Temporary Safe Haven in the Dollar

 

Ted: Jay, on February 28, 2009, you wrote on your portfolio update, "As explained previously, Rogers has predicted chaos ahead in the currency markets. I infer from his interviews that he is still holding most of his US dollars. I have converted all of my foreign currencies back to dollars, with the exception of Chinese currency, which is pegged to the dollar. I may convert it to dollars but haven’t decided." How long do you intend to hold your RMB? Jay: Not long. I called Everbank on Friday and asked them to convert my renminbi deposit to US dollars. Since I have a US dollar checking account with them, I told them to put the dollars there. The transfer will actually take place March 10. Ted: Why did you do that? Jay: I took this action after listening to seven interviews with Rogers on Friday morning. (See YouTube JimRogersChannel.)  One of them contained a rather lengthy discussion on the currencies. He has sold most (if not all) of his currencies with the exception of the Yen and Renminbi. He sold his Swiss Francs a few days ago when the Swiss government bailed out UBS. He commented that it is almost impossible to know which currencies are best to hold now. He said the dollar is considered the number one safe haven AT THE MOMENT. He said he would probably hold most of his dollars for the rest of 2009 and possibly into 2010, but still plans to get out of dollars at some point. When specifically questioned about the Renminbi, he said he still holds them and might add more in the future. But his position seemed to me to be much less clear and certain. He even said the Renminbi could go down against the dollar for a time, although long term he expects it to go up.

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A currency expert (unknown to me) was part of the discussion, and Rogers questioned him at length on which currencies he recommended, adding that he was uncertain at the moment.

This was my last non-dollar cash holding, and as I have said previously, I have no business in the currency markets in today's environment. Thus, all my cash is now US dollar. My dollars are hedged by gold, silver and physical commodities, a hedge against inflation of the dollar. My tangible assets are hedged against deflation by dollars. 

Ted: So, now you have 1/3 of your portfolio in US dollars?

Jay: We are actually in an inflation of the currency, but temporarily in an artificial (forced) deflation of the currency, i.e. a dollar short squeeze driving the dollar to ever higher levels (see Letter 34). As long as the dollar remains the world's reserve currency and the safe-haven of choice, it will be a good hedge against deflation. One day, this condition should end. Velocity of the dollar will increase, and inflation will increase. When that happens, I will probably shift my allocations to reduce my dollar holdings, but I can't predict when that might occur, nor to what extent. I'm comfortable with my current allocations.

Ted: So does this mean that people with large allocations in stocks and/or commercial real estate might want to sell now if they can and just hold their proceeds in dollars?

Jay: There is just no good answer to this because of the distance the dollar short squeeze has already moved. The only thing that would approach an answer would be our recent discussion, What Should I do If I Missed the Major Allocation Shift Last March?  You could follow the plan mentioned there to the extent you have conviction and peace about it.

Ted: What about gold as a currency (see Holding Gold As Cash)? For those who do not already have 30% of their portfolio in gold and silver, do you recommend they move first to 33% in US dollars or first to 30% in gold and silver?

Jay: It depends on how far from those allocations one is. I think the best plan would be the same mentioned in the preceding answer. The single most important thing in my mind is to buy any further weakness in gold and silver. It is the great value long term. If we get a significant further drop in the price from current levels, I would add even though I am above my target allocations.

Ted: What about the Hong Kong dollar? It has been pegged to 7.8 HKD to 1 USD for many years. Since November, it's been around 7.76. Have you heard anyone talking about a change in the Hong Kong dollar link?

Jay: No, I haven't. Holding Hong Kong dollars might work out fine because of the peg. But there is an extra layer of risk, since the peg could be abandoned without notice.

Ted: What do you think will come out of the April 2nd G20 economic summit in London?

Jay: I have no idea. I am not optimistic that they will improve our current crisis.

Ted: Rogers, Maybury and some of our other experts are saying that President Obama's team is doing all the wrong things financially. When the masses begin to realize his team's policies are not helping them, do you think his popularity will be strong enough to weather the storm? Do you see him to be strong enough to be like FDR?

Jay: Obama is a total unknown to me at this time. Since stimulation with fiat money has never worked in history, I would expect his popularity to be in steady decline during his first term. Maybury has a number of good comments on Obama in his March issue which came yesterday, and which he gives permission to share with friends. He believes Obama has already blown his opportunity to re-start money velocity, and we are headed for long recession (or depression), including riots.

Jay O'Keefe is a retired investment consultant.  Ted Spaeth is an English tutor.