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Two of 2011's Surest BetsBy
Saturday, January 15, 2011
When I talk about "The End of America," I don't mean the end of our political union (although I won't rule that out). I'm talking about the end of the U.S. dollar as the world's reserve currency.
So how will it unfold? That's what people keep asking me.
My answer is: The collapse of the global fiat money system is already underway.
Gold has gone up for 10 straight years. Gold is the counterbalance to fiat (paper) money. For 10 years in a row, investors around the world have been favoring gold. This trend is going to continue, and it will not stop until serious actions are taken to put a floor under the value of the world's major paper currencies: the euro, dollar, and yen. And that can't happen because the governments backing these three currencies are all bankrupt. The euro will die first. Just look at the numbers...
Greece, Ireland, Spain, Portugal, and Italy have all made the same mistake. They responded to the collapse of real estate prices and debts by guaranteeing the private obligations of their banks with their country's treasury. (America is doing the same, by the way.) The problem is, the debts are vastly larger than the governments can afford to repay... far larger.
So for example, when Anglo Irish Bank failed, it announced it required $35 billion. That's equal to 25% of Ireland's GDP. And that's only one of Ireland's failed banks. Ireland will never be able to afford these obligations.
As a result, Germany, France, and the other euro nations have put together a bailout plan. All of the European treasuries will act to save any member state.
Total debts owed to foreign investors in the so-called "PIIGS" countries are $2.6 trillion. The bailout package that's been assembled totals $1 trillion. That sounds pretty good... at first.
But Italy and Spain have pledged $130 billion to the bailout. Where will they get that money? Greece has pledged $12 billion. Ireland, $7 billion. Portugal, $11 billion. Only about half this money will ever be raised and almost all that can be raised will come from France and Germany. Sooner or later, the taxpayers in those countries will say "enough" and the whole thing will unravel.
It will happen suddenly. And very, very soon.
Even if you pretend Europe can raise that size of a bailout fund, that figure isn't nearly large enough to bail out either Spain or Italy. And both are likely to suffer a default if either Greece or Ireland defaults. That's why interest rates in Ireland and Greece are back to crisis levels, despite the bailout promise. That's why the euro continues to fall. And that's why shorting the euro is one of 2011's sure bets.
The collapse of the euro will cause all kinds of big problems this year and almost surely lead to a huge correction in commodities and a rise in the dollar. Does that mean the U.S. dollar's problems are just a mirage? Nope. Sooner or later, the U.S. will face a stark choice...
If we let the euro fail, there will be terrible short-term consequences. So the Fed will crank up the presses yet again. Quantitative easing 3 will be another $1 trillion effort, this time focused on buying European sovereign debt. The Fed must become the lender of last resort not only for the U.S., but for the world.
That's the last step before its eventual collapse. After that point, people will no longer flee to Treasurys when a crisis erupts. They will flee to gold.
Good investing,
Porter Stansberry
Further Reading:
Yesterday, Dan Ferris showed two important of the currency crisis... "The market is telling you tough times are here," he said. "Stick with my advice and you'll protect yourself and even profit while others lose... and wonder what the heck is going on." Get in the loop here: Signs the "End of America" Is Nearing.
Market NotesCHART OF THE WEEK: GET READY TO PAY MORE FOR FOOD! The message from our chart of the week: "Get ready to pay more for food."
As Michael Pollan reminds us in his excellent book, The Omnivore's Dilemma, the foundation of the U.S. food system is a vast annual crop of calorie-dense, nutrient-lite corn. The cows, chickens, and pigs you eat are fattened with corn. Corn syrup makes your soda taste good. It's also in all kinds of cereals, condiments, and packaged foods.
And due to one of the truly stupid government boondoggles of all time, we now burn 40% of the corn crop as motor fuel. (We stand in awe of the screw job the farm lobby pulled on the taxpayer. These guys could give Wall Street banks a run for the taxpayers' money.)
That's why it's important to note where corn prices are today. You see, for much of the past 20 years, corn has traded in the $2-$3 per bushel area. But due to recent weather trouble, historically low stockpiles, and the emergence of Asia as a big buyer of corn, prices are skyrocketing. Since June 2010, corn has shot from $3.50 to $6.42... an 83% gain in seven months. This huge move means it's party time in Iowa... and food prices are going higher.
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Stat of the week
214.7
Current reading of the U.N. Food and Agriculture Organization's Food Index. The index, which tracks wholesale food prices, is at its highest level since its creation in 1990. In The Daily Crux
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