What the Demise of the Dollar Means for These Popular Investments

by Michael Lombardi, CFP, MBA

Okay, so I’ve been writing in the PROFIT CONFIDENTIAL for two years now that the U.S. dollar would start a free fall against other world currencies. My thought pattern was simple: Too much debt eventually leads to a weak currency for any government.

The U.S. federal deficit for this year is now estimated to be $1.84 trillion. The government’s fiscal year ends September 30, 2009. And by the time that year is over, the U.S. will have issued a record $3.25 trillion in debt instruments to finance itself. These are all staggering numbers putting pressure on the U.S. dollar.

So, the demise of our dollar, while not headline news in the media yet, is well underway. The euro is now at its highest level against the U.S. dollar in 2009. The pound is at this highest point against the U.S. dollar since November 2008. And the Canadian dollar is on rocket fuel.

Standard & Poor’s said late last week that it may need to cut the credit rating of Britain because its debt level is too high. Will the debt rating of the U.S. not also be eventually downgraded?

Here are the effects the demise of the dollar will have on two very popular investments:

Bonds will continue to decline in value, because interest rates will go up. To attract foreigners to our debt instruments (which finance us), the U.S. will eventually need to raise interest rates to make our bonds attractive to foreigners. Any investments you own that are interest-rate sensitive will be affected.

Gold bullion will continue to rise in price. Gold is already up $75.00 an ounce this year, or 8.4%. The more pressure there is on the U.S. dollar to decline against other world currencies, the higher gold bullion goes. Quality gold-producing stocks continue to be where the money-making action will be for investors in the months ahead.

Michael’s Personal Notes:

A news article I read this weekend reported that a Canadian provincial government was planning to indirectly help preserve the pensions of General Motors workers. I’m adamantly against
government loans to cover pension shortfalls. There are hundreds of companies that have closed their doors and their pensioners received nothing. I don’t believe it is fair to pick only one (or two companies) for the government to help with their pensioners, while others suffer. The help these mismanaged auto-makers are getting from governments is too politically motivated for me.

Where the Market Stands:

All major market indices have turn positive for 2009, except the Dow Jones Industrial Average, which continues to toy with the concept. The magic number for the Dow Jones to beat is 8,776.39. And every time the Dow gets close to that number, it backs off. Maybe too many analysts are turning bullish and the Dow is becoming contrarian. Maybe there is no steam left. Or maybe the market senses the longer term repercussions of a falling U.S. dollar. I still believe that the market has legs and that the bear market rally is not over. The Dow Jones in presently down six percent for the year.

What He Said:

“I personally expect the next couple of years to be terrible for U.S. housing sales, foreclosures and the construction market. These events will dampen the U.S economic picture significantly in the months ahead, leading to the recession I am predicting for the U.S. economy later this year.” Michael Lombardi in PROFIT CONFIDENTIAL, August 23, 2007. Michael was one of the first to predict a U.S. recession, long before Wall Street analysts and economists even thought it a possibility.