Ace in the Hole
Tuesday, September 21st, 2004
By Michael Lombardi, MBA for Profit Confidential
If there is one key factor the U.S. has going for it… if there is one plan Greenspan has that is working… it’s the gradual devaluation of the U.S. dollar against other world currencies.
I’ve been writing for some time now about “Greenspan’s quiet plan” to devalue the U.S. dollar. My prediction has been right, so far, with the U.S. dollar falling against other world currencies over the past 24 months. I believe the trend will continue. And I believe it is the proverbial “ace in the hole” for Greenspan.
A cheaper U.S. dollar achieves several positive results:
– Foreign goods start becoming more expensive for Americans. Hence, Americans may start to look at buying American again.
– Foreign labor, which is currently being tapped by the large American corporation, also becomes expensive. Hopefully, this is a step in the right direction to create domestic jobs.
Now think about all the foreigners that have invested in U.S. assets. Will they sell as the U.S. dollar declines in value? Likely not.
A simple example is all the foreigners who book vacation homes along the Florida coasts. Canadians, Germans, Argentineans, and other foreigners are huge owners of vacation homes in Florida. A Canadian who bought a condo in Florida two years ago at CDN$450,000 will see that property only worth $390,000 today because of the currency exchange (assuming no increase in the value of the property). And although two million Canadians migrate to Florida each winter, this is only one example. There are major foreign corporations with substantial investments in properties, stocks, and businesses in the U.S. And a lower U.S. dollar means they will likely have to hold their assets for years or take the currency loss.
The U.S. dollar will remain under pressure for several reasons, the most well-known being its large current account deficit. The U.S. current account deficit is the U.S.’s broadest measure of its trade with the remainder of the world. And it rose to a record $166.2 billion in the second quarter.
Foreign countries have become wealthy thanks to a previously high American dollar. Countries all over the world dreamed of shipping their goods to the U.S. for consumption because they were paid in American dollars that converted into a greater amount of their own respective foreign currency.
The Canadian example is a great one, as 80% of all the goods manufactured in Canada are shipped to the U.S. market. When US$1 was equal to CDN$1.50, a Canadian manufacturer had a competitive edge (assuming constant costs) shipping to the U.S. But US$1 only equals CDN$1.29 today… and that competitive edge is disappearing fast.
The TD Bank expects the U.S. dollar to be worth only CDN$1.20 within 24 months. A dimmer forecast comes from the National Bank of Canada, which expects one U.S. dollar to be worth CDN$1.18 within 12 months.
Anyway you look at it, this is bad news for foreign manufacturers, great news for the U.S. domestic economy, and a real triumph for Greenspan, even though he will not publicly admit there’s a plan in place for the structured decline of the U.S. dollar against other world currencies.
By the way, Warren Buffett is betting billions the U.S. dollar will fall against other currencies.
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Michael bought his first stock when he was 17 years old. He quickly saw $2,000 of savings from summer jobs turn into $1,000. Determined not to lose money again on a stock, Michael started researching the market intensely, reading every book he could find on the topic and taking every course he could afford. It didn’t take long for Michael to start making money with stocks, and that led Michael to launch a newsletter on the stock market. Today, Michael only employs the top market analysts and editors. Some of our recommendations have posted gains in excess of 500%! Michael has authored and published over one thousand articles on investment and money management. Along the way to building Lombardi Publishing Corporation, now with over one million customers in 141 countries, Michael became an active investor in real estate, art, precious metals and various businesses. Readers of the daily Profit Confidential e-letter are offered the benefit of the expertise Michael has gained in these sectors. Michael believes in successful stock picking as an important wealth accumulation tool. Married with two children, Michael received his Chartered Financial Planner designation from the Financial Planners Standards Council of Canada and his MBA from the Graduate Business School, Heriot-Watt University, Edinburgh, Scotland.Follow Michael and the latest from Profit Confidential on TwitterTweet
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