The United States of Zimbabwe

Jekyll.  This guy has been one of the big hitters in town for years, and has always been known as rich and ‘in the know’.  Years ago, it was known around town that he was very wealthy, and was doing very, very well. However, the last few years haven’t been good to him.  You’ve heard rumors that he’s now got debt coming out of his ears, and many of his recent investments have gone bad.  Money he lent out he can’t collect back, and the debt he’s been packing on has caught up to him.  He’s in a cash crunch.  Jekyll comes to you because he knows you’ve got some capital to invest.  He wants to borrow some money from you, even though you suspect he has so much debt, you’ll likely never be paid back. Would you lend him money? I hope your answer is ‘absolutely not!’. Unfortunately, this scenario isn’t too much different than what is currently happening to the U.S., in the context of the global economy.  We’re watching the U.S. government take on trillions of dollars of debt, and their solution is to crank up the ‘printing presses’ and just create more money to pay the debt. Until now, the U.S. has been fortunate enough, because foreigners have gladly taken U.S. dollars in exchange for goods and services.  China has accumulated trillions of dollars of U.S. treasuries, gladly taking the money as it ensures that the U.S. remains a willing buyer of all the goods China creates. Since the U.S. has outsourced most production out of the country, the U.S. is largely a consuming and borrowing nation, while countries like China are producing and saving economies. And what we’re seeing happen in the world right now is a meeting of those two facts – and what this is going to create is significant inflation, and a decline of the U.S. dollar. For the past few months, we’ve seen a rise in the U.S. dollar, primarily because of so much deleveraging occurring around the world, and U.S. dollars being repatriated.  However, the stage is being set that in 2009, we’re likely to see significant inflation in the U.S. – hyperinflation – and we’ll watch the U.S. dollar begin it’s next leg of decline. This is a partial explanation of how commodities have crashed – since they’re priced in U.S. dollars, it’s inevitable that as the U.S. dollar increases in strength, it takes less to buy a unit of a given commodity. So, the bottom line is this – I expect in 2009 that we’ll watch the U.S. dollar erode in value, commodities will begin to form a base and prices will begin to rise again (in part, due to a declining U.S. dollar), and we’re going to watch inflation run away in the U.S.  What does this mean for you, the investor? Well it really depends on where you are.  Any assets held in U.S. dollars are going to erode in value, as compared to assets in other currencies.  To see the impact of currency, imagine that as a Canadian, I buy a house in the U.S. for $100,000US.  After my purchase, the Canadian dollar gains 10% strength over the U.S. dollar.  Even if that house could still be sold for $100,000US in the market, I’ve actually lost 10% of my money .. because when I sell and convert the dollars back to Canadian, I only get 90% of what I put in. The currency risk to investors today is one of the most significant and severe risks that I see facing us in today’s global economy.  It doesn’t matter where you are.  If you don’t factor in the effects of currency into your investing, you’re makng a big mistake. I say this in part because if you are oblivious to the currency markets, you then can’t really make a smart decision on where you should invest, or in what. There are a lot of Canadians right now jumping into the U.S. market, buying into the emotion that “prices have come down 30%” and, as some of the classified ads placed in papers here by American real estate agents say, “prices have never been this low in decades”.  (which of course is a lie, but that’s another conversation to have..) But here’s the problem for Canadian investors going into the U.S.  We are in the middle (or near the end) of a U.S. dollar rally.  That means it costs more Canadian dollars to buy each U.S. dollar.  So when you go into the U.S. to buy something, you’re paying with more Canadian dollars. If I am correct, and we see a decline in the U.S. dollar over the next few years, you’ll lose money on the currency exchange, which will offset some of the gains you made by buying the real estate at a lower price. On top of that, I do not believe that the downturn in the U.S. real estate market is over — and I think it’s far from the end right now.  It continues to get worse, and I think if we see a bottom in 2009 we’re going to be lucky. So that means in addition to the currency risk, you’re taking on the market risk in the real estate world.  No one can say for sure where things are headed, but there’s a lot more evidence that prices are headed lower, before they begin to climb again. Now at this point I’ll remind you that all real estate is local, and that there ARE some markets in the U.S. that are actually flat or going up in value right now.  But they’re the exceptions, and what do you think is going to happen with the incredible onslaught of layoffs and job losses the U.S. is now experiencing? At the root of the U.S. dollar risk is that the steps being taken by the U.S. government are horribly inflationary, and you cannot ignore this risk – particularly if you’re in the U.S. now. Where SHOULD you be investing? I believe that we have not seen the end of the commodities bull market.  I expect oil, gold and other commodities to regain strength in 2009.  I believe we’re going to see $1,500 gold in 2009, as I’ve said before.  I also think we will see triple-digit oil again before the end of 2009. I follow the wisdom and insight of people like Jim Rogers, Eric Sprott, and Peter Schiff, who all believe that markets with natural resources (such as Canada) will do well over the next several years.  What we are witnessing right now is a series of one-time, unusual impacts on the market that are disconnecting decisions from fundamentals.  However, ultimately there will be a ‘regression to the mean’ (in other words, sanity will return), and you’ll see the longer-term fundamentals begin to make their impact once again. Canada continues to lead the G7 nations, and both economically and from a financial/banking standpoint, it continues to be recognized as one of the strongest countries in the world.  My belief is that Canada is going to be among the world leaders in growth and stability in 2009.  And I don’t just talk about this – I put my money where my mouth is, because the vast majority of my assets are located in Canada. No matter where you are, and no matter what many ‘experts’ say, I believe that every investor needs to have some exposure to gold.  All of the indicators point to a major jump in gold prices over the next several months, as the world begins to recognize that holding U.S. treasuries is no longer the safe haven it once was, and the real threat of a U.S. dollar collapse begins to take hold outside of the conspiracy theory circles. I am absolutely NOT a financial planner and never give financial advice — and that includes now.  But all I can tell you is what I am doing — I’m betting against the U.S. dollar, I’m betting on Canada, I’m betting on significant inflation continuing and increasie, and I’m betting on gold as well. If you’re in the U.S., what I am saying is that it makes practical sense to get some of your net worth OUT OF U.S. dollars.  If you’re a real estate investor in the U.S., that doesn’t necessarily mean you shouldn’t be doing any investment in the U.S.  There is a LOT of money to be made in the U.S. real estate market right now, primarily by finding undervalued properties and flipping them at a profit – you can buy low enough to sell them to other investors still below market value, and make some money for yourself. If you’re already in the U.S. you’re positioned physically to take advantage of the incredible turbulence that’s occurring in the U.S. markets right now.  If you’re able to find opportunities that do not take a sizeable amount your capital, and you’re able to create money from the transactions, that’s still a very attractive thing to do — because you’re printing your own money! However, what I do believe would be prudent is that as you make some money, you begin moving some of that money into non-U.S. denominated investments, or investments that benefit from a declining U.S. dollar (such as gold). I’m not telling you to take ALL of your money and run, but it would be prudent to hedge some of your net worth into non-U.S. priced assets. And, as I’ve been saying for a long time, YOU CANNOT LISTEN TO THE MAIN STREAM MEDIA because most of them have NO idea what they’re talking about!  If you don’t believe me, watch this video below that shows some of the “experts” who laughed at Peter Schiff and some of his projections a year or two ago — all of which have come to pass, and shown Schiff as someone willing to step out and say what he believes, regardless of criticism. If this video doesn’t demonstrate to you how “sure” the experts think they are, and how TRULY wrong they can be, then there’s not much more I can do to prove the fundamental that you cannot believe what you see and read in the ‘news’.]]>