Investors are on their own when it comes to mega trends. A few tell-tale events may signal a coming landslide. A few voices may sound a warning but they are inevitably lost in the media chorus – a chorus that always advises you to "stay the course." Just ignore the latest tidal wave coming in your direction.
Black Swan. That's the catchy name these days for unpredictable events that trigger a landslide. But "black swans" have no power in inherently stable systems. The Japanese earthquake did not cause social collapse and economic panic because of the fundamental stability of that nation's society.
But America is busy creating ever-deeper social and economic instability. The mainstay of the economy, the greenback, has survived crises before but it may not make it next time.
Few average Americans know about the pummeling the U.S. dollar has taken, simply because they haven't been told. Newscasters endlessly rerun "pain at the pumps" stories without a mention of the real cause of higher gas prices. Not Libya. Not riots in Bahrain.
It's the dollar stupid. How tough is it to understand this graph?
U.S. Dollar Index, Year To Date
Oil, copper and most of the world's other commodities are denominated in dollars. So it's small wonder that prices are moving in exactly the opposite direction of the dollar index.
Even if Americans aren't watching the slump of the dollar, the Chinese certainly are.
China Quietly Sells Greenback
China may be the biggest holder of U.S. debt, but Beijing is not happy about its predicament.
In a little-noticed move, the Chinese recently reduced their holdings of U.S. debt instruments for the fourth month in a row. China cut its net holdings by $600 million to $1.15 trillion in February. That follows a whopping $5.4 billion of U.S. debt sales in January.
Foreign buyers are becoming much less enthusiastic about buying U.S. dollar assets. Among all foreign investors, according to Reuters, purchases of U.S. Treasury notes and bonds totaled just $30.6 billion in February. That is a very sharp plunge compared with net buying of $46.5 billion in January.
Private foreign investors are becoming even more wary. They bought only $14.7 billion worth of Treasury notes and bonds in February. That is less than half of the $35.2 billion which private investors bought the previous month.
What about the U.S. stock market?
Foreign purchases totaled a mere $6.1 billion in February. That is a stunning 61% plunge from the $15.9 billion purchased the previous month.
Is it any wonder that U.S. stock markets are under broad pressure that seems to leave no sector untouched?
China's President is calling for a new world financial order. Yes, a new world financial order. Again, the American mainstream and financial media have paid no attention.
President Hu Jintao is meeting with leaders of BRIC nations…Brazil, Russia, India and China, the world's fastest growing emerging economies. (South Africa was also invited.) None are happy with the dollar's position as a reserve currency, and they are continuing to search for a substitute.
If that happens, financing America's debt will become much more expensive.
Look Who's Talking about Default
The possibility of the U.S. defaulting on its debts has always been considered unthinkable. But now, the careless politicians who hold office in Washington are allowing the world to think about it. That's the result of the politicized battle over U.S. debt.
No, this is not some kind of doomsayer or survivalist warning.
Bill Gross of Pimco, the world's largest bond fund, has gone public on warning of "some kind of default – not an explicit one, but an implicit default." He has ordered Pimco to sell all holdings of U.S. government debt. This is a warning sign that no investor should ignore.
Japan's financial giant, Nomura, is also worried that America will undermine the dollar with more "quantitative easing." Hamish McRae of Britain's Independent quotes a Nomura spokesman as saying, "We fear [for] the credibility and status of the U.S., the U.S. dollar and U.S. Treasuries."
Coming up, watch for nervousness about the dollar to grow as the U.S. government goes to war with itself over the debt ceiling. Failure to raise the debt ceiling would cause a default by the U.S. That simply cannot be allowed to happen.
But politicians are playing brinksmanship with the full faith and credit of the U.S. Treasury. The closer politicians push the government to the brink the worse damage they will do to faith in the dollar.
They run the risk of pushing the U.S. to the brink of what Pimco calls "implicit default." There is simply no telling how widespread the damage could be.
Investors would be well advised to consider measures to protect their holdings. If the world's reserve currency totters, gold, silver and oil will be pushed to new highs.
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