The Shotgun Blog
Friday, July 16, 2010
The first sign of the U.S. Dollar apocalypse has come
Over a year ago, I was sitting around with a group of people talking about the long-term prospects for the USD. And, for more than a year, I've been hyper-bearish on the US economy.
In fact, in a spat of tweets on Twitter last Fall, I publicly pronounced that I was completely divesting of all US-denominated assets and moving almost entirely into Canadian and Asian stocks.
I talk markets with many colleagues, and many people poked fun at this position. In fact, a stock analyst friend of mine tried to convince me that I was going to "miss" the ride up the slope of the assuredly coming US recovery. Holding firm, I decided I was okay being the odd-man out in the terms of my investing strategy.
Further, much of my moves were aimed specifically at shorting the US as a whole. This move paid off huge at the beginning of the year, and since has been sort of a so-so strategy of late. But I held on, refusing to jump ship from my commodity-heavy, inflation-hedged strategy all the way up until today. Even when people were cheering on the strong US job growth a few months ago, I refused to budge.
Today, I'm increasingly convinced that I was right to do so.
I have long said that the first sign of the coming US economic apocalypse would be when China stopped buying US treasures. And China has done just that. In fact, China's Dagong Global Credit Rating two days ago, downgraded US Treasuries from an AAA to AA rating with a negative outlook. Ouch.
That comes on the heels of downgrade warnings by S&P and Moody's earlier in the year.
This action on part of China, for all the political posturing over China's currency peg, is not something the US can come out of unscathed. In fact, the likely outcome is a massive decline in the value of the USD in the near to medium-term.
Those of you non-Americans who believe the USD is safe, and have serious US-based holdings need to seriously consider your portfolio immediately. You are at extreme risk of losing it all. Make no mistake, the US is on a collision course with disaster; the entire country is over-leveraged to the hilt, and it's biggest creditor is no longer loaning it money.
As global investors and foreign central banks continue to perceive the increasing risk of US treasuries, yields will be forced up, and US debt will become more and more unsustainable.
Here's my personal outlook for the US economy, that's driving my investment choices, for what it's worth:
- US job growth will continue to falter, and US unemployment will likely be higher before the end of 2010 than it was at the beginning.
- US treasuries will continue to experience increasing pessimism from global investors and central banks, despite their liquidity advantage
- The US consumer will find their personal debt unmanageable, and will soon begin feeling serious inflationary pressure due to devaluation of the USD against it's trading partners, pushing import prices up and squeezing the US consumer to his limit.
- Gold has not finished it's run, and will likely go above $2000/ounce in the next 6 months.
- There is a high risk of a sudden sell-off of US currency worldwide that could lead to rapid devaluation of US currency in the next 6 months. If this happens, gold could easily reach $5000/ounce in USD.
- US manufacturing will continue to see improvements, despite all of this chaos, as Americans will be forced to rely more and more on domestic production due to a lack of buying power on global markets. Despite this, investment by international investors is not advisable in the near-term.
Some musical accompaniment -- "The Day the Dollar Die" Performed by Peter Tosh.
Posted by: The Western Confucian | 2010-07-16 9:58:04 PM
Laffer wrote an interesting column awhile ago about how the repeal of tax cuts next year is pushing economic activity from the future to now. So this lame economic activity in America is actually with borrowed strength. From the future.
Posted by: Cytotoxic | 2010-07-17 11:07:53 AM
I'm not a fan of Art Laffer at all, to be honest. His economic worldview does not mesh with mine. He is a monetarist with Keynesian tendencies.
Posted by: Mike Brock | 2010-07-17 12:10:37 PM
True he kinda sucks. But his article makes a lot of sense. Scary sense.
Posted by: Cytotoxic | 2010-07-18 4:50:28 PM
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