It's not my role to spread panic but to give investors new ideas to live and profit by.
As many of you know, "going to cash" is a term most investors once thought they understood. In times of volatility or sharp market drops, investors instinctively go to cash. In other words they sell stocks and hold dollars in interest-bearing accounts.
That once seemed like a flight to safety and quality. But as I have commented previously, the dollar has been dropping, perhaps not like a stone (due to weakness in the euro), but dropping steadily no matter how you look at it.
DXY: One-year US Dollar Performance
How much worse could it get? For starters, the situation is already worse than it appears from this chart because the DXY measures the dollar against a basket of other currencies. Many of them are European and have also experienced declines. In other words the greenback is declining relative to other falling currencies.
It could get much worse according to the People's Bank of China. As you probably know, the Chinese have huge holdings of U.S.-denominated debt instruments. China's stake in the U.S. likely amounts to more than a trillion dollars. But China is nervous about its stake in America.
A spokesman for China's central bank recently warned an economic forum that the U.S. dollar could drop sharply over the next three years. The spokesman and bank advisor, Li Daokui, says U.S. federal and state government debt have become a serious burden which could sink the dollar even further.
The bank believes the U.S. has actually dodged a bullet so far. Li says the problems associated with record high U.S. budget deficits have not been a problem so far only because global investors' attention has been temporarily distracted by the European debt crisis.
As Europe solves its problems, investor attention will turn to the U.S. As Li put it, "To tell the truth, the state of U.S. finances is not good, and it will be difficult to avoid a sharp dollar depreciation, falling U.S. Treasury prices and rising yields."
This is a voice Americans cannot afford to ignore. China has effectively become America's banker, and it is saying publicly that it is losing confidence.
I'll leave the solutions to politicians to figure out. As for investors, I want you to know that the bell has tolled again. The dollar is not necessarily a safe haven. Here's one subscriber secret I'll share: the cash portion of the China Stock Digest portfolio has been allocated to a yuan denominated ETF and it has been rising in value.
I would suggest that all readers now consider a diversified portfolio of liquid assets to mix with their dollar holdings. Rather than going to dollars, going to cash might include holdings in gold and precious metal ETFs. Also ETFs that track baskets of currencies are another liquid option to consider when going to cash. Get in touch with me at Trippon.com/grads.htm if you wish to discuss some options with me.
Whoever you call, remember it's not too late to contact a professional financial advisor to discuss safe havens that really are safe in today's global economy.
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