Stearns gain necessary liquidity to avoid disaster, but, apparently, that strategy did not work.
It’s a "tear the Band-Aid off" versus "death by a thousand cuts" period in history. The pain is coming to the dollar, and it is going to be TOUGH. It can come now or it can come slightly later, but the losses are going to staggering and the shift significant. Rumors are already circulating that one or two major US banks will go out of business in 2008.
No matter what, the devaluation of the dollar is just beginning. There is a few simple reasons for this. First, the Fed will need to drop interest rates to stabilize the economy and thereby drop dollar demand. Second, international wealth that might otherwise be used to prop up the value of the dollar will need to flow into bailing out global financial institutions . Lastly, the economy and the institutions behind the dollar are in poor shape as compared to what they once were, and they appear to be declining fast. As a foreigner, would you buy dollars after learning about the Bear Stearns fiasco?
What can you do? I just purchased a large block of FXE (CurrencyShares Euro Trust) to essentially bet on the Euro against the dollar. Europe will remain stable through this messy period, and the European Union is actually expanding by adding new countries. The decline of the dollar will hurt Asia and the Middle East, but Europe will remain relatively pain free. In fact, the US may become a cheap source for goods and labor, which may actually help Europe thrive, and you may also see a talent migration to the stable socialist economies of Europe, too. Europe and the EURO are a no-brainer bet right now.
I am also betting that price of oil will rise further through a major purchase of USL (United States 12 Month Oil Fund, LP). As the dollar tanks, the price of oil must go up to a certain point, since oil is a highly valued essential commodity priced in the declining dollar. Obviously, when the price of oil gets too high, there will be a decline in consumer demand. My guess is that the oil producing nations will just drop production at that tipping point, since the the high price of oil is an unprecedented economic boom for them.
Long and short of it: I strongly recommend that you BET AGAINST THE DOLLAR. Just my $0.02.
Putting your nest egg in global investment makes sense in the new global economy. Purchasing European investments is good choice, as they still retain many of the same economic culture & goals with the U.S.
A weaker dollar will vastly increase overseas purchase of american-made good & services, so that’s not all bad news either.
Beware selling our major assets, like real estate & corporate entities though. These things still retain long-term value, and comprise our only strategic reserves.
Remember that in a global economy, our financial ‘enemies’ continue to wage a quiet war against us.
Don’t belittle economic struggle: R.Reagan stood in Berlin as the western economic machine brought down communist walls.
[…] All in all, the decisions seem prudent given the chaos. I am also aggressively shorting the dollar, as discussed here. […]