10.8.09
An important concept missed by many people on financial TV and in most investment discussions is what the declining dollar could do to your REAL investment returns.
For example, let’s assume that over the next 3 years, the stock market more than doubles so that the DJIA (Dow Jones) hits 20,000. At the same time, the dollar loses 50% of it’s value compared to a basket of commodities – let’s assume a basket representative to average annual use by an average person – in food, energy, clothing, manufactured goods, etc. So to illustrate:
Assumptions:
Dow Current ~ 9,500
Dow in 3 years ~ 20,000
Current – Dollar buys 1 basket of commodities
In 3 years – Dollar buys 1/2 basket of currencies.
In the above scenario, you double your portfolio but your purchasing power has fallen 50% – in effect, you are no better off even with a massive rise in the market. Therefore, it is quite possible, with the efforts of our government to spend us into oblivion and our Federal Reserve to inflate the money supply, that the value of our dollar compared to other currencies and commodities falls tremendously. In a very bad case scenario, it falls even more than the returns you make on your assets causing you to have a lower standard of living!
Marc Faber illustrates this scenario with the Mexican Bolsa (stock exchange). They actually experienced this in the 1980s and 1990s. However, some of you doubt that this could happen to America or our currency – but our political leaders and Ben Bernanke show the same hubris (or ignorance) shown by leaders of past “empires” who subsequently saw their currency value fall. And it was often caused by the same reasons – devaluation of the currency, massive debt spending, and under investment in real growth.
If you wonder why commodity prices are rising, do not believe the ignorants who ‘serve’ you in government by blaming “evil” traders and profiteers. Global demand for scarce resources will make commodity prices rise, and, our falling dollar will make those prices rise FASTER for Americans than for Australians or Canadians in my opinion due to their stronger currency position. Think about it – Canada and Australia have massive natural assets to support their currency and they EXPORT. What do we have to back our currency? Pelosi’s Dolce e Gabbana bag? We have assets but exploring and using our MASSIVE natural gas supply to offset foreign oil dependency will not happen anytime soon nor will we fully explore the massive metal resources across our country. Dogmatic (and mindless) environmental policy will prevent that.
And one final note – following up on the trend in politics to blame evil traders when oil hit $147/barrel in 2008 – notice the chart below comparing oil prices to the rate on a 10 year treasury note. Notice that right around the time that Bernanke and the Federal Reserve started cutting rates, oil prices went parabolic – understand, our MONETARY POLICY will cause you to lose MORE money than any unscrupulous commodity trader by the theft of inflation – that has happened, and will continue to happen. Protect yourself, because the rest of the world will continue to grow and prices will continue to rise…
Oil vs 10 Year Rate
Chris Grande
