How to Profit from the End of the Dollar

Here is a five year chart comparing the Dollar ETF (NYSE: UUP) to the Gold ETF (NYSE: GLD).

As you can see, gold and the dollar move opposite each other.

The world's largest economy, the U.S. of A., has been systematically destroying the value of the dollar for the past several years. This is done through creating money.

The several bumps up have been due to “flights of safety”, where investors pull their money out of falling assets such as Greek bonds and put them in the dollar (short term Treasuries) until they can figure out where they should put it.

But all the while the value of the dollar erodes like a sandcastle with an incoming tide.

Would I Lie to You, Honey?

Treasuries have been considered the safest -- and most liquid -- investments in the world since the dollar replaced the pound sterling after the first world war.

But all good things come to an end. The U.S. is currently the world’s largest creator of debt. It has $14.2 trillion of debt outstanding, while marketable Treasuries total $9.7 trillion. And it must continue to sell $1.4 trillion in debt per year to pay for ongoing deficits.

Central banks and other overseas investors own $4.48 trillion, or 46% of marketable debt.

And they are getting almost no return for buying this debt. According to Bloomberg, the three, six and twelve month Treasuries yield zero. The two-year yields 0.5% and the thirty year yields 4.375%. For comparison, risky Greek three-month bonds now pay 22%.

Why would you lend the U.S. Government money for no return? Would you lend them money for thirty years for a return that will be wiped out due to inflation?

Inflation is already above 4% and heading higher. Unfunded debt to pay off the baby boomer retirement is over $100 trillion. Obamacare will add to it. We are in three wars and have bases in over 150 countries. Growth is anemic, unemployment remains high and housing continues to fall.

In the face of this slow motion catastrophe, the U.S. Congress bickers about who twittered a picture of his penis to whom.

Bill Gross is Out

Bill Gross is the billionaire founder and co-chief investment officer of Pimco. He has been saying for months that U.S. Treasuries are unattractive because yields don’t offer enough compensation for the risk of inflation and U.S. policies will hurt investors. He sold $28 billion of U.S. government bonds this year.

For the record, Mr. Gross beat 98% of competitors in the last five years according to data compiled by Bloomberg.

The largest buyer of Treasuries (85% of all U.S. debt issued since November) has been the Federal Reserve though QE II. This program ends on June 30^th. Other large buyers are Japan, China, Saudi Arabia and Qatar.

Who will take up the slack?

China has already sold its holding of U.S. short-term debt and is warning Congress about default. Recently, Li Daokul, a Chinese central bank advisor, warned:

"If a default happens, the Chinese government should have a consultation with the U.S. government. China can promise that we will not sell our holdings of U.S. debt, but the United States must also promise that you will not hurt our interests by guaranteeing the safety of our investment... I really worry about the risks of a U.S. debt default, which I think may lead to a decline in the dollar's value." Source: Businessinsider.

It's hard to imagine that China will take up the debt slack from the U.S. Fed.

Japan currently has more debt per GDP than any other country at 225%. They just got hit with a major catastrophe. It's hard to imagine they will pick up the slack.

This leaves the oil kingdoms. Together these countries hold about $210 billion in treasuries. There is no way they could purchase an additional $1.2 trillion over the next year even if they wanted to. Nor is there any logical reason they would risk so much money given such a low return. And the inevitability of a default.

For the record, a default doesn't have to be a big declaration of “We're not paying. Go eat dirt.” It can be done through inflation. Over 30 years a price inflation of 10% a year would destroy 94% of the purchasing power of a 30 year bond.

Default can also happen through a falling currency. And at least one Chinese credit agency says the U.S. has already defaulted.

According to AFP, Guan Jianzhong, president of Dagong Global Credit Rating Co. Ltd., reportedly told state media the United States has already defaulted by letting the U.S. dollar weaken. "In our opinion, the United States has already been defaulting," Guan said.

Bill Gross (mentioned above) agrees, "Unless entitlements are substantially reformed, I am confident that this country will default on its debt; not in conventional ways, but by picking the pocket of savers via a combination of less observable, yet historically verifiable policies – inflation, currency devaluation and low to negative real interest rates."

But again, who would buy U.S. Treasuries at no yield with rising inflation? Not me, that's for sure.

How to Profit

There are a number of ways to beat coming inflation and the stronger dollar. You could take out the biggest loan you could get at today's low interest rates and buy the most rental properties you can find. Inflation has historically driven up rentals.

You could buy Canada, Brazil or Australia, each of which have been moving up on the commodity boom. But if China crashes, the commodity boom will end quickly.

Or you can buy gold, which rises during chaos.

Buy Gold

Say what you want about the metal, but it is one of the few assets that is still going up.

Sincerely,

 

Christian DeHaemer
Editor, Wealth Daily