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Nadeem Walayat Financial Markets Analysiis and Trend Forecasts

How to Profit From the Falling U.S. Dollar

Currencies / US Dollar Jan 18, 2010 - 12:36 PM GMT

By: Larry_Edelson

Currencies

Best Financial Markets Analysis ArticleAs many of you already know, I am very bearish on the dollar.

And in just the past four weeks of trading — starting right before the holidays and continuing into the new year — the benchmark U.S. Dollar Index (DXY) has lost nearly 9% of its value against the world’s major foreign currencies.


In other words, on an international basis, the dollar now purchases 9% less than it did just four weeks ago!

My reasons for remaining so bearish on the dollar have not changed …

A. There’s simply no way the world will recover from the financial crisis without a weaker dollar.

It is the only way Washington will ever get out from under the $134 trillion and growing debt mountain it’s created. By defaulting on those debts, on the sly, via devaluing the dollar.

Fed Chief Ben Bernanke knows this. So no matter what he says in public about supporting a strong dollar, take it with a grain of salt. The truth is he wants the dollar to decline in value. Period.

B. We are the world’s biggest debtor, with the world’s worst budget deficit to boot. That may sound similar to the problem above, but we need to put it in context.

Reason: Way too many analysts compare today’s U.S. economy to the 1930s, claiming we’re on the precipice of a great recession, at best, and a great depression, at worst.

There’s no disputing those last two points. But understand this: In the 1930s …

arrow A, B, C — Profit!  The U.S. was a creditor nation.

arrow A, B, C — Profit!  Washington had a balanced budget.

arrow A, B, C — Profit!  The dollar was backed by gold.

Exactly the opposite core fiscal conditions that we have today. A great recession now? Absolutely. A great depression? Entirely possible, and I would even argue that we’re already in one.

But whatever your view is of our economy today, how the economy can slide into a severe deflationary environment is illogical when the fiscal conditions underpinning our economy today are the polar opposite of what they were in the early 1930s.

Think it through and the only valid, logical conclusion is that we’re headed into the opposite of what we experienced in the 30s: A hyperinflationary depression.

It’s like fire and ice. An economy can destroy itself through severe deflation (ice), or severe inflation (fire). Both extremes end up in the same place.

It’s a matter of how you get there. In the 30s, the economy took the deflationary path to ruin.

Now, in the early 21st century, because the core fiscal conditions — not to mention monetary policy — are exactly the opposite of the 1930s — the economy will take the hyperinflationary path to ruin.

It's only a matter of time before the economy hyperinflates.
It’s only a matter of time before the economy hyperinflates.

It’s simply a matter of time, not if, but when.

C. Because the U.S. is the world’s largest-ever debtor … because Washington has the world’s largest budget deficit … because there’s no gold standard … and because Bernanke will stop at nothing to devalue the dollar and inflate away debts …

There is simply NO WAY the dollar can be a safe haven in this crisis.

That’s why it irks me when I see so many analysts and investors running toward the dollar when there’s some bad economic news elsewhere in the world.

They’re simply jumping away from a fire — but plunging headlong into the frying pan.

In other words, the theory that the dollar is one of the world’s safest havens in this financial crisis is dead wrong for today’s economic environment. For all the reasons I cite above.

Sure, there will be short-term rallies in the greenback, like the one we just experienced. But each and every one of them remains destined to fail, and the dollar set for much lower levels in the months and years ahead, wiping out the savings of most investors.

Except those that understand how the process works, and who take defensive action.

One of the ways you can do that is by owning a good chunk of the only true international currency: Gold.

So, be sure your gold holdings are up to snuff.

Another way to make sure your portfolio has some money invested in other contra-dollar investments is with the PowerShares DB U.S. Dollar Bearish Fund (UDN) — an ETF designed to appreciate in value as the dollar falls in value in international markets.

And still another way is natural resource stocks, companies whose main products are the bread-and-butter commodities and resources the world needs on a daily basis; tangible assets denominated in dollars and whose value goes up as the dollar goes down.

There are oodles of natural resource stocks out there that are going gangbusters, with gains of as much as 48% in just the last four weeks.

For more details, your best bet is to stay abreast with my Real Wealth Report — a publication devoted to protecting your money, making sure it’s always real wealth, and headed for real profits.

Yet a fourth way is to invest in select companies in foreign markets that are performing well. Case in point: China, whose economy is still rocketing higher. Check out the latest stats from China …

arrow A, B, C — Profit!  For the 11 months ended November 2009 (latest data), bank lending in China doubled to $1.35 trillion.

arrow A, B, C — Profit!  For all of 2009, automobile sales in China soared 46.2% over 2008, to 13.6 million units, officially making China the world’s largest car market.

arrow A, B, C — Profit!  Fourth-quarter GDP in China likely exceeded 11% growth. For all of 2009, GDP likely hit at least 8.9%.

arrow A, B, C — Profit!  In December, China’s exports surged 17.7%, while …

Two ways to protect your portfolio from a devalued dollar is by investing in natural resources and foreign markets.
Two ways to protect your portfolio from a devalued dollar is by investing in natural resources and foreign markets.

arrow A, B, C — Profit!  China’s December imports exploded 55.9% higher, proving that China’s 1.3 billion people haven’t skipped a beat when it comes to improving their lifestyles.

Other Asian economies — India, and most southeast Asian countries — are also firing away on eight-cylinders, decoupling from their dependence on the U.S. economy.

It’s also why over the last 10 months, many of my suggestions in this column are paying off for investors in spades …

arrow A, B, C — Profit!  The iShares FTSE/Xinhua China 25 (FXI), up 55.5% since I alerted you to it in my March 16, 2009, column …

arrow A, B, C — Profit!  The U.S. Global Investors China Region Fund (USCOX), up 47.0% since I suggested it in my April 6, 2009, column.

And two other recommendations in Asian economies and markets show open gains of as much as 57.6%.

Bottom line: Make sure you’re protecting the value of your dollars and are set to reap profits this year from the dollar’s ongoing demise — with gold, natural resources and tangible assets, and Asian stock market investments.

Best wishes,

Larry

This investment news is brought to you by Uncommon Wisdom. Uncommon Wisdom is a free daily investment newsletter from Weiss Research analysts offering the latest investing news and financial insights for the stock market, precious metals, natural resources, Asian and South American markets. From time to time, the authors of Uncommon Wisdom also cover other topics they feel can contribute to making you healthy, wealthy and wise. To view archives or subscribe, visit http://www.uncommonwisdomdaily.com.


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