High (Dollar) Anxiety

Posted On May 9, 2016 By Dave Gonigam

  • Mainstream frets for no reason about a rising dollar
  • One thing that’s certain no matter the outcome of the “Brexit” referendum
  • What’s next now that the Saudi oil minister’s been cashiered?
  • Teamsters’ pension stays intact… for now
  • Beware that bargain-priced stock!… how Obamacare hoses Americans living overseas… a complaint about “the 11-second video”… and more!

There I was yesterday, reading Marc Faber’s latest Gloom Boom & Doom Report on my iPad… when The Wall Street Journal saw fit to interrupt with an alert.

Seriously, people? Not only is that not urgent, it’s pointless.

The dead-tree edition of the paper delivered more goodness this morning…

The “nut” paragraph was this: “…traders fret that every new economic report could bring the Fed a step closer to raising rates — a move that would be expected to support to the dollar — if data come in stronger than expected. Higher rates make a currency more attractive to yield-seeking investors.”

Whoever these “traders” are, they’re not yet acquainted with the “Shanghai Accord” thesis. If they were, they’d know they have nothing to worry about.

As a quick refresher, Jim Rickards believes the International Monetary Fund brokered a secret deal with the globe’s four major monetary powers in late February during a summit of G-20 leaders in Shanghai.

It goes like this: The European Central Bank would act to strengthen the euro. The Bank of Japan would act to strengthen the yen. The Federal Reserve would act to weaken the dollar. And the People’s Bank of China wouldn’t do anything. Because the yuan is loosely pegged to the dollar, the yuan would fall without the PBOC formally devaluing — an act that caused a U.S. stock market freakouts last August and again last January.

So far, the Shanghai Accord is working like a charm. Here’s the U.S. dollar index, which measures the greenback against a basket of six developed-market currencies. The euro and yen make up 71% of the index.

Yes, there’s been a blip up so far in May. It looks a lot like the one in mid-March. It might continue a while longer.

But don’t confuse short-term movements with the longer-term trend, counsels Jim Rickards: “The Shanghai Accord has enormous explanatory power and will prevail for another year, perhaps two.”

[Confidential to paying subscribers of any Jim Rickards publication: Jim is preparing an urgent message for your eyes only. Watch your inbox this evening for an email with the subject line “Urgent: A HUGE Announcement on Gold…”]

Here’s a coming currency move unrelated to the Shanghai Accord but rather the “Brexit” referendum.

If you’re not up to speed, “Brexit” is the hideous portmanteau the media have coined for a possible British exit from the European Union. British voters will decide the matter on June 23. Prime Minister David Cameron made a splash this morning by saying a vote in favor of leaving could set the stage for a new war in Europe.

Some background from Jim Rickards: “While the U.K. has long been a member of the EU, it has never joined the separate eurozone that backs the euro. The eurozone members have a combined 10,788 tons of gold, giving them the highest gold-to-GDP ratio of any major economy in the world. As long as the U.K. is in the EU, it has an option to join the euro either on an orderly basis or an emergency basis in the event of a sterling crisis.”

Jim recently spent a week in the U.K., where he picked up some important “ground truth”…

“The bottom line is that sterling is heading for a spectacular devaluation against the U.S. dollar regardless of how the vote turns out,” he says. “The current GBP/USD cross-rate is about $1.40. It’s all downhill from here.

“If U.K. voters decide to leave the EU, sterling will be on the high wire with no net… The Bank of England doesn’t have enough gold of its own to assure confidence in sterling when the global liquidity crisis strikes, probably in the next few years. A run on sterling will result, pushing GBP/USD to the $0.80 level or lower.

“If U.K. voters decide to stay in the EU, a separate decision to join the euro is just a matter of time. This is a key truth that the ‘Stay’ campaign is not sharing with the U.K. voters. They think they can have their cake and eat it by staying in the EU and not joining the euro. They can’t.

“If the U.K. joins the euro, it is highly advantageous to have the lowest possible exchange rate. This gives the U.K. a permanent comparative advantage against trading partners such as France, Germany and Italy. A low exchange rate reduces U.K. unit labor costs and helps the export sector.

“In this scenario, a GBP/USD cross-rate of $1.00 looks like an attractive level for sterling to enter the euro.”

Conclusion: “Sterling will fall due to lost confidence (if the U.K. leaves) or cool calculation (if the U.K. stays). Either way, a sterling devaluation is in the cards.”

To the markets, where the story of the moment is gold — beating another hasty retreat from the $1,300 levels it’s flirted with twice in recent days.

At last check, the bid is down nearly $22, to $1,266. And you can’t write off the move to dollar strength; the dollar index is up only slightly, at 94.1.

Stocks, meanwhile, are quiet, the Dow down slightly at 17,170, the S&P 500 up slightly at 2,058.

Crude popped a bit overnight as it became evident the huge wildfire in western Canada will crimp production in Alberta’s oil sands region. But now it’s back in retreat, a hair below $44.

Oil traders are also pondering the firing of Saudi Arabia’s oil minister Ali al-Naimi after more than 20 years on the job.

The only certainty at this point is that Prince Mohammed — the 30-year-old power behind King Salman’s throne — is consolidating his control over the economy.

Did he blow out al-Naimi as punishment for al-Naimi’s strategy of keeping the spigots open even as the oil price fell, the better to retain market share? Hard telling. Al-Naimi’s replacement is Khaled al-Falih — who spent 30 years at the state oil company Saudi Aramco, most recently as chairman.

No matter who’s running the oil ministry, persistent low prices will continue to drain Saudi Arabia’s foreign exchange reserves — bringing ever closer the day the kingdom will double-cross the United States and devalue the riyal. Will you be positioned to profit?

A quick 5 follow-up: The day of reckoning for a quarter-million retired Teamsters has been delayed.

Last month, as we explored the theme of broken retirement promises, we noted the Treasury Department was reviewing a request by Central States Pension Fund to cut benefits for current retirees — something no pension fund has done in more than 40 years.

On Friday, Treasury said no. The agency was unconvinced the cuts would shore up the fund. It was also concerned that some retirees would see a bigger percentage cut than others — up to 50%.

The story’s not over: Central States says it might go back to the drawing board and reapply later. Otherwise, it says the fund will be unable to pay any benefits by 2025.

We know one thing: Central States won’t be the last pension fund to make such a request of the federal government.

Looking for a bargain stock? How about a left-for-dead social media name whose headquarters is worth nearly as much as the company itself?

On Dec. 16, 2011, Zynga went public. You remember Zynga, right? The maker of the Facebook game FarmVille? In which players raise virtual crops and livestock and trade them with their “friends” using “Farm Coins.”

“On this tissue-thin business model,” we wrote that day, “is built an IPO valued before today’s open at $7 billion.”

Times were good. The following year, ZNGA bought a seven-story building for its headquarters in San Francisco’s Design District.

Times change. No one plays FarmVille anymore. This morning, ZNGA is valued at about $2.2 billion. But a good $1.5 billion of that is cash. So the company itself is worth roughly $600 million. The headquarters building — which Zynga has put on the block — is assessed around $540 million.

Attractive, huh? Well, if the company can hold on.

According to Medium, where we picked up this story, “Employees at neighboring tech companies can reportedly judge when layoffs are happening by the long lines of people walking out of the Zynga office with boxes of their belongings and by the unusually large number of people at local bars at 2 p.m. on a weekday.”

Heh… Bottoms up!

“I read with interest your points about Americans leaving the U.S. behind due to the government’s regulating their foreign bank accounts,” a reader writes after Friday’s episode. “Here’s another ‘Gotcha’ from the IRS:

“My wife and her two sons are Mexican citizens and until Jan. 25 of THIS YEAR resided full time in Mexico. My wife is 30 years old, and the boys are 9 and 3. I am an American citizen and resided officially in the U.S. I claimed my wife and her two boys as exemptions on my 2015 income tax return, largely because I had approximately $100,000 in medical expenses from doctors and hospitals in Mexico in order to save her life.

“I have just been informed that I am being ‘fined’ (taxed?) an additional $4,184 because I did not purchase health insurance for the three of them last year. They neither lived in nor were citizens of the United States! I was not even aware that one could purchase Mexican health insurance. For the most part, the doctors and some of the hospitals insisted on payments in U.S. dollars (cash) before they would do anything to help my wife!

“For most routine medical care in Mexico, you go to a doctor who has an office in a pharmacy. The cost is usually about 80–100 pesos (about $4–5).

“This is the first time I have been fined for this — for the 2014 tax year, they did not require the purchase of health insurance for people who neither lived in nor were citizens of the U.S. According to my accountant, the government slipped this into the tax code last year without telling anyone.

“Now that they are here, I have health insurance for the three of them. I pay $478 per month for the insurance, but they still prefer getting their health care in Mexico (we live 45 miles from the border). I’m starting to think that maybe it would be better for all of us to move to Mexico!

“Thank you, Mr. Obama, and thank you, Obamacare!”

The 5: Just wow…

The ‘11-second video’ is not only even less racy than I was expecting. It wasn’t even 11 seconds long,” a reader complains. “Very disappointed!”

The 5: Well, if you’re looking for something truly racy, there are many other places on the Web to look, right?

But we do think the video lives up to our billing as NSFW. Really, do you want someone looking over your shoulder and seeing that clip? And some people will doubtless be more offended by it than you were. They deserve proper warning.

As for your 11-second claim… are you implying the screen controls at the bottom of the clip are skewed?

We double-checked by running a stopwatch on it — surely, the strangest use of our time preparing today’s episode of The 5 — and it came out to exactly 11 seconds.

We stand by all our findings in the video and accompanying report.

Happy Mercury Transit Day,

Dave Gonigam
The 5 Min. Forecast

P.S. Just to reinforce the point… If you’re OK with 11 seconds of sexual content in order to learn about a huge wealth secret that could be worth up to $30 billion a year — then click here right now.

WARNING: Don’t watch this at work. Or any place else in public, for that matter.

Click here for an 11-second thrill ride.


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