Economic Review XI – Urgent Dollar Warning

by | Sep 21, 2007 | Archives

This series is reviewing ideas gained at the Jyske Bank Global Economic Seminar in Copenhagen . I have added a special US dollar warning. See why below.

One of the speakers joining me at the Jyske Copenhagen course was Andrei Kozyrev, the foreign minister of the Russian Federation for Boris Yeltsin from 1990 to 1996.  After the failed Soviet coup attempt of 1991, he found himself in Yeltsin’s team of young reformers, which included Yegor Gaidar and Anatoly Chubais, and shared their Western liberal-democratic ideals. This was one of the men who helped dismantle the Soviet Union . He gave an insightful speech I really enjoyed.  

Even better…Merri and I were then invited to have dinner with Kozyrev.  

This was an incredible treat in itself…worth the entire trip….to have several hours with this man who represents so much living history.

At dinner we shared with Kozyrev one of the most memorable moments that our writing has created….one I believe most baby boomers at least, will appreciate.  We were brought up with the ever present threat of nuclear annihilation from Russian missiles and bombs.  We shared with Kozyrev how one morning after Glastnos had began, we came into our office and in our fax from a Russian in Moscow was an order for our global economic newsletter. The order was paid for with an Amex card!  At that moment we really felt that the cold war was over…that we could shed those decades of good guy – bad guy conditioning and that people of two great nations could move forward together in a positive way.

I believe he found this as heart warming as Merri and I have.  We talked about many things, why Russian bombers are flying again, will Putin remains in office and much more. He asked that most of his replies be off the record so though you may see what I learned reflected in upcoming messages, I’ll use the meal as great background information, but won’t quote much of what he directly shared.

However there are some points he did say I could share.

  •  To see what happens in Russia , simply watch the price of oil.
  •  Lukoil is a good investment.
  •  Putin will not run for reelection.
  • Gorbachev did not plan for Glastnos and Peristroyka to go as far as it did.

This last revelation I found the most fascinating of all.

My assumption had been that Gorbachev was a really smart guy who had planned the shift from communism to capitalism in Russia .  Perhaps he just opened Pandora’s Box and events spiraled out of control.

Thought on events spiraling out of control may have real and vital relevance to what is happening today. 

Yesterday the fed dropped interest rates a half point.  Equity markets shot up and may be breaking record highs.  Yet this shift could create another dollar wave that could spiral out of control.

There has been turmoil in equity markets for some time.  There has been anxiety in the market run ups for the past two years.  Each year (2006 and 2007) has been good.  Yet both were marred by sudden drops of panic that ruined many investors.

The first sudden equity black hole was March through August 2006.  This was quickly filled in, and prices once again rose even more. Results have been phenomenal.  Then equity markets dropped again violently last month.

Now these markets have recovered again.  You can see this rise, fall and powerful share resurrection in the portfolio performance of the five multi currency portfolios we have created (with Jyske Bank’s help) and track for educational purposes.

Yet this may be a last gasp party. See why below. 

This drop of interest rates at a time when inflation is beginning to soar could lead to a rapidly falling US dollar.

We can see from the chart here that the dollar has done almost nothing but drop for 40 years.  Yet much more dollar dropping could be in store.

Two weeks ago the note below was sent to readers of this site:

“It’s likely that the U.S. Dollar Index will rise in the near-term to around ‘85’ (its now 81.36). This is from some Elliott Wave type sources. I consider them rather accurate because they predicted this current rally long before it actually started. But they also say that when the rally to 85 is over, that it starts to get ugly. And if it drops below ‘80’ they said it gets REALLY ugly with the possibility that it will drop down into the 40s.

“The U.S. Dollar Index gives a general indication of the value of the U.S. Dollar’s purchasing power around the world. This started at 100 in 1973 and has gradually drifted down to 81. This index is formed by averaging the exchange rates between the U.S. Dollar and six major world currencies of 17 countries (12 countries of the Euro zone plus the five others that do the bulk of international trade with the US . In 2005 the index was 92! In other words the purchasing power of the green back has dropped but has the potential to drop much, much more. When it does the inexpensive Wal Mart stuff will be gone!”

Former Fed Chairman Alan Greenspan presents factors in his new book “The Age of Turbulence” that could also hurt the buck.

Greenspan’s book says that the low cost of living that Americans have enjoyed has been created by globalization and a flow of people into the workforce in developing countries such as China .   As this movement of workers from farms to factories, slows, prices rise. His book says that the shift “may be upon us sooner rather than later.”  Plus his book points out that in the “next few years,” inflation will build unless action is taken. He says that double digit dollar interest rates will be required to combat inflation.

Greenspan also sharply criticizes President Bush for not keeping good fiscal control and worries about U.S. primary and secondary education slipping. The book voices the biggest concern he has as well: The retirement of baby boomers and what this will do to spending from Social Security and Medicare.

I agree with Greenspan. Perhaps this is the time when the US leadership has opened the Pandora’s Box that contains events that spiral out of control…in the form of a dollar free fall. 

This would normally be a time to raise interest rates that protect the greenback and slow inflation.  Yet due to the sub prime loan crisis, the Fed dropped rates to stimulate the economy instead.

We can see the immediate reaction in the US Dollar Short Portfolio above versus the US Dollar Neutral Portfolio.

These portfolios have been running hand in hand. Now the short portfolio shot ahead by 10%.

Other factors suggest downward pressure as well.  The dollar dropped today to 1.40 per euro its lowest parity there ever.

Saudi Arabia has refused to cut interest rates in lockstep with the US Federal Reserve. This is the first time this has happened and could show that oil-rich countries are preparing to stop pegging their currency to the buck. This could set off a dollar sales stampede in the Middle East .

Hopefully I am wrong.

Jyske Bank does not agree with my concern and wrote in their latest strategic assessment.  “The latest turbulence in the financial markets has caused renewed volatility in the forex market. Things are a bit more involved with respect to

the dollar, but we nevertheless maintain our bullish view of the currency. Given our lower growth estimate for the US , an additional narrowing of the current-account deficit will point to a stronger dollar, just as a possible coming home bias among American investors may cause the international cash flows to turn with a resultant strengthening of the dollar. Thus we do not agree with the current market psychology with respect to the need for a weaker dollar. It rather seems to be a further confirmation of our bullish view, since the dollar is currently strongly oversold.  Until we see a decisive breach of the level around 133 of the EUR/USD rate, we must however, keep patient since trading in the

range of 133–142 will still dominate the market.  In terms of funding, we still recommend a defensive portfolio due to the general rise in volatility. A clear clarification of the current financial problems is required before we will

again open a more aggressive funding strategy.”

I tend to be a continual dollar bear and have been for decades. Overall this belief has served me well.  Let’s watch the greenback versus the euro. 1.42 dollars per euro is a mark of resistance. If the dollar falls below this, be prepared for a bigger tumble of Uncle Sam’s cash.

This could, however, create an even more bullish view for equities which are still at low P/E ratios and are an attractive asset class.  Falling interest rates stimulate equity investments.  History suggests that the best way to combat inflation over the long term is by owning equities and real estate.   These facts may remind investors to keep buying shares as the dollar slides.

The obvious solution is to hold multi-currency portfolios rich in non dollar equities. This could be a good formula for success. Certainly the performance of the multi-currency portfolios we have created and tracked for the past two years suggest that this is true.

Until next message, good global investing.


You can learn why this performance has taken place in a sixteen page email report about how 13 economic forces now clash to shape investments markets ahead that show the rewards and the risks.  The report also outlines the

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