Forty years ago today, the dollar died… How gold has performed since the 'Nixon Shock'… China still buying Treasurys… Bank of America exits European credit cards… Starbucks CEO disses the government…
Editor's note: Porter Stansberry will be interviewed on Yahoo Finance tomorrow. He will debate James Altucher, a noted market bull. We'll provide you with a link to the interview when it becomes available.
Today, August 15, is the 40th anniversary of the day President Nixon ended the dollar's convertibility into gold... and the end of the Bretton Woods international monetary system. From this point forward, the U.S. dollar became a fiat currency, backed by nothing but the promise of our federal government. (You can view an original video of Nixon's announcement here.)
For the first years following World War II, Bretton Woods worked. The world was rebuilding and needed dollars to do so. As foreigners built currency reserves, they parked them interest-bearing dollars – not gold. And at the time, the U.S. owned more than half the world's official gold reserves (574 million ounces). The system was secure.
But as Germany and Japan recovered, between 1950 and 1969, the world had less need for dollars. Plus, U.S. spending on the Vietnam War and domestic programs left the world awash with greenbacks. Our counterparties, losing faith in their paper, started requesting gold. At the same time, the monetary base continued expanding – i.e. inflation grew – throughout the '60s. And at the time, the U.S. gold reserves had fallen to $10 billion, half its 1960 level. The U.S. was vulnerable to a run.
And so, 40 years ago today, we had the "Nixon Shock," as it's known. Nixon blamed the crisis on currency speculators. (Just like current governments blame short sellers for their crushing debts.)
No single economic activity was more responsible for our current debt crisis than the end of the gold standard. On August 15, 1971, U.S. dollars were convertible into gold at 35-to-1. Today, that ratio is nearly 1,800-to-1.
Similarities to 1971 abound… Only when foreigners lose faith in the U.S. dollar today, they're forced to buy still more U.S. dollars. The dollar's place as the world's reserve currency overpowers – for now, at least – last week's S&P downgrade. When the rating agency cut our debt rating to double-A-plus, Treasurys rallied. Other than gold, which also rallied, there aren't a lot of good options if you're looking for a safe haven. Since the gold market is too small for the large, sovereign buyers to pile in quickly… Treasurys have been the choice.
Why else would China, despite its vocal displeasure with the U.S. fiscal situation, still buy Treasurys? According to the latest Treasury International Capital report (TIC), China's Treasury holdings rose by $5.7 billion in June to $1.166 trillion. But there's no way investors will continue funding America's follies for these artificially low rates. Eventually, the U.S. (and Europe, for that matter) must pay market interest rates for their debt. And on that day, the charade ends.
While China is buying, others are dumping… Private foreign net purchases of long-term Treasurys fell by $18.3 billion in June, after a $16.4 billion increase in May. The record drop in Treasury purchases was $16.5 billion in June 2000. And the declines this June were concentrated in Luxembourg and the Cayman Islands, suggesting more nimble, private investors are selling.
While China and the rest of the world are doing their part to prop up the U.S. dollar, the European Central Bank (ECB) is busy bailing out Europe. The ECB announced its Securities Markets Program (SMP), aka its bailout fund, bought 22 billion euros worth of euro-nation bonds last week – above expectations of 15 billion euros. This is also the largest weekly purchase since the fund's inception more than a year ago. The previous record was 16.5 billion in the SMP's first week.
Just as the ECB is increasing its bailout efforts, major corporations are pulling out of the continent. Today, Bank of America (BOA) announced the sale of its Canadian credit card business to TD Bank for $8.6 billion. The bank is also exiting the U.K. and Irish card markets. BOA agreed to sell its Spanish card business to Apollo Capital Management on August 3. "While the credit card remains a fundamental core product for our U.S. customers, an international consumer card business under another brand is not consistent with that strategy," CEO Brian Moynihan said in a statement.
We'd guess the bank's European exit has less to do with consistent strategies, and more to do with avoiding huge losses. BOA has a combined $19 billion in credit-card loans in the U.K. and Ireland. The bank stands to lose billions of dollars on that portfolio.
Brookfield Asset Management, the Canadian asset manager with $150 billion under management, is still investing in Europe… But only if its investments have assets outside of Europe. On the company's earnings call last week, CEO Bruce Flatt said the company is "spending an enormous amount of time talking to many companies" in Europe and is "highly likely" to purchase distressed property and infrastructure. "Our first choice is to assist European corporations to restructure affairs, particularly if they have assets outside of Europe," Flatt said.
|
New 52-week highs (as of 8/12/11): None.
Two letters of thanks in today's mailbag. How have we righted you lately? Tell us here… feedback@stansberryresearch.com.
"Thanks for pounding my head with trailing stops. I finally got it going and in the last week you saved my bacon. Great advice. I should have been doing this a long time ago. A bit of work to set up but well worth the time. THANKS!" – Paid-up subscriber WJW
"Just wanted to thank you for the outstanding service and information you provide. Solid intel is worth its weight in gold, and your team brings the gold.
"I have been putting more and more of your recommendations into play over the past three months. Each time I try something 'new' and get over the anxiety of the action, I feel like I am making another evolutionary leap. It started with buying a few of your recommendations in the spring. Then, I had to execute my first stop loss sale, which was very uncomfortable as I have always been guilty of holding and praying for it to come back (GE).
"Not too long after that I sold my first covered call on CVS. That expires worthless and a winner later this week. The past two weeks I have sold three cash-covered puts (I'm still small potatoes so I can't sell anything naked yet). And this week, I plan on shorting one of the recommended short sales.
"And reading your publications has also helped push me off the sidelines in the gold-silver trade. Earlier this year, I bought gold at $1,350 and silver at $30, hoping I wasn't buying a top. But thanks to reading your publications, I noticed no one was in a buying frenzy. Everyone in the coin shop was selling.
"Such was the case this past weekend. One lady was selling silverware, and a young couple was selling their gold. I thought I had won the lottery by finding an MS66 1924 Saint Gaudens. The dealer sold it to me for $2,300 (the price of the MS65 I asked about). Not a bad deal. Only 22% margin on what's becoming a rare gem in the gold collectibles market.
"I could go on and on, but I just wanted to thank you all for the information. Definitely looking forward to continued years of PWA membership!" – Paid-up subscriber David C. Veschi
Regards,
Sean Goldsmith
Baltimore, Maryland
August 15, 2011