Today's comment is by Jack Crooks, Currency Director for The Sovereign Society and Editor of The Money Trader and Crooks on Currencies.
Dear A-Letter Reader,
You may notice something a little strange as you elbow your way through the malls this holiday season (especially if you live in a big city like New York).
You keep bumping into shoppers who speak with a European accent. You look around and you realize that international shoppers seem to be everywhere this holiday season. Way more than usual. Can you guess why? It has something to do with the cash in your wallet.
You see these international shoppers understand their pounds and euros are worth WAY more than your U.S. dollars right now. So they're coming in by the plane-full to "trade up" their pounds and euros for dollars. And then they're scratching off their Christmas lists with the "bargains" on our store shelves.
Remember when you could grab great deals by crossing the border into Mexico or Canada? These savvy European shoppers are doing the exact same thing. Except instead of getting "more bang for your buck," they're grabbing "more purchases for the pound," so to speak.
These "bargains" abound for everyone except you because the U.S. dollar is tumbling on the foreign exchange markets. Euros, pounds, and Swiss francs are rising against the dollar. It may sound trivial, but the value of the dollar affects almost every aspect of our daily lives. A falling dollar is a direct threat to your overall wealth. But there are simple and effective ways to protect against it.
Keep in mind that as Europeans gain purchasing power, we lose purchasing power. It's a mirror image. A sinking dollar is great for them and a disaster for us. And it's not just shoes and toys we're talking about here. It's virtually everything related to money: real goods such as energy and food (everyday spending), financial goods such as stocks and bonds (our retirement savings), and even real estate (our homes and store of wealth). A falling dollar can boost our living costs and threaten our wealth at the same time. Here's an example that I think will hit home-the threat to real estate from a falling dollar.
Right now, mortgage interest rates would be much higher if international investors didn't recycle hundreds of billions of dollars into the U.S. bond market. They do that because the U.S. bond market is very liquid and considered safe. This recycling of international reserves back into the U.S. created the so-called "cheap money" that helped stoke the demand for U.S. real estate. It also drove up real estate prices. And as prices increased, home owners became wealthier.
Now, if those same international investors decide the U.S. dollar is a bad investment, they will sell those bonds and move into other currencies.
The relative global value of dollar-based bonds falls directly with the dollar. The exchange rate doesn't have to go down that much, before the loss in capital value is greater than a year's expected interest income. Consider that we've watched the dollar go down as much as 70% against other currencies during major dollar bear markets.
If international investors sold their bonds, it would drive up interest rates, push up the cost of new mortgage loans, and drive up costs for those holding adjustable rate mortgages. It could be a major blow to and already weak real estate market.
And because real estate represents a major portion of the U.S. workforce, real estate prices falling further could have a major impact on the economy. So you can see what I mean when I say the value of the dollar impacts almost every aspect of our lives.
Protect Your Assets' Power
The most simple and effective way to protect your global purchasing power is to denominate a portion of your wealth in other currencies. Or in other words: move outside of the dollar. Here is an example of how to do that:
1) Multi-currency deposit accounts: These are very similar to standard bank accounts. The only difference is that these accounts allow you do denominate your cash into any commonly traded currency of your choice. The beauty of this account is it's so simple, yet effective. You can hold deposits in a currency appreciating against the dollar and get paid interest at the same time. That means you can get a double-whammy of gains that add up surprisingly fast given the relative safety.
2) International portfolio of stocks and bonds: You can diversify simply by investing in stocks and/or bonds denominated in another currency. Now, you still run the risk of your chosen stock or bond's currency depreciating. So this isn't quite as effective as the multi-currency approach, but it still should be part of your portfolio strategy.
3) Direct speculation into a specific currency other than the dollar: There are several ways to go about this, depending on your risk tolerance, your return objectives and your time frame. But the four different common ways to speculate in currencies for the average investor are:
- ETF's
- Options
- Futures
- Spot forex
I believe the latest dollar drop represents another leg down in the ongoing dollar bear market. It's hard to forecast how far and how long it will last. But we do know it represents a major risk to the wealth of anyone with the majority of their wealth based in dollars. It's time to consider some protection.
JACK CROOKS, Currency Director
On behalf of The Sovereign Society
EDITOR'S NOTE: The dollar's value continues to plummet. Take action now. Jack Crooks is holding an emergency teleconference this Friday, at 4 PM EST, to explain how you can protect your purchasing power, before the value of your U.S. dollars slips any lower. Click here to find out how you can dial in.
