I believe the time is rapidly approaching when the foreign powers, who truly possess the “weapons of mass destruction” are about to unleash their, as of yet, unknown fury on our country in a manner that will leave us searching for an enemy that we created and cannot destroy. These weapons of mass destruction are not the traditional weapons of mass destruction that we have been so accustomed to hearing about in the Bush era. No, these weapons of mass destruction are worse and they leave us in a wide open position that is almost indefensible. I am not talking about bombs, I am talking about the frivolous printing of paper that our country has been so enamored with for the past decades. The reckless spending sprees of the past are about to come back to haunt America in a way, whose outcomes, are impossible to predict at this point in time.

How many of you have ever taken the time to really think about the word “worthless?” We all use it many times throughout the course of the day; mostly when we talk about a brother-in-law or a son-in-law. Seriously though, this word usually starts with a different spelling “worth less.” Get my point! Now think of the once almighty dollar; do you see how “worth less” can turn into “worthless?”

For months our dollar has shown increasing signs of weakness. Wanda and I took a cruise last February and I was amazed at the knowledge of our head waiter. The crew of the ship was paid in dollars, something that they had no problem with in the past; all that has changed as he told me of the need to convert those dollars into an asset that has not fallen 30% in value over the last year. I was quite stunned to see how an employee on a cruise ship was fully aware of the need to get out of dollars as quickly as he could so as not to have a cut in pay. This is a perfect example of the words “worth less.” The definition of the word ”worthless” will be perfectly clear when the time arrives that the crew will not accept dollars as payment for their labor. This is a very small glimpse of the future and I believe it is a glimpse of a future that very few analysts can see at this point in time.

Most analysts seem to believe that if the economy begins to slide into the tank again, that the “boyz” will just lower the interest rates and the game will be the same as in the past. I think that this pattern of investing and borrowing will be very destructive to the holdings of investors looking for yield and corporations looking for the least inexpensive form of debt financing available to them. The lowering of interest rates is a game that the U.S. has been playing for several years without being able to create a “magical recovery.” These intelligent leaders just don’t seem to understand that this is not the problem and lowering interest rates is definitely not the solution to the perceived problems in the economy. It is impossible to sustain a long lasting recovery, if your recovery is based on recovering to a bubble and this is the point that Greenspan and company will not address. These gentlemen are trying to recover to a period in time when the growth from the creation of the internet and the growth from corporations spending billions to protect themselves from the possible devastation of Y2K was the major stimulus for growth in the economy at that period of time. The “boyz” have never recognized that this growth was not normal and after January 1, 2000 there was absolutely no reason for a corporation to update their computer systems for fear of Y2K, as the risk associated with Y2K no longer existed.

Corporations and consumers will update their computer systems as age and obsolescence sets in, making it necessary to update their computers. If these people would have recognized this, then I believe they would have understood that the weakness and ensuing recession was a natural and necessary correction of business and life after such a prosperous period of time. The problem was that Greenspan chose not to address “irrational exuberance” and instead changed teams and chose to promote the absolute worst thing for the economy; the enhancement of debt and the financial markets. I believe the economy should have been allowed to fall to what would have been its normal level; cleaning the excesses of the past on the way to true normalcy.

I believe that mammoth mistakes have been made and are currently being made with tremendous amounts of money in today’s markets. The pain and loss from these mistakes will be felt for decades. I find it impossible to comprehend how an investor or a foreign country can purchase a 10 year U.S. Government Bond with a 4% rate of return. Anyone can figure out that rising oil prices and very heavily increased government spending can only make for a totally opposite scenario down the road; and I believe down the road may be around the next turn. Rising oil prices and increased government spending can only result in much higher levels of debt and that can only equate into higher interest rates. As foreign owners of the dollar realize that the necessity to support the dollar is not worth the loss associated with a perpetually declining dollar, then I feel they will adopt a new attitude and that attitude will make the dollar “expendable.”

Currently our dollar is “worth less” than it used to be; the next turn will put it on a road to becoming “worthless.” This is a very critical point in time; investors need to understand that this is a major event that will shape their lives for years to come.

Japan, Russia, China and the Opec Countries have amassed Hundreds of billions of dollars that will and are becoming “expendable” in the new investment world that is beginning to take shape. The need for these countries to continue to acquire dollars has changed with China stepping into the 21^st century. China’s most pressing problem facing them will be the solvency of their financial system when things fall apart in the United States. Can they survive? In my opinion, they will survive if they keep the Chinese people from having easy access to credit cards and abusing the credit system. If they can maintain their financial system I believe that a true behemoth with an insatiable need for natural resources has been awakened that will create a demand for the world’s dwindling supply of natural resources that has yet to be defined. This worldwide competition for the dwindling supply of natural resources will eventually turn very ugly as the price of these natural resources soar and the U.S. is then thrown into a position to compete for the supply of those dwindling natural resources. The U.S. citizen has never been in a position where he has had to stand in line and wait for his turn to receive an asset, whose ownership he has always taken for granted as belonging to him. China and India’s entrance into the 21^st century will establish a whole new set of rules and I am sure the U.S. consumer will not be happy in sharing what they originally thought they owned. The gas lines of the past are nothing compared to what may happen in the future.

Now go back to “worth less” and “worthless”. With the billions of dollars that these powers have accumulated, what do you think they will do as they begin to understand that the U.S. is not the consumer of last resort? If China can keep their financial system in order, I believe that China will replace the U.S. as the most favored place to do business. There are a terrific amount of questions that we do not have the answers to at this point in time. If China is able to adapt to the 21^st century then I am afraid that there are a whole lot more unpleasant surprises coming our way; surprises that resemble an addict having his fix taken away.

With the U.S. consumer now in a position where he may be at the end of the road as far as refinancing and pulling equity out of an asset that has been abused for many years; while using the proceeds to spend on luxury items that he will no longer be able to afford. I believe that the owners of all those dollars will now come to realize that they are trying to keep the “Titanic” afloat knowing that they are fighting a losing battle. In other words they realize that they no longer need to support the dollar and that they must now focus on how to unload those “worth less” dollars in a manner to minimize their losses and maximize their future positions. I believe that the Chinese have taken the first step in showing what their future plans shall look like.

Noranda is the first victim of what should be the first of many buyouts by the Chinese seeking to guarantee their future supply of natural resources whose future availability could come into question. The Chinese have a couple hundred billion dollars; they are spending roughly $5 billion to buy the largest mining company in Canada. Just imagine the U.S. assets that can be bought out by these foreigners who own hundreds of billions of dollars. It is possible our best corporations could become foreign owned and they would still have money left over to buy anything else they fancy. Do you begin to see why ever increasing levels of debt are a really bad thing? The U.S. could become U.THEM. 

I also believe the Chinese understand the necessity of backing their currency with gold and that a future target will be gold bullion and quite possibly gold companies. I believe in the fickleness of the U.S. population; I believe that ownership of gold by that same fickle population may become the “patriotic” thing to own as we move forward in time.

We live in some dramatically changing and very exciting times and I believe that we are on the precipice of some terrific opportunities. I get real excited when I view the opportunities that we have now; but I also get dejected when I recognize the increasing cost associated with these new opportunities.

I have stated before that I believe the possibility exists that the U.S. will go into a severe recession, on a best case basis, but the possibility exists that the rest of the world may chug along with positive growth. India and China are the keys to the rest of the world and I believe that they are now in a position, as a result of outsourcing, to supply their own needs internally. All they need to guarantee this growth is a functioning financial system and access to the natural resources they currently do not have. Where do you think those “expendable” dollars will wind up? Where will that leave the U.S. in its quest to satisfy its own insatiable demand for natural resources? Seems to me our competitors are very well armed and with our weapons, excuse me I mean our “worth less” or “worthless dollars!”

I could care less about short term volatility in the price of gold and the other natural resources. My belief in the long term is the only event that I want to focus on. I view weakness as an opportunity to go back and take advantage of an opportunity I missed or did not take seriously enough the first time around; I think you should too!

My first e-mail article should go out within the week to all who have signed up. There is still time to get on board.

Mike

© 2004 Mike Hoy
Editorial Archive

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