Saturday, December 13, 2014
The Weekend Edition is pulled from the daily Stansberry Digest. The Digest comes free with a subscription to any of our premium products.
The U.S. dollar is showing tremendous strength against other currencies around the world. Since June, the dollar has beaten nearly every major currency. Today, it sits at its highest level since 2010.
Part of that strength is due to the Federal Reserve recently ending quantitative easing... and the possibility that it will raise interest rates in the near future.
Plus, the U.S. economy is starting to look a little healthier, too. The recent November jobs report showed that non-farm payrolls increased to 321,000 jobs – well beyond expectations of 230,000 jobs.
The U.S. dollar index compares the dollar with a basket of other major currencies. As you can see in the chart below, the U.S. dollar index is surging higher while other currencies – like the yen and the euro – are in freefall mode...
These currencies are being devalued as central banks around the world are engaged in their own versions of the Bernanke Asset Bubble. They're printing money and keeping interest rates near 0% for the purpose of stimulating their economies.
Japan – the world's third-largest economy – is officially in recession. According to Bloomberg, Japan's economy shrank "an annualized 1.9% in the July to September period from the previous quarter." That's on top of an annualized 1.6% decline in the second quarter.
Business spending declined 0.4%, while private consumption rose a meager 0.4% from the second quarter to the third quarter. It seems that consumers are feeling the pinch from a devaluing yen and an increase in sales tax from 5% to 8% back in April.
Over in Europe, things aren't looking much better...
Ratings agency Standard & Poor's just downgraded Italy's credit rating to one level above junk. In October, German industrial production was much lower than anticipated. And European Central Bank (ECB) policymaker Ewald Nowotny recently warned of a "massive weakening" of the European currency union.
Nowotny recommended that the ECB purchase bonds from ECB member countries in an effort to stimulate the economy. France and Italy are on board with that plan. But Germany would prefer for these countries to show more fiscal responsibility... and pressure is starting to mount. French Finance Minister Michel Sapin told the Financial Times that he was concerned with "certain extreme comments in Germany."
The ECB's measures – designed to stimulate the European economy – have proven to be ineffective. It's difficult to entice investors into buying Spanish 10-year bonds at all-time lows of 1.88% or Italian 10-year bonds at 2.06%... considering neither government is exactly ideal.
So far, the ECB has only purchased around 18 billion euros' worth of bonds. Its goal is 1 trillion euros' worth. At this rate, it will take the ECB more than five years to complete its purchases. If the ECB wants to stimulate Europe's economy, it will likely be forced to buy sovereign bonds and continue easing.
That's what ECB President Mario Draghi has been pushing for... But again, Germany is against the idea.
Jens Weidman, chief of German central bank Bundesbank, said that low interest rates don't work for Germany... and "easy money" policies reduce the incentive for governments to reform.
As a result, the ECB will wait until the first quarter of 2015 to decide whether to begin easing.
On top of the recent economic struggles in Japan and Europe, neither area is even close to hitting its 2% inflation goals. The Japanese Consumer Price Index (CPI) shrunk 0.9% in October. And inflation in the European currency union was a meager 0.3% in November. As we said in the December 2 Digest...
As a result of quantitative easing in Japan and Europe, both currencies remain under pressure. The dollar-to-euro ratio sits at 0.80, its highest level in more than a year. And the dollar-to-yen ratio has skyrocketed to 118.4 – its highest level since 2007.
Before the stimulus, Japan was already the most heavily indebted nation in the world, with nearly $14 trillion in debt – or more than 230% of its gross domestic product. Now, Japan's central bank – the Bank of Japan – will purchase an additional $271 billion in Japanese government bonds... for a total of $723 billion in Japanese government bond purchases a year.
And if Prime Minister Shinzo Abe's Liberal Democratic Party wins parliamentary elections next week (as is currently projected), the yen is likely to weaken further.
So, what will protect you from this global currency experiment? Gold, for one. It's a good time to purchase some of the precious metal.
We know that deflation is temporary, and that one day, central banks will win out. The ongoing debate of inflation versus deflation is critical today. As we've explained recently, the best way you can possibly position yourself for whatever is coming down the line is to understand the issues.
Our friend and currency expert Jim Rickards wrote the best book we've read that details the big picture today. It's called The Death of Money. In it, he argues that precious metals like gold will soar higher in both inflationary and deflationary environments.
He also agreed to do us a favor... and wrote a "bonus" chapter exclusively for our subscribers. You can't get this chapter by buying it off Amazon (where it retails for nearly $20). But we believe this book is so important, we're giving it to you for free. All we ask is that you cover the minimal shipping and handling costs (less than $5). Click here to get your free copy today.
Date Range:12/4/2014 to 12/11/2014
Date Range:12/4/2014 to 12/11/2014