Hi Ron,
I introduce myself to provide some context to my views as an offshore investor. My home is in Hong Kong and my base currency is the US Dollar. I am at 8% equity, 8% bonds, 3% platinum coins, and rest in cash. My currency allocation is necessarily mostly in US Dollars, as HK Dollar is pegged to the greenback. Of the equity portion, more than half accounted for by short puts on Newmont Mining (NEM) and Stillwater Resources (SWC), rest in residual positions of AOL, SNE, CHL and the like (more for sentimental reasons).
I did better than survive the Asian Financial Crisis of 1998, the Hong Kong Red Chip Crisis of 1996, the TianAnMen Crisis of 1989, and am so far OK on the The USA Crisis of 2000. What is happening now and may get worse in the US is only new to the folks living in the US. As George Soros had said in 1998 right before the massive HK market intervention, "this time it is on the periphery, next time the center".
On the US trade deficit, it is quite simply not a sustainable trend. The longer sustained, the worse the hangover.
The US as a destination of investment money will eventually fall out of favor as the other large economies either reform, depreciate into value category, or drag the US down as these other large economies vaporize. The first two possibilities are more likely prospects, but not central to the case against the dollar.
The good times in the US has resulted in excesses. The excesses will be corrected, just as the mighty California real estate did not pass the laugh test in the 1980s and does not now. The real estate and financial assets serve as security against debt leverage of all flavors and the cure for debt leverage excess is the same each and every time.
Just for example, if we were to use NASDAQ index in 1989 at 500 (plus or minus a few points) as starting point, and apply a long term rate of return of say, 15%, then a nasty correction can take the NASDAQ to 2300. If we use 10% as the long term return rate, then the correction of NASDAQ can take us to 1400. We know by experience of others that the markets always reach for extremes, in due time. Should any of the above two cases materialize, all financial institutions the world over will suffer, the faith in all currencies will drop, regardless of national pedigree, more so for previously highly valued ones. Problem is that the currencies can not all depreciate against each other, but must depreciate against a standard. The recent decision by the oil producing nations to accept the Euro as payment for some oil is a start of a trend. The standard is passed around every so many years, from gold to pound to gold to Yen to Dollar, and maybe onward again to Oil or some other standard. The Dollar's reign has been, so far, quite short in the context of previous trading currencies.
When offshore folks hold US Dollars, we are explicitly saying (a) the opportunities in the US for gain are better and more plentiful, (b) the US government is more trustworthy than the alternative, (c) inflation is under control in the US. These statements can not always be true and has not always been true. When sentiments change, the money will leave the US as it had left Thailand. There is no ordained magic to the dollar (just a piece of paper accepted as money in many places) just as there is no ordained magic to Dell (just a box) or any other objects thought of as ordained at one time or another (i.e. Cisco is just another box).
Right now, the two presidential contenders do not inspire confidence overseas, especially as they do not even inspire confidence at home. The recent moves by US Congress to politicize the US capital market regulations as an arm of foreign policy is also not wise for maintaining the Dollar value. These esoteric issues most likely will escape the notice of the everymen in Florida, but not the typical offshore investor.
On gold, I am not a gold bug, and I do not believe in a return to the gold standard. Gold is not money. However, gold is a store of value. I do not know the value of gold, but I do know by observation that the selling of hoards of gold had saved many families in Asia during the past few years. I think platinum is a better store of value. An oil field may be better still.
Thought experiment ... if we have been selected to travel by time machine to randomly selected times and locations in the past and future, and are given a choice of cash and credit cards, what currency will we take along with us? Now, for further thoughtful fun, let's limit our time machine's cruising range to plus 25-50 years only.
Uncertainty, not the hope for gain, but the despair of impending loss, will drive people in and outside of the US to the metals, to farm land, and to Philippine private islands, or to some other store of value. The US Dollar, facing a population so firmly believing in a surplus and so intent on electing politicians to spend the surplus, simply does not offer comfort to folks with a choice. Depending on the failings of the Japanese and Europeans to maintain the purchasing value of the Dollar is not wise for the offshore investor, especially as US assets starts to go down, threatening to drag down the more leveraged participants, starting with Lucent, Cisco, and possibly ending with Citicorp, once again.
The Japanese debt you spoke of are government debt, and government debt are gotten rid off the same way every time. The unleverged Japanese everymen can retire either by exporting themselves to sunny places or importing labour, or export capital to where they are most welcomed by way of returns on capital, but nothing says they have to export capital to the US until such time the babyboomers in the US decides to retire on Japanese money. The Japanese will have to do what they have to do, or vaporize, but their options do not include supporting the purchasing value of the Dollar.
The quote "History does not repeat itself, but it rhymes" should give pause to our retirement planning with assumptions anchored on recent experiences. We are now entering a period of outlying events. |
