Safehaven | Five Profit Bonanzas from a Dollar Decline

December 11, 2006

Five Profit Bonanzas from a Dollar Decline
by Martin Weiss

You've seen the dollar falling against the euro, the pound, the yen and the yuan. You've read our alerts. You know what's happening.

But do you realize how serious this really is?

Have you sat down to contemplate the potentially far-reaching impacts on your money, your income, and your entire financial future?

My recommendation:

Don't be persuaded by the theory that the dollar's decline is mild ... that its plunge is ending ... or that its demise doesn't matter. Don't let anyone tell you it's all for the better.

Above all don't let anyone talk you out of protective investments.

Quite to the contrary, the same investments that help shield you from a dollar decline also have the potential to deliver some of the greatest profit bonanzas as the decline accelerates.

This morning, I'll give you five prime examples. But first, join me on a tour through time -- to experience the consequences of currency collapses ... and to see the fortunes that can be lost, or made, as a result.

The Unimaginable
Is Not Impossible

Imagine a currency that falls to one billionth of its value -- in just two and a half decades.

Imagine another that plunges five times further in the same time frame.

Or worse, imagine a currency that's so thoroughly smashed and decimated that its left with just one hundredth of a billion of its original value ... after just 23 years.

No. I'm not talking about the hyperinflation that swept Germany after World War II. Nor is this example taken from a fledgling economy in pre-modern times.

Rather, the examples I just gave you are from modern economies of our time, the last of which is the eighth largest in the world -- Argentina.

Just to match the buying power of a single peso today, you'd need 100 billion pre-1983 pesos (called the peso ley).

If you stacked those old 1-peso bills on top of each other, you'd have a pile that's 6,896 miles high. And if you laid them end to end, they'd go around the earth at the equator, loop from pole to pole, and reach all the way from our planet to the sun.

The cost of the paper alone was thousands of times more than the money's current value. Even the speck of ink used to engrave the letter "B" in "Banco Central de la República Argentina" cost more than that peso is worth today.

And with that destruction of the money, came the demise of the country as well -- not only the structure of its economy ... but also the fabric of its society ... the ethos of its culture ... the core of its psyche.

Just five years ago, during the climax of that once-proud nation's collapse, it went through three presidents in 11 days.

Its National Congress was ransacked by rioters.

In Buenos Aires and other major industrial centers, professional, middle-class citizens -- plus their children -- could be found at rat-infested dumps, collecting bottles, cans, paper, and cardboard.

So many trash pickers, or cartoneros -- including young adults still dressed in work clothes, children, and old folks -- were sitting on the sidewalks throughout Buenos Aires that tourists said they had to be careful not to step on them when walking down the street.

The tren blanco, also called the "Ghost Train," was used so frequently by catoneros that the seats were removed to accommodate their large carts.

As the crisis spread, street riots resulted in hundreds of deaths. The suicide rate soared. Banks closed. The economy collapsed.

Unlike Iraq today, there was no civil war. But for many long months, Argentina virtually ceased to exist as a cohesive nation.

The Impact Of Currency
Collapses on the Wealthy
Can Also Be Equally Severe

Let's say you were a well-to-do Argentinean industrialist. Your family grew its assets over many generations. You built factories and office buildings.

But about two decades ago, you sold your vast empire and retired, netting $50 billion Argentine pesos. Do you know how big your fortune would be worth today if you kept it in cash? Not even enough to buy a cheap cup of coffee!

I Personally Witnessed the Devastating Impact
Of Currency Collapses Growing up in Brazil ...

One day stands out in particular -- November 6, 1964.

While in the middle of biology 104, my high school classmates and I heard a loud, thundering sound from downtown.

We rushed to the window just in time to see the city's largest building, under construction for two years, crumbling to earth.

Several died. Our Portuguese teacher's wife, who lived behind the building, was crushed and barely survived.

The apparent cause: To cope with rampant inflation, the contractor skimped on the cement; and government officials, struggling with devalued salaries, accepted a piece of the action to look the other way.

In other Brazilian cities, similar projects collapsed for similar reasons, with even more casualties. Directly or indirectly, highways, bridges, dams and railroads were equally gutted by the falling currency. The education system, once robust, went to hell in a hand basket. Crime and corruption swept the nation.

Other Examples of
Currency Chaos Abound:

The currency collapse in Germany in the 1920s is the textbook example. When people went to buy food, it doubled in price every 49 hours. When thieves encountered a wheelbarrow of cash, they took the wheelbarrow and left the cash behind. When the collapse finally climaxed in 1923, a loaf of bread that had cost one mark was going for 726 billion marks.
The currency collapse in Russia after the fall of the Soviet Union provides a much more recent illustration. In 1992, when post-Soviet Russia abandoned price controls, the inflation rate hit 2,520%. The value of the currency plunged from 100 rubles to the U.S. dollar in 1994 to 30,000 rubles to the dollar in 1999.
The currencies of other East European republics got slammed even more severely. In the Ukraine, if someone had robbed a bank and stashed 2 million of their currency in 1992, today they'd be lucky to buy a candy bar with the loot. In Belarus, Yugoslavia, Romania, and other countries, the collapse was similar -- or worse.
We've recently seen currency collapses in Turkey and Zimbabwe.
Earlier, we saw disastrous collapses in Thailand, Malaysia, the Philippines and Indonesia.

In each and every case, when the currency falls, international capital flees. The value of local debt instruments is obliterated. Stock markets get clobbered. People's lives, whether rich or poor, are shattered.

Some People Seem to Think
This Is Strictly the Fate of
Developing Nations. Not So.

France suffered a series of currency devaluations in the years following World War II.

Then, in 1981, it happened again. The French government began implementing nationalizations and economic reforms. But international investors didn't like that. So they dumped the franc and took their money elsewhere.

At first, the French made some futile attempts to support their currency. But soon they were forced to devalue -- three consecutive times between October 1981 to March 1983.

Nearly all of Western Europe was swept up in a sweeping currency crisis in 1992; nearly all of East Asia, in 1997.

Mexico's "Tequila" currency crisis in 1985 trashed their stock market and nearly sunk their economy.

In short ...

This is No Game. Nor
Is the U.S. Immune.

President Nixon's moves to devalue the U.S. dollar in 1971 set off a decade of rampant inflation.

President Carter's neglect of the dollar in the late 1970s culminated in surging interest rates and the collapse of the U.S. bond market.

Not to be outdone, President Reagan let the dollar fall in early 1987, which set the stage for the worst single-day stock market crash in American history.

Back to the Present

Right now, some of the most worrisome signs I see for the dollar are among the least discussed by others.

Worrisome sign #1. While the dollar has been sinking toward its low against the euro, it has plunged toward a new 14-year low against the British pound.

In its worst year, in 1992, the dollar was worth an average of 52 cents on the pound. This year, it's averaging 54 cents and this month it's down to 50.5 cents.

Worrisome sign #2. Adding to its woes, the dollar is now beginning to fall more rapidly against the Chinese yuan, putting growing pressure on the Chinese to unload a lot of their dollars.

That's why, one year ago, the chief economist at the Bank of China called for East Asian central banks to come up with a plan to slow the rate of accumulation of U.S. dollars and eventually cut their holdings.

That's why this past August, Fan Gang, a member of People's Bank of China's policy committee, commented "The U.S. dollar is no longer a stable anchor in the global financial system, nor is it likely to become one, therefore it is time to look for alternatives."

That's also why, this past October, he said "China risks an erosion of its holdings because the U.S. dollar will probably decline."

But it didn't end there: One month ago, on November 9, Chinese central bank chief Zhou Xiaochuan said they had a clear plan to diversify into other currencies.

And just two weeks ago, Chinese deputy central banker Wu Xialong warned other Asian central bankers of the future risk of a U.S. dollar devaluation, jolting the foreign currency markets.

Now here comes the clincher: On Thursday and Friday of this week, U.S. Treasury chief Henry Paulson and Federal Reserve chief Ben Bernanke will meet with Chinese officials in Beijing.

The inevitable outcome: More pressure on the Chinese to jack up the value of the yuan and more big declines in the U.S. dollar -- not only in China but in all of East Asia.

Will the dollar suffer a collapse of the same devastating magnitude as the currencies of Argentina, Brazil and others? Not likely.

But it doesn't have to. Even a less severe dollar decline -- similar to the early 1990s West European crisis or late 1990s East Asian crisis -- would be earth-shaking.

I hope it doesn't happen. But I expect it will.

When it does, it will be both convulsive and pervasive. It will be enough to turn investment portfolios upside down and inside out. And it could drive our favorite investment vehicles through the roof.

Five Profit Bonanzas
During a Dollar Decline

There are at least six vehicles I think you should consider:

First, this gold bullion ETF (GLD) signaled higher prices last month when it broke free from a seven-month downtrend.

And last week, it paused temporarily, giving you what looks like a good entry point.

Second, consider oil-related investments. Crude oil has just begun to rise, but oil stocks have surged and should continue to do so.

Third, we like ETFs tied to fast-growing countries like China. This China ETF, for example, has greatly outperformed the Dow and should continue to do so.

Fourth, consider targeting individual Asian stocks that have the potential to even outperform the booming Asian indexes. Tony is issuing a trading alert on his #1 and #2 favorites today, while giving his subscribers a heads up on three others.

(Editor's note: For more details, call 800-285-7264, or click here for Tony's latest Money and Markets article. The deadline for new subscribers is 12 noon today, Eastern Time.)

Fifth, if you're looking for a nice, direct play against the dollar, investing in foreign currencies is now more accessible than ever. There are now ETFs that track foreign currencies, including the Australian dollar, British pound, Canadian dollar, euro, Mexican peso, Swedish krona and Swiss franc.

Each of these vehicles gives you the potential for a profit bonanza as the dollar falls.

But don't go overboard. It's never prudent to invest all your money in contra-dollar assets. And it's always a good idea to keep a good chunk of your funds in the safest investments you can find, including those denominated in U.S. dollars.

Good luck and God bless!

Martin

Martin Weiss, Ph.D.
Editor, Safe Money Report
support@martinweiss.com

For more information and archived issues, visit http://www.moneyandmarkets.com.

About MONEY AND MARKETS

MONEY AND MARKETS (MAM) is published by Weiss Research, Inc. and written by Martin D. Weiss along with Larry Edelson, Tony Sagami and other contributors. To avoid conflicts of interest, Weiss Research and its staff do not hold positions in companies recommended in MAM. Nor do we accept any compensation for such recommendations. The comments, graphs, forecasts, and indices published in MAM are based upon data whose accuracy is deemed reliable but not guaranteed. Performance returns cited are derived from our best estimates but must be considered hypothetical inasmuch as we do not track the actual prices investors pay or receive. Contributors include Jennifer Moran, John Burke, Beth Cain, Red Morgan, Ekaterina Evseeva, Amber Dakar, Michael Larson, Monica Lewman-Garcia, Julie Trudeau and others.