Will the greenback collapse?

I have never claimed to be an expert on currencies. Now I’m starting to wonder whether anybody is.

Recently, I spoke at the World Money Show in Orlando, a huge event that attracted more than 14,000 people this year. While I was there, I took the opportunity to listen to what some of America’s best-known financial minds had to say about economic conditions in general and the investment prospects for 2005 in particular.

One thing I quickly discovered is that the fall in the value of the U.S. dollar is just as big an issue in the States as the rise of the loonie has been in Canada – at least among those who understand what’s going on.

The second thing that became apparent is that, collectively, all these wise people don’t have a clue about what will happen next to the greenback. Opinions ranged all the way from a “don’t-worry-be-happy” mentality to “head-for-the-hills-the-sky-is-falling” predictions of looming catastrophe. No wonder conference attendees were left dazed and confused!

The value of the U.S. dollar in the coming months and years has important implications for Canadian investors, so it’s rth considering some of the views that were expressed.

The “don’t-worry-be-happy” camp
Frank Cappiello
, chairman and managing director of Montgomery Brothers, Cappiello, LLC and a panellist on Louis Rukeyser’s Wall Street. His outlook for the greenback is “neutral to positive”. He sees concerns about the U.S. deficit and national debt, the main factors cited by dollar pessimists, as being overblown.

John Dessauer, newsletter editor and high-profile TV panellist. He strongly believes the U.S. dollar will not fall much further, if at all, and that it “will be higher against the euro and the yen one year from today”. He not only dismissed the U.S. trade deficit as a major concern but almost seemed to depict it as an act of benevolence by America to the rest of the world by supporting foreign economic expansion.

Ken Fisher, portfolio strategy columnist for Forbes and CEO of Fisher Investments. Anyone who reads Forbes is familiar with Ken Fisher and he is one of the most highly-respected financial commentators in America. He says the triple-deficit problem in the U.S., which provides the main fuel for dollar-bashers, has been blown way out of proportion. “As a percentage of GDP, the debt level is exactly where it was in 1942,” he said. In short, it’s no big deal.

Next page: The sky is falling

The “sky-is-falling” team
Peter Schiff,
president, Euro Pacific Capital. “The ultimate collapse of the U.S. dollar will be one of the most significant events in our lifetime.” With those words, Schiff began a workshop presentation that must have stuck terror into the hearts of anyone who took him seriously. Comparing the greenback to the Titanic, he direly warned that “any asset you have that is denominated in U.S. dollars is going to lose value”. The only escape is to invest your money overseas in stronger currencies. It’s worth noting that overseas investing is exactly the business that Euro Pacific specializes in.

William Donoghue, well-known money manager, author, and newsletter editor. As the U.S. dollar falls, interest rates are going to rise at an ever-faster pace in an effort to provide support by attracting foreign money. That will create a vicious circle that will drive down the value of the securities that are the core of most American portfolios: government bonds, utilities bonds, and S&P 500 stocks. It happened during the 1966-83 period, he said, and it is about to happen again.

Martin Weiss, chief editor of Safe Money Report and CEO of the Weiss Group. His was by far the most dramatic and frightening scenario laid out by the dollar-disaster group. He began by describing a society in which hyperinflation took hold, the middle class was financially wiped out, politicians demanded a 10 per cent cut of every contract, and buildings collapsed because inspectors were bribed to look the other way when inferior cement was used to cut costs.

He pulled back to reveal he had seen it all growing up in Brazil and that the same fate now threatens America unless something is done fast. “If we let this go on, our entire way of life will be threatened!” His bottom line was to urge Americans to put some of their money into foreign currencies. His recommendations: the euro, the yen, the Brazilian real (he sees Brazil as having a sounder currency today than the U.S.), and commodity-driven currencies like the Australian and Canadian dollars.

What conclusions can we make?
So what are we to make out of these wildly-conflicting views? My visceral reaction is to discount the extremist opinions if only because I find it difficult to believe that the politicians in Washington are so incredibly stupid as to allow events to spin so terribly out of control. (Having said that, I must admit that I have seen politicians do some amazingly dumb things.)

Right now, the U.S. dollar is in a rally mode against the euro and the yen. Our Canadian dollar has broken down below US80c, although that is due at least in part to the decision of the Bank of Canada to hold the line on interest rates while the U.S. continues to tighten, as the Fed did again last week.

Whether the greenback rally continues beyond spring will depend in large part, I believe, on how serious President Bush is seen to be in his stated objective to reduce the deficit and begin moving back to a balanced budget, and how Congress reacts. If he is able to stay the course on this and obtain Congressional support, then the worst days of the U.S. dollar may be behind us.

But, as I said at the outset, I am not a currency expert!