Another Dollar Disaster, Gold Perspective, An Investment Megatrend and More!

by Addison Wiggin & Ian Mathias

  • Dollar suffers another major blow: Global central banks give greenback cold shoulder
  • Is gold really at record highs? Some surprising perspective, below
  • The single best investment of all time — 258,449% returns in one election cycle
  • Chris Mayer with another investment mega-trend: A “second Industrial Revolution” you don’t want to miss
  • "Business Bay" — Addison checks in from Abu Dhabi


  Man, the dollar just can’t catch a break!

Just a few days after the story/rumor that a consortium of nations wanted to remove the dollar from the oil trade, we hear this: Global central banks are ditching the dollar at a historic rate.

Central banks increased foreign exchange holdings by $413 billion in the second quarter (the most since 2003), say Bloomberg data. But of those new holdings, only 37% were greenbacks. Over the last 10 years, the average dollar share of new reserves has been 63%. Has the credit crisis christened a new era for FX reserves?

“Central banks are doing more than talking about reducing the concentration of USD in their reserve portfolios,” said Barclay’s Steven Englander, who wrangled this data. “They are actually acting on their statements."

Interestingly, global central banks chose the euro and yen to replace the dollar in the second quarter. The two monies accounted for all but a smidge of the remaining 63% share of new FX reserves. The euro garnered 50% of new reserves, the first time it’s ever achieved such investment.

We could think of more attractive monies… perhaps ones that aren’t part of a bitterly divided union of nations or a country that’s been in recession for most of this decade. But hey, with performances versus the dollar like this over the last six months, can you blame them?

  The dollar index is down a few more tenths of a point today, to as low as 75.7. That’s the lowest level since this time last year. The index has fallen 10.3% since April, its worst six-month stint since 1991.

  A lousy dollar is what’s really behind gold’s record rise. The spot price climbed to another all-time high this morning, $1,068 an ounce. But what about gold denominated in other currencies — like in places where gold is actually produced? The spot price is just over 252,000 South American rand per kilo, 23% below its March 2009 high. The spot is 20% off its high in Australia. And even Canada, with such an integral relationship with the U.S., has gold prices in loonies 6% below all-time highs.

In fact, according to Mineweb, gold has reached record highs in the last week in only three currencies: the dollar, Indian rupee and the Saudi riyal.

  Nevertheless, “We are looking for gold to average around $1,000 an ounce in the fourth quarter,” reads the latest research from JP Morgan, “but new highs between $1,050-1,100 look likely for early 2010.”

  30% of American shoppers plan on spending less this holiday season than last year, reports market research biz NPD Group today. What’s more, when the Xmas shopping season arrives in force, 50% of respondents said the “state of the economy” will have a “significant effect on their holiday spending.” Recall our leadoff bit in yesterday’s 5, which showed that consumer spending now accounts for a record 71% of U.S. GDP… might be a rough start to 2010.

“Consumers continue to ditch credit cards at a hefty clip,” writes Rob Parenteau, “exceeding that of the two prior steep recessions of 1973-5 and 1980-2. Since this is the highest-cost form of household debt, this reduction of consumer credit outstanding helps immensely in slimming the interest expense burden of debtor households while at the same time reducing the leverage on household balance sheets.

“There are many who are eager for banks and other creditors to open up the taps again for private credit flows. We have no disagreement in the case where sound business expansion plans need to be financed, especially for small businesses. But we see much to be gained by encouraging households to save for future expenses and by encouraging households to keep their spending growth below their income growth. After the debt distress and financial fragility revealed in this last recession, when the household sector achieved an unprecedented deficit-spending position, it is hard to understand why this is even a source of dispute, but there are many who seem convinced a return to just a lighter, somewhat diluted version of the prior growth pattern, which was clearly dependent upon serial asset and credit bubbles, is the best way forward. We are certain Dr. Richebächer would find this stance rather bizarre, but old habits and addictions don’t tend to die very easily.”

  After rallying for six days in a row, the S&P 500 is taking a breather today. The weak dollar and strong performance from energy stocks have bumped the index up to 1,079, its highest level this year. Likewise, the Dow is just below 2009 highs around 9,900. Both indexes are hovering at break-even as we write.

“The Dow at 10,000 seems almost a certainty,” writes our resource trader Alan Knuckman, “as financial stocks lead off the earnings this week with JP Morgan Chase and Goldman Sachs on the calendar. Solid numbers there can ignite another market run and get money to chase this extreme rally. Good banking profits can whitewash individual joblessness concerns in the markets.”

  “The single best investment — in terms of greatest return on invested dollars,” writes Barry Ritholtz, who spoke at our Investment Symposium this summer, “has been the lobbying efforts of the major banks and finance firms.

“They spent $114.2 million dollars in contributions toward the 2008 election, according to the nonpartisan Center for Responsive Politics. The companies that have been awarded taxpayers’ money from Congress’s bailout bill spent $77 million on lobbying and $37 million on federal campaign contributions, the center finds.

“These firms’ political activities have yielded them $295.2 billion from recapitalization, TARP and other assorted bailouts

“The return on investment: 258,449%.”

  While not as profitable as financial lobbying, oil’s been a winning trade so far this week. It’s mostly the same old story: A weak dollar and economic optimism have bumped up light sweet crude yet again, this time to a seven-week high of $74.50. We note OPEC raised its forecast for global demand for the rest of the year and 2010 as well.

  “In order to meet global electricity demand, we’ll need to build the equivalent of one large power plant every week for the next 20 years,” writes Chris Mayer, armed with your opportunity of the day. “And that says nothing for the infrastructure that goes with that — such as the miles of transmission lines.

“The big emerging markets are still in the early stages of a kind of second Industrial Revolution. There is a massive migration to the cities as workers go where the jobs are. These are ongoing and long-term trends, nearly unstoppable, akin to financial glaciers or tectonic plates shifting beneath the earth’s crust. The current economic woes only slow that process down for a time.

“Today, you have a chance to pick up the companies that will make all that goes into power generation. In a few years, some of them could be two-four times as large as they are today. In hindsight, the opportunities such a build-out creates will seem obvious.

“Look at the big emerging markets, which really drive this story. The electricity use per capita is still well below the global average for China, India and Brazil. Never mind trying to catch up with the Western countries. I’m just talking about getting to the global average. Take a look at the nearby chart ‘Lots of Room to Grow.’

“Those are the per capita numbers. We can break it down another way by looking at total consumption and growth rates. The OECD — broadly, the ‘Western’ countries — has the larger current demand, but will grow only at a rate just above 1% annually. Most of the growth in demand will come from the non-OECD countries, or emerging markets. In another 20 years, the non-OECD countries will consume more than the OECD counties.”

Geesh… yet another reason to get in on our latest newsletter: BRIC by BRIC.

  Another sign of the times: Citigroup has opened the first American retail banking office in Vietnam. The mega-bank is opening a branch in Ho Chi Minh City in hopes to capture some of the rising incomes of Vietnamese — specifically, deposit and remittance services.

Business nerds might call this a “blue ocean strategy”… only 10% of Vietnam’s 85 million inhabitants have bank accounts.

  “On our way to Abu Dhabi,” writes Addison Wiggin from his Middle Eastern excursion, “we passed by the free zone surrounding the new deep-water global trading port at Jebel Ali. Business Bay near Jebel Ali is the home to many of the bubble-era development projects, 30-story towers standing side by side, dark windowed and tenantless.

“We suspect many of these nutty projects — like the City of Arabia, which had boasted an amusement park full of life size animatronic dinosaurs as its calling card during the boom — will never find the funding to finish. More sober projects that are at or nearing completion will likely take years to find tenants. And those ‘investors’ who bet big and large on Dubai property in 2003-08 are no doubt already wishing they never had.

“But the free zone near Jebel Ali is the site of Dubai’s real potential: banking and trade. Corporate tax rates in are effectively zero. You name a multinational and Mo can point to its local subsidiary. The Dubai Mall, for example, is reported to need 10,000 shoppers a day to break even, but now sports only around 7,000. Why do the world’s most famous brand names all have shops open and spiffy already, we couldn’t help but wonder. It has to be for those fine tax rates, we couldn’t help but conclude.

“We suspect this fantastic wreck in the desert is only one scene in a long, exhilarating drama. We’re not ‘long’ Dubai in any real investment sense. Not now, anyway. But like most onlookers to the spectacle, we struggle to avert our eyes. The story promises more exciting car chases, more steamy sex scenes and political intrigue to come… and we’d be lying if we didn’t admit we’re suckers for a good story. And who knows, we may open an office of our own there.”

Addison and Chris Mayer just arrived in Mumbai… for their perspectives on Indian investment opportunities, stay tuned.

Thanks for reading,

Ian Mathias

The 5 Min. Forecast

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