The Dines Letter (TDL) offers regular features - the following excerpt is one such feature from a recent letter. For our current thinking and our other features, please see our latest issue.
IS IT THE CANADIAN DOLLAR'S TURN TO CRASH?
A Simple Explanation of "The Coming Currency Crisis" Worldwide
It is remarkable that the decline in the Canadian dollar had until only recently escaped the notice of the world's press, nonetheless it has dropped a dismaying 8.0% since March 27th, and the currencies of other leading natural-resource countries have plunged even more deeply. The accompanying chart of the currencies of five natural-resource countries show that Canada alone has yet to really break down as seriously as have the others, such as the South African rand, but the fact that it is in a Downtrend should be a cause for concern to Americans also as its largest trading partner and a crash in the Canadian dollar could produce serious economic and political repercussions in the US.
Canadian economists have been surprised by the recent slowdown in their Gross Domestic Product, a decline in shipments of manufactured goods, and the number of jobs having declined in June for two consecutive months. The Asian currency crisis is already affecting Canada, having ravaged its west-coast timber industry, but the demise of the Canadian currency has been slowed by their ability to export into the still-bullish United States, and the lower the Canadian dollar goes the more exports will flood into America. A similar factor is at work in Mexico, which has been able to export into the US as the peso has declined. No such luxury has been available to Asian countries because Japan is sinking into a deepening recession, for example. The inescapable fact is that the Canadian dollar and Mexican peso are in Downtrends, indicating that the currency crisis will flare up in North America, which might undermine the US dollar itself. The Dines Letter (TDL) therefore predicts that Governor Gordon Thiessen of the Bank of Canada will raise interest rates to buoy the Canadian dollar, which a recessionary Canada needs like a moose needs a hat rack. Not in the press yet, we predict that Mexican interest rates are likewise headed higher, so Mexican TDLrs are advised to act immediately. The reason that these currencies remain in Downtrends rests on the fact that the international currency crisis is not understood for what it is.
Canadian Prime Minister Jean Chrétien has been mistakenly predicting since January that the Canadian dollar's slide would not last, and blamed "currency speculators in red suspenders" for having caused the declines in the exchange rate. US Treasury Secretary Robert Rubin, a former currency trader, says he doesn't blame speculators for the Asian financial crisis, but did blame corporations that needed hard currency to cover foreign-exchange obligations. Indonesian government officials blamed their crisis on a "conspiracy." The blaming goes on and on, and nobody seems to comprehend that the spreading currency crisis is simply the printing of too much paper money. It is thus an interesting exercise to wonder why this situation should be, and how it might be cured.
The dismaying truth is that governments worldwide are very deliberately and knowingly printing too much paper money because they unabashedly want their currencies to decline in world marketplaces in order to give their exporters an advantage over those in other countries. In TDL's view, this is nothing less than an updated, sophisticated version of the infamous Smoot-Hawley Act of 1930 that aggravated The First Great Depression, when it sought to block imports and boost exports. Further back, it is like Voltaire's absurd village that thought to support itself with each household taking in its neighbor's laundry. Deliberate devaluation of a country's currency is a fool's game that has always ended in disaster, as Indonesia has learned to its sorrow, and many others will also unless something is done urgently. All TDL can do is to continue sounding the alarm.
America is rich now, times are booming, and is not so upset when nations devalue their currencies against the US dollar, although it is quietly strangling US exporters who find it increasingly difficult to compete with countries sporting ever-cheaper currencies. American trade deficits will soar. Besides, currencies are such a tedious and boring topic, the dollars in US pockets seem stable enough, and in this summer of glorious sunshine life is a beach.
But tectonic forces are at work that very seriously threaten the world's economic stability, as it mindlessly repeats the errors of the 1920s. Every country in the world is devaluing its currency against the US dollar, the English pound, and the Chinese renminbi. President Clinton panders to Chinese pride by describing its refusal to devalue having made it a "island of stability" in the region, but China's exports are plunging as their neighbors continue to devalue, and the question is how long China will tolerate their exports disappearing before they too yield to devaluation. Optimists insist that China has "ample reserves with which to defend its currency," but few grasp that much of such reserves are in a plunging yen. And what happens when the US dollar itself gets taken out? And when will China at last turn to gold? Until then, one of our predictions is that not only must the Chinese currency fail, but it is only a matter of time before the English pound and US dollar go the way of all paper currencies. Down.
It is not easy for booming America to think how the world looks to an Indonesian, for example, amidst crashes in stocks, bonds, currencies, businesses and real estate, but who sees that anything imported has gone through the roof in terms of local currencies. Thus medicines imported from America into Indonesia, or raw materials such as copper have gone way up in local currencies -- which is difficult for Americans to realize because in US dollars medicines are relatively stable while copper has dropped. Accordingly, the Asian currency crash has also been a source of the decline in raw-materials prices (such as aluminum, petroleum, and even precious metals) not only from a reduction in poverty-stricken Asian demand, but because in their local currencies hard assets have gone through the roof.
Another aspect of this crisis is that frightened capital in Asia has fled to what they perceive as safety into the US dollar, bonds and utilities, which is why those American investment areas have been so strong. Wealthy Asians have purchased our liquid blue-chips, especially names with which they are familiar, such as Coca-Cola, Disney, McDonalds, General Electric and other comparably high-quality stocks, which explains why those stocks have risen so distantly above what traditional Security Analysis would have normally dictated. Your editor's third and final business book Mass Psychology carefully delineated the elements of Mass Fear and Mass Contagion (which recently has been adopted as the current buzzword "Asian Contagion") that has in fact been driving America's bull market with scant regard to traditional value analysis, and why so many otherwise outstanding market observers have missed this bull market entirely as it moved to the dictates of Mass Psychology rather than traditional Graham & Dodd, and why it is therefore destined to go much higher in what I have been calling in recent years "The Mother of All Bull Markets." But our prediction has long been that it would end in "The Father of All Bear Markets" because of a currency crisis, so we wonder whether or not this is 'it.'
So far, governments have been reduced to a single remedy, raising interest rates far above even mafia-high levels, an immoral bribe to innocents to hold depreciating paper currencies. We have been bitterly against the idea of raising interest rates in the midst of these crises, because the last thing Asians need at such a dire moment is having their credit-card debt or corporate debt balloon to unpayable levels; interest rates at 15% mean that such debt doubles every fifth year, and Russia recently raised its interest rates to 150%. Canada's central bank will soon likewise resort to the failed policy of raising interest rates, leading to a brief raly by the Canadian dollar. This cannot possibly be the correct remedy, which is why the International Monetary Fund has yet to achieve a single success in its attempt to cure the Asian currency crisis. What then is the cure that TDL recommends?
The reason TDL was the only financial newsletter in the world to have specifically predicted a "currency crisis that would begin in Asia" over two years ago on television, radio, in the press and in this newsletter was because we recognized the significance of Asian governments' printing 20% more paper money each year, which made it a literal impossibility for their currencies to have maintained their value. By the simple and inexorable law of supply and demand of paper. It is thus remarkable that Asia's currency crashes have been blamed on virtually everything else. Clearly, if the true cause is for the first time finally understood as an excess printing of paper money, then there can be no doubt by any sane and reasonable human being on earth that the only solution that could conceivably work must be one that limits the creation of that paper money. One possible solution would be voluntary restraint of printing more, like Nancy Reagan's unsuccessful "Just say no to drugs." Or, it might be a currency board linking the creation of any nation's money to the amount of US dollars they have in reserves, which is certainly better than anything Asians have going now, although the problem there is that the US currency itself is being printed at a rate of perhaps 10% annually.
Few things upset people more these days than the idea of linking paper money to gold, immediately relegating any such suggestion to the "kook" category, yet currencies worldwide keep collapsing. In June it was scarcely noticed that the United States rushed to buy South African rands in order to prevent an all-out crash, and we are apparently the only member of the press in the world wondering when bureaucrats were given the right to speculate with tax money in the currencies futures markets, an area in which government employees tend to be inexperienced. Well, actually, to be blunt, suckers.
Indeed, it is precisely central bankers (including Canada's) having ostentatiously and obstreperously flaunted the sale of the gold backing behind their currencies that was a direct cause of current currency implosions, because the function of gold is specifically the inhibition of printing too much paper money. This is undeniably an extremely unpopular position, and even if we are virtually alone in the world iterating it, that is where the truth resides; sooner or later, whether before a crash or after it, it is a position that will have to be confronted rather than brushed off as beneath consideration by the Washington Economic Establishment (WEE) as beneath its consideration.
The Genoa Convention of 1922 is almost never discussed in history books, but as outlined in your editor's second book The Invisible Crash, that was when the world went off the gold standard to an Orwellian "gold-exchange standard" that created enough money to have paid for World War I, and paved the way for the unlimited printing of paper money that flushed into the stock and real-estate markets before having ended in the 1929 Crash -- its true cause. Today, surplus paper money is flooding into the US and Canadian stock and real-estate markets, and once again we are headed for what we will call "The Father of All Bear Markets" unless the steps laid out in the Mass Psychology book are followed beginning immediately.
For example, the first thing that needs to be done is getting honest about "inflation," misused as a synonym by everybody as meaning "higher prices." In fact, the strict truth is that the dictionary defines it as an increase in the money supply. Inflation is usually followed by higher prices, but not always, such as during wartime price controls, or when there is excess competition. Let's say the United States is creating 10% more money each year, then in truthful terms inflation is running at 10% annually. Inflation's resulting higher prices will show up where there is no suppressing competition, such as by the US Post Office monopoly, or soaring rents in New York, San Francisco and elsewhere, where monthly rentals for a one-bedroom apartment are going as high as $5,000 to $20,000 a month. On the other hand, Asians desperate for non-devalued currencies to pay off their ballooned debts now sell computer products at any price, even below cost, which results in declining prices for personal computers and a boon to companies such as Dell. Government officials see computer prices plunging and erroneously worry about "deflation." TDL's contrary prediction is that not only will inflation burst out at the 10% or higher level, but that dreaded hyperinflation is about to erupt in Asia, probably to begin with Indonesia, and that prediction is based on the fact that they are creating money at a rate of over 50% per annum. It is remarkable that not one other publication in the world has printed any of the numbers concerning money supply of Asian nations.
The Dines Letter has been bearish on Japan since 1989, looking for a collapse in its banking system, and since 1993 in the Chinese banking system. However, now TDL predicts crashes in the Canadian and Mexican currencies, and we find it difficult to believe that the US dollar could withstand plunges in its only two immediate neighbors and among its largest trading partners. It would take a Mass Psychological (probably Mass Fear) event to trigger a Major bear market, but once the US dollar goes down it is difficult to conjecture what could buoy the world's house of paper money.
TDL's specific and unhedged prediction is, unless currencies are linked to gold again, that American stock markets will continue to soar as terrified foreign capital pours into the refuge of Wall Street, spearheaded by Internet stocks that for the last few years we have been describing as "the greatest invention since the wheel, that will redefine every business on earth," but that it will all end in an historic currency crash and an historic bull market for gold when central bankers rush to repurchase precious metals in the final "flight to safety." What we call, "The Coming Gold Crisis," about which we have actually written little, so far. That is why our model portfolio is loaded with Internet stocks, for example, America Online recommended at 22-1/4 on 7 April 97 (up over 500%) and Amazon.com recommended at 28 on 9 Feb 98 (up around 400%). We recommend immediate purchase of a "spread" of our favored Internet stock, balanced by a 'core position' in the precious metals as a hedge against a US-dollar monetary upheaval.
Mr Dines has been the editor of The Dines Letter since 1960, and currently writes it from Belvedere, California, a suburb of San Francisco. To order your "one-year Fair Trial" subscription call 1-800-84-LUCKY or e-mail email@example.com
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19 August 1998