Is September 30 really “D-Day for the U.S. Dollar” as Jim Rickards is Warning?

By Travis Johnson, Stock Gumshoe, August 2, 2016

Jim Rickards, an economist and lawyer who has been peddling newsletters for Agora for a couple years, has a new ad out for his Strategic Intelligence newsletter that tries, as so many have for the past five years, to lather readers up into a panic about the imminent demise of the U.S. Dollar.

And, of course, it’s a newsletter ad — so there has to be a deadline. There’s no urgency to sign up unless they tell you that this huge opportunity will only last until a specific date… and without urgency, of course, we’re free to wander off and think about other things. Just like car salesmen frantically try to get you not to you leave the dealership by throwing their “best deal” at you and saying the car you like may be gone tomorrow, newsletter pitchmen are panicked that you might click away from their ad without buying. The customer who waits to think things over is much less likely to buy.

And the deadline this time is September 30 — and Rickards makes it seem even more imminent and “insider-y” by putting a time on it, too:

“This time, and on top of every other pressure our cash already has to face, there’s an exact deadline on the calendar . In a nutshell, it’s an event scheduled for Friday, September 30th.

“By my best estimate, what’s coming will go down around 4 pm.

“And when it does, you’ve got no idea yet how radically this could end up impacting your financial safety.

“Not only could this event gut the U.S. stock market… and cannibalize your retirement savings… but it could ultimately END what we’ve come to know as the American way of life.”

No soft-pedaling there, right? Soft pedaling doesn’t sell newsletters, strong opinions and urgency sell newsletters. Just ask Porter Stansberry about his “End of America” presentation from 2010 and 2011 that predicted riots in the street, food shortages and more as the dollar loses its “reserve currency” status.

As we’ve seen with most “doomsayer” pieces over the past 40 years (Porter’s “End of America” piece was the most aggressively marketed, but there were lots of other people saying much the same thing about the dollar’s demise not only in 2010, but for years before that… and from time to time over the past few years, too), these arguments usually have plenty of reasonable-sounding logic in them and there were and are real risks, not least because the general trend of all “fiat” currencies is to inflate the currency base and gradually erode the value of the currency over time.

But believing in the “fear” message or the specific predictive power of a particular pundit too strongly would have likely led to tremendous opportunity costs for investors who bunkered down and missed out on the big run in stocks, bonds and the US dollar over the past five years. People were already afraid of stocks after the 2008-2009 crash, they were ready to hear the message that “the end is nigh” and hide in the cellar, and that’s not so likely to have worked out well for most of them (depending, of course, on the specific pundit and spiel you’re talking about — but there were a lot of them from 2009-2012, at least, predicting Dollar “doom”… and that has continued in more recent years as well).

I tend to get too blathery when talking about the risks of believing in a compelling-sounding story coming from a reasonable-sounding “expert,” so I’ll try to be relatively brief in looking at what Rickards is actually talking about. Just remember: One of our great weaknesses (and gifts) as a species is our love of storytelling, and our tendency to build a narrative around events that makes us believe we can predict the future is ingrained and very strong.

So what is it that Rickards sees coming this time? Here’s a little more from the ad:

“… there is a new form of currency that’s about to flood the world economy. It’s not money for you. You’ll never get to withdraw it from an ATM, even if you travel overseas.

“This new form of money is strictly created for the financial elite.

“We call it ‘world money’ because of what it could ultimately do — and soon — which is replace U.S. dollar reserves around the world.

“That’s right — this is as close to the end of ‘king dollar’ as we’ve ever come.

“Now, what does that mean exactly? After all, what do you care if the people in Asia, Europe or the Middle East suddenly decide the dollar no longer gets #1 status around the world? ….

“Losing our #1 status means giving up a whole slew of benefits you never knew you had….”

He goes through some things that he thinks will happen “when central banks empty their vaults to make room for ‘world money'” … he notes that it “could push world stock markets off a cliff,” “gut your savings account,” “hike up prices you pay for everything” and “send U.S. tax rates soaring as D.C. scrambles for another source of cash.”

So that sounds pretty apocalyptic… but then, more from Rickards:

“Is this the monetary apocalypse? Not exactly.

“In fact, it’s not even the first time we’ve had a currency implosion like the one I’m warning you about now. It’s happened three times just in the last century — in 1914, 1939 and 1971.

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“What I am telling you though is that you will want to take steps to get ready.

“In case you still doubt the accuracy of this September 30th date… or what’s about to replace the dollar… I’ve even got some smoking-gun proof.

“It’s an actual 42-page blueprint… buried deep on the website of the world’s most powerful financial institution. This document lays out exactly how “world money” works.

“Inside the document, it says…

“If there were political willingness to do so, these [“world money”] securities could constitute an embryo of global currency.”

Translation?

“The financial elites are saying this could be the “money” that replaces the dollar in central bank vaults the world over.”

And the panic sets in:

“If you’ve got even a nickel in dollar-denominated wealth, you need to pay attention.

“Because, make no mistake, the day ‘world money’ fills that role… the value of the dollars in your bank account will plunge in value, virtually overnight.”

So what’s he talking about? As best I can tell this is, once again, a hullabaloo about the fact that the IMF is going to change the makeup of its special drawing rights (SDR) calculation for reserve currencies on October 1.

The move is well-known and well-telegraphed, and it’s really about China more than it is about the US dollar (unless, of course, you’re reading between the lines and predicting that this is a first step in the IMF taking over global currencies — which is a conspiracy theory line of thinking. Conspiracy theories are not necessarily wrong every time, but they rarely make for good investment strategies).

The SDR is a derivative reserve currency created by the IMF to try to diversify global reserve currencies, and to some degree that’s intended to lessen the reliance on the US dollar as the single reserve currency — though it’s not new. The SDR has been around since the late 1960s, and was originally based on gold and the US dollar (since major currency exchange rates were still fixed back then, under the Bretton Woods postwar system that collapsed a couple years later). Now, I’d describe the SDR as an attempt to have a global reserve currency that’s more representative of global trade flow and economic power — it exists as a currency, sort of, in that countries can exchange it and it’s occasionally used in some exchange rate calculations, but the most widespread use has been the 2009 attempts to bolster some economies whose balance sheets were in trouble, and I think the only real value of the SDR is that it can be exchanged for the currencies that make it up.

Currently, the SDR is made up of the U.S. dollar (41.9%), euro (37.4%), Japanese yen (9.4%), and pound sterling (11.3%). As of October 1, in a move that was announced last November but delayed a bit to allow more time for the Chinese Yuan to become more freely tradable, the makeup will be: U.S. dollar relatively unchanged at (41.73%), and weightings for the euro (30.93%), yen (8.33%) and pound (8.09%) fall to make room for a 10.92% slot for the Chinese currency.

Similar words of panic about the fall of the dollar were distributed by a number of pundits last year, leading up to the decision to include the Chinese currency in the SDR basket and therefore acknowledge China’s importance as a global financial player, and the fear then was also largely that the US dollar would fall because suddenly all this money would flock into “SDRs”.

Which, of course, didn’t happen. There are precious few SDRs in existence (a few hundred billion, I think — there are roughly 10 trillion US dollars in the global money supply), and as a non-economist myself it seems like more of a political, foreign aid, and bookkeeping tool than anything else (I’m sure Rickards knows a lot more about the use of the SDR than I do, but it seems quite limited to me). SDRs are made of money, and the only reason they haven’t been completely obliterated in value over the past couple years is that the US$ and Japanese Yen make up half of the SDR — the other components have been getting clobbered, even before the Brexit drop.

And if the worry is that there’s a new global currency that’s going to replace the current system, which is dominated by the dollar but also includes huge flows of cash between every major currency every day in a fairly seamless dance, I can’t help but think that ship has sailed. If there’s anything we’ve learned about global politics over the past few years, it’s that countries are now suddenly aware that giving up control of their own currency creates the potential for economic disaster. Controlling your currency, either by deflation or inflation or by actual curbs on trade or on money flow, is one of the key capabilities of any nation — and those who give it up often find (hello, Greece) that their partners (hi, Germany) have different priorities when it comes to currency values and stability.

So… could the US dollar lose its status as the preeminent “reserve currency” for the globe? Sure. That’s sort of been happening, to some gradual degree, for years — the euro (until the last year or so, at least) was starting to take a piece of that role to some degree, and central banks that are cash-rich, like China, have spent the past decade talking about diversifying their reserves.

But from what I can see, this is moving very, very slowly. Certainly no one is really dumping the dollar, because they’re all too aggressively trying to dump their own currencies to try to create local inflation and raise exports to keep their citizens happy. This has been going on for several years, central bank reserves seem to be getting a little less dollar-centric, and other currencies (mostly the Yuan) are rising in global importance… but the only major currency that has been going up in value versus other currencies is the US dollar. Old habits die hard.

Here’s a chart for the past five years — I used the currency surrogates that are easiest for small investors to trade, the CurrencyShares ETFs (Blue FXY is Yen, red FXB is Pound, green FXCH Yuan Renminbi, orange FXE Euro) and the Dollar Index (purple AMEX). You can see that the Japanese Yen has had a bit of a recovery in the past year or so, but otherwise the only trend of the past five years has been “sell everything else, buy more dollars.” (This isn’t a completely fair representation of those currencies, but it’s pretty close)
currenciesvsdollar5yr

That’s the past, of course, not the future — but it’s important to note that 2014 and 2015 saw several waves of very similar “the dollar is dying because the SDR basket is changing” arguments from newsletters and other pundits (as well as the “FT-900 shift” that was fretted about as a “dollar killer” back in 2014). They’ve all been very wrong so far, other than the fact that most of those folks have urged investment in higher-quality gold mining or gold royalty investments which have now finally gotten some traction. That doesn’t mean they’ll be wrong forever, or that their insight into trends might not be worth considering, but when they promise a change that’s going to happen on a specific date we should be very skeptical.

So what does Rickards think you should do to avoid this “disaster” that will be coming “around 4pm” on September 30?

More from the ad:

“The first shows you how to hedge your wealth against an immediate backslide in the dollar. At minimum, it’s a way to halt your savings from going to zero. At the outer reaches, there’s the potential for an extraordinary eight-to-one return.

“Then I’ll show you how to avoid another 2008-level wipeout in the stock market. My risk models exposed the last bust over two years in advance. This time, they’re signaling an even bigger fall. But that doesn’t mean you have to hang on for the ride.

“I’ll show you specific, household-name stocks that look especially toxic for the coming collapse. I can also show you how to make money even as Wall Street comes undone. In my own career, I’ve made gains on falling shares as high as 3,000%.

“Finally, I can show you how to own a stake in ‘new money’ itself, before it replaces the dollar and takes over the #1 slot as a world financial reserve. This would normally NOT be possible for most regular investors. However, I’ve found a completely original way for you to do it.”

OK, so that last one is easy — if you want to own a stake in this SDR “new money,” just buy the currencies that make up the SDR. It’s not rocket science (though it is, unfortunately, a little bit of math). I don’t even see any reason to be precise, frankly — if you round things a bit you get to 40% US dollar, 30% euro, and 10% each of Yuan, Pound and Yen. You can buy all of those either through a foreign currency-denominated bank account (probably Everbank makes this easier than most, though many big banks can provide accounts in foreign currencies and I don’t know if they’re necessarily the best), or using those same CurrencyShares ETFs in your regular brokerage account. And, frankly, if you live in the U.S, you’ve already probably got lots of dollar exposure, so you could just split your “mimic the SDR” allocation up among the others — half in euros, half split roughly evenly among the other three. Easy enough. (This is not a recommendation, of course, and I’m not doing this, I’m just trying to approximate what a “buy the SDR” decision would look like for an individual investor.)

I assume that his “potential for an extraordinary eight-to-one return” pitch is related to much of what he says in the remainder of the ad (and in his book, The New Case for Gold) is about investing in gold — that gold mining stocks have the potential to provide highly levered returns. Which is true, and in an era of competitive currency devaluation it’s logical to me that gold should do well… or, at least, should help to protect against any really dramatic loss of value in a particular currency.

The “avoid another 2008-level wipeout in the stock market” is presumably a reference to hedging — which is fairly expensive, as a general rule. You can bet against the broad market either using options (like buying put options on the S&P 500 through the SPY ETF or one of the many other broad-market ETFs), or by using inverse ETFs that use futures contracts to move up when the market they’re tracking moves down. Both will work if you’re reasonably accurate about time frame, but both also have substantial time decay if you’re wrong — which is a fancy way of saying that holding those levered bearish positions costs money, so if you don’t end up needing the hedge (because the market doesn’t go down) you will have wasted quite a bit of cash. Sort of like insurance, though compared to most kinds of insurance contracts these bets against the market are much more expensive.

The cheaper solution would just be to short the market, or to short particular stocks that you think will fall particularly hard — that doesn’t carry as much cost, other than whatever it costs you to borrow the shares that you’re selling short, but it carries a larger risk (shorted positions can theoretically post infinite losses, since a stock could go up forever) and it doesn’t provide any additional leverage like an option or a 2X or 3X inverse ETF will… so you may need to hold a big short position to make up for the risks you think you have in the rest of your portfolio.

Personally, I’m a long-term investor and a long-term optimist about the future of the stock market, so my preference during times of uncertainty (which I’ll agree we seem to find ourselves in) is to do any hedging in active investments (like buying gold miners, which can hedge against some adverse markets or currency changes but not, of course, against everything bad that could happen) and, perhaps more importantly, to be mindful of individual company risk, think in advance about whether I want to use stop losses for particular holdings, and to keep more cash than is usual in my brokerage accounts. That last one is a position I’ve been trying to adhere to most of the time for the past couple years, with more cash than is usual for me… and that extra cash has hurt performance in my portfolio, though not, of course, as much as an active bet against the market would have.

Here’s one more bit of the scary scenario laid out by Rickards:

“After September 30, bank vaults worldwide could opt to swap dollars for “world money.”

“This could send a tidal wave of cash back to the U.S.

“And you know what happens when there’s too much of anything.

“It makes everything that’s there worth less.

“Imagine paying twice what you pay now to buy a car, an iPhone, or gasoline. Companies that do business overseas could see every cost advantage vaporize. Will that bring jobs back home too?

“Don’t count on it.

“Because weaker dollars will make costs soar here too. You could see mass layoffs. Some companies will just shut their doors forever. They won’t have any other option.

“Of course that will slam the stock market.

“As global investors flee, you could see stocks crash 50%… 60%… or more.”

That “too much money makes it less valuable” argument should work, but it hasn’t really, not yet — we’ve been churning out more and more dollars by cutting interest rates and doing quantitative easing, and most other major currencies have also been churning out more and more and easing monetary conditions as well, so all currencies should be falling. And they are, in relation to asset prices — that easy money is why real estate is again going up in the US and in many other places, and it’s a big part of the reason why the stock market is going up (which is why everyone’s panicked about what happens if interest rates really start to go up, which could also begin in September… though the betting on that is decidedly mixed). And it’s probably why gold has finally been rising this year, though that rise has been widely anticipated by lots of newsletter guys for at least a couple years.

Does that mean we’ll see a crash? Or that October 1 will bring a sea change in the global economy? I really doubt it. Not that the market won’t go down — the market is pretty expensive and obviously jittery, and it wouldn’t take much in the way of bad news to cause a correction in the stock market — but I don’t think it will have a lot to do with the change in the SDR or the possible continuing transition to having less dollar-centric reserves around the