The Tycoon Report

Why the decline of the dollar may get ugly…

The decline of the dollar can have some painful impacts on your portfolio in 2005. What you can do now to protect yourself now.

 DEAD IN THE WATER. THING OF THE PAST. NO LONGER RELEVANT.

You've heard the descriptions. No, I'm not talking about Colin Powell. Nor am I talking about John Snow (although it's worth noting that Andy Card, the name mentioned as Snow's replacement, isn't dreaming of a snow-white Christmas anymore).

I'm talking about the U.S. Dollar. IT'S ALIVE. Well Kind of - if you consider haveing a "pulse" being "alive." Yes, the dollar is back. A rally in Peoria this week. But many of you "regular" readers of this column know my thoughts on the dollar. In short, if the dollar keeps declining at it's breakneck pace, that could have potentially painful effects on your portfolio in 2005.

Why? Because the United States spends more money than she can afford. And to spend that money we borrow from foreign governments. The borrowing largely comes in the form of United States Treasury bonds that we issue each month. During the past several years the largest buyers of our bonds (investors lending us money), have been the leading governments in Asia. They’ve been lending us between $1.5 and $2 billion per day.

To date, the large (and rapidly growing) amount of external debt has not yet been much of a burden on our economy. So far we’ve had no problem borrowing more money and interest rates haven’t been much of a burden to this point. That’s likely to change though. Foreign governments, believing that our imbalances are too large, are beginning to purchase less and less of our bonds.

Let me explain. When we issue bonds we borrow in our own currency. Therefore, by letting the dollar drop, trillions of dollars are wiped off of the value of our lenders assets. In other words, we owe the foreign governments that lent us the money trillions of dollars less than the amount we actually borrowed. This amounts to the U.S. “defaulting” on its debt.

Not defaulting in the way you and I would default on our personal debt. Defaulting in a way that only the most powerful government in the world could. To put this in perspective, if the U.S. dollar falls by 40 percent in value this would amount to the biggest “stealth default” in world history. This is, without question, the biggest problem facing U.S. investors in 2005.

Why? Because the U.S. MUST borrow money to operate. But lenders are going to stop lending us money if the value of what we already owe them drops. Ultimately (and this is beginning to happen now), they'll start to demand higher interest rates. That (and a host of other issues) could bring on inflation pressures. Inflation is to an investor what quicksand is to a hiker.

*Inflation makes it more expensive for companies like Intel to build new plants.

*Inflation makes it harder for some companies to pass increases to their customers.

*That means profit declines, which means a decline in stock prices.

But inflation can also be a friend to certain companies. Companies that have pricing power. Companies that have brand names. We own companies like this. As a matter of fact, in our December 15th issue of the Tycoon Report, we tell you who they are. If you don't have money in the market read no further - nothing we say concerns you.

But if you do have money in the market and you've read the news about the dollars decline, there are 3 reasons you need our December report:

****You'll recieve a birds-eye view of the economic dangers facing the stock market in 2005.

***You'll recieve 5 investing rules that are essential for 2005.

***You'll receive 6 stocks we believe will have the best chance to weather the storm in 2005.

This is serious business if you have money in the market. Serious enough for you to read the report.