Kuwait Breaks the Peg

The Daily Reckoning PRESENTS: There are times, like today, that any reasonably astute observer can look to the horizon and see what’s coming. A monetary crisis is headed in our direction, and the pace of its arrival is, in our view, quickening. Casey Research’s David Galland explores…


Years ago, I recollect hearing a successful currency speculator say that if you wanted to know what a government is going to do with its currency, listen to what they say they aren’t going to do… then expect the opposite.

On March 3, 2007, for instance, we had the following report out of Bloomberg:

“Saudi Arabia, the United Arab Emirates and four other Persian Gulf nations will discuss revaluing their currencies’ peg to the U.S. dollar before a proposed monetary union in the region in 2010.

“The states would only change the dollar peg simultaneously, U.A.E. Central Bank Governor Sultan Bin Nasser al-Suwaidi told reporters today. The six countries form the Gulf Cooperation Council and their central bank officials next meet in April. The other countries are Bahrain, Qatar, Oman and Kuwait.

“‘We will not act unilaterally,’ al-Suwaidi said in Dubai, U.A.E.”

On March 15, Bloomberg followed up with this…

“The dollar may also be buoyed after the six Gulf Cooperation Council members, which include Saudi Arabia and Kuwait, agreed not to revalue their currencies against the U.S. currency.

“‘We have no plans to revalue,’ Hamad Saud al-Sayari, the governor of the Saudi Arabian Monetary Agency, told reporters in Dubai today. ‘The U.S. dollar is still very important to us.'”

Apparently, someone forgot to copy the Saudis on the memo, because on March 20, Kuwait announced that it was tossing the dollar peg over the side and replacing it with a basket of currencies.

This will almost certainly lead to a domino effect in the Middle East, a move that would likely be warmly welcomed by the local citizenry there, and not so warmly welcomed by those in the U.S. government charged with maintaining the U.S. dollar hegemony.

And then there’s China…

On announcing last year that it was forming a new agency to help better manage its foreign reserves, China took pains to assure the markets that they were not doing so in order to begin unloading dollars. But then on May 18, it announced it was going to invest $3.3 billion in Blackstone, a private equity group.

Now, you can be assured that Blackstone is going to go all out to impress their deep-pocketed new partner. And it won’t impress them very much if they only buy U.S. stocks that have to then fight against the tide of a depreciating dollar.

In our view, this is just the beginning of a much larger strategy, the core of which will be trading out of U.S. treasury bills and into all manner of other investments… an international basket of stocks, natural resource deposits around the globe… pretty much anywhere and anything offers the prospect for a higher return with lower currency risk.

Or, if the currency risk is going to be taken, then the potential returns will have to offset those risks. Earning a 4.5% yield on a Treasury bond while taking a 10%, 20% or even 30% risk on the dollar doesn’t make a lot of sense to us. And, we expect, neither does it to the Chinese.

There are some very interesting implications in all of this. For instance, if the Chinese slow down their buying of Treasuries in favor of other asset classes, who is going to step up to take their place?

Of course, at the right interest rate, far higher than those on offer today, someone will. But then there’s that whole collapsing housing bubble thing.

The U.S. continues to be trapped on the horns of a dilemma, wedged squarely between a rock and a hard place. Raise interest rates to head off a devastating mass exodus from the dollar and sink the economy… or, lower interest rates to keep the economy afloat and doom the dollar.

Or, simply continue printing money like there’s no tomorrow, steadily devaluing the $6 trillion in the hands of foreigners, and hope no one will notice.

There are times, like today, that any reasonably astute observer can look to the horizon and see what’s coming. A monetary crisis is headed in our direction, and the pace of its arrival is, in our view, quickening.

Gold, and for more pep in your portfolio, gold stocks, are no longer an option but a prerogative – even for conservative investors.

Meanwhile, pay close attention to the comments of high government officials about their intentions on the dollar…


David Galland
for The Daily Reckoning
June 5, 2007

Editor’s Note: David Galland is the managing editor of BIG GOLD, a new publication from Casey Research dedicated to helping investors profit from the developing bull market in precious metals – with an easy-to-maintain portfolio of conservative mid- to large-cap gold producers and near-producers.

You can learn about BIG GOLD and its unusual 3-month money-back guarantee by clicking right here:


Free Paris! Save the Humans!

There are two types of Americans. The most common pays close attention to the news…the opinion…the sports scores…the politics. The other type has no idea what is going on in public life. The latter is far better off.

The well-informed American turns to his regular sources of misinformation this morning and discovers two very important things:

One of the brightest stars in the firmament of humanity is about to go dark…at least for 23 days. But don’t worry about that; the whole human race may be extinguished, too. Yes, everyone’s favorite socialite and heiress has landed herself in the hoosegow in Los Angeles.

And, then, the whole world is going to Hell…

As the former, we are shocked and alarmed. What kind of police state is America turning into? If you can’t drink and drive anymore…what can you do? Soon, you won’t even be able to blow smoke into your boss’s face, pinch the secretary…or take a handgun on an airplane.

Free Paris, we say. Free America!

The newspaper consumer also discovers that the whole earth is in danger. Yes, that’s right. Humans are now an endangered species. We have to fight to save the planet. From what? From rising temperatures.

Why rising temperatures are a threat to this old ball has never been fully clarified. You’d think that about as many people would prefer a little extra warmth as would loathe it. But no matter, global warming is said to cause all sorts of calamities.

“You know, there are only 12,000 penguins left,” Henry announced yesterday, after reading a report in the French press.

“Twelve thousand seems like more than enough,” we replied. “I mean…how many penguins do you need?”

“Dad, the penguins are endangered by global warming,” Henry persisted. “If we don’t do something to stop it, they might all disappear.”

“Wonder why they didn’t disappear the last time the earth hotted up,” was our comeback.

But a lot of people take global warming seriously, especially in Europe. And if you read the newspapers, even you are likely to begin worrying about it. The International Herald Tribune has a special section on the Greening of the Planet that has been running for a few days. This week’s Economist’s cover announces “Cleaning Up”, leading to a report on how business is tackling climate change. Even our own MoneyWeek magazine, in London, offers a cover story – perhaps a little more skeptically, if not more cynically – on how investors can profit from the world’s headlong rush to green.

Our energy guru, Harvard-trained geologist and soon-to-be-nonpracticing attorney Byron King, is in Alaska this week for a private tour of Prudhoe Bay, looking for innovative energy investments, for his soon-to-be released service, Energy and Scarcity Investor. Find out how you can begin receiving it for free.

Meanwhile, on the chilly banks of the North Sea in Heilgendamm, Germany, the heads of the world’s most powerful countries will meet this week. The number one item on the agenda – yes, keeping the world from going to Hell.

We are indebted this morning to Ban Ki Moon, who in case you have not been following the spectacle closely enough, is both the current secretary general of the United Nations and a man upon whom gravity seems to have no effect. Even with the weight of his office under his soft derriere, Mr. Moon threatens to spin out of orbit. Writing in the IHT, the U.N. man asserts, “The science is clear. The earth’s warming is unequivocal; we humans are its principle cause.”

How Mr. Moon knows these things with such certainty is not revealed. But he goes on…

“The time for action is now. The cost of not acting, most economists agree, will exceed the costs of acting early, probably by several orders of magnitude. The damage Hurricane Katrina inflicted on New Orleans may or may not have anything to do with global warming, but it’s a useful caution nonetheless on the financial and social perils of delay.”

Meanwhile, Germany’s Chancellor, Ms. Merkel, wants the Group of 8 to agree not to allow the world’s temperature to rise more than 2 degrees centigrade. We know that our governments can control the rate of inflation – with wide variations and occasional blow-ups. But this is the first time we’ve heard that they can control the temperature of the planet! Details to follow…we suppose.

But leave it to our favorite columnist, Thomas L. Friedman, to come up with the most asinine comment of all: “…it is inevitable that manufacturing clean, green power systems, appliances, homes and cars will be the next great global industry. It has to be, or we will not survive as a species.”

We stop there for a moment. Like a prizefighter staggered by a blow to the head, after a wallop of absurdity like that it takes a minute to recover our senses.

We’ve always admired Mr. Friedman’s ability to look into the future and then come up with ways to improve it even before it happens. The columnist then gives his list of policies designed to save us from extinction – such as having the U.S. government buy more solar and wind power, “with only US-based manufacturers able to compete for contracts.” You’d think that with the survival of the whole human race at stake, the man might permit, say, the new super-sized U.S. embassy in Baghdad to buy a little juice from a local entrepreneur…but that’s Friedman; no idea he comes up with is so idiotic that he can’t make it worse by getting into the details.

In spite of all this hot air, however, we admit that on many occasions, there may be a real problem. If we light a fire we get the benefit of the warmth; but the smoke goes up the chimney. And if enough smoke goes up the chimney, bad things could happen to other people. They could choke, cough and curse the man who lit the blaze. The honest thing to do would be to fess up and pay for the damage we’ve caused – if any.

The trouble with global warming is that we’re not sure that there really is any damage; and if there is, we’re not sure if it is possible to stop it…or even worth stopping. People light fires to warm their hands; if they are prevented from lighting a fire…the loss would be immediate (the poor man’s hands would be cold). The gain, on the other hand, may be illusory.

So many questions. So few answers. Global warming may be 90% huff and humbug, but you can be sure of one thing: there’s so much money and power at stake, people will spend a lot of time trying to get some of it.

More news:


Addison Wiggin, reporting from Charm City…

“Two independent studies were released yesterday, both predicting staggering growth in India in the coming years.

“First, American Express predicted that India’s 100,000 ‘dollar millionaires’ will grow by 12.8% a year for the next three years. That’s a whole lot of rich Indians. What’s more, McKinsey Global Institue predicts that the average Indian’s income will triple by 2025.

“Consequentially, 300 million Indians will come out of poverty and cause the middle class to grow by 1000%.  That’s over 583 million middle class Indians… almost double the entire population of the United States.”

To find out how you can get a ‘front-line’ perspective of the investment opportunities in India – and for more market insights – see today’s issue of The 5 Min. Forecast


And more thoughts…

*** With winds of 160 miles per hour and gusts of 195 miles per hour, Cyclone Gonu, which is expected to be the strongest ever recorded in the Arabian Peninsula is heading toward the oil-rich Persian Gulf off of Saudi Arabia and southern Iran.

While it is unclear whether or not the storm will hit the region’s important oil installations head-on, or lose momentum before getting to the Persian Gulf, our commodities guru, Kevin Kerr, is still a bit worried.

“Why might Gonu matter?” Kerr wrote us this morning.

“Well, that answer begins with the fact that the world production of petroleum plateauing around 85 mbbl/day, any slight blip in supply or exporting could be quite noticeable on the world markets. A sizeable portion of the world’s petroleum exports go through the Gulf of Oman.

“Particularly, Oman matters in this because it produces 743,000 bbl/day; Oman is also a net exporter, non-OPEC, whose production peaked earlier in the decade.

“Of course, this storm also has the potential to affect Iran, UAE, India, and/or Pakistan for that matter – mainly because of shipping disruptions, but there could be some real effects on infrastructure and assets depending on track and landfall. There are also refining and other production assets in Southern Iran, especially in Chah Bahar.

Accuweather reports:

“No cyclone has ever entered the Gulf of Oman. And there are no custom ‘storm surge’ models available for that area. This forecast is based on my experience and subjective analysis of the seabed slope and storm surge interaction with the sea floor. Considering the region has never experienced a hurricane, let alone a strong one it is highly unlikely the loading facilities or platforms were constructed to withstand the forces – both wave action and wind force – that they will experience. Significant damage will occur. How much long-term damage, and the volumes associated with it – can not be determined at this time.”

“Oh man, Oman,” says Kevin.

Kevin has been our expert on hurricanes and their effect on the commodities and resource markets for quite a while – sometimes reporting directly from the scene (he was in Florida when Hurricane Dennis, Katrina’s precursor, hit back in 2005). Kevin’s insights and analysis are almost always spot-on, which is why he makes frequent appearances to CNBC, CNN, FOX News and the like.

Kevin manages to keep himself very busy…between media appearances, and a MarketWatch column, he also runs a commodity options trading service, Resource Trader Alert, and co-edits, along with Byron King, Outstanding Investments. Now, for a very limited time, you can receive both of Kevin’s newsletters, Byron’s new service, which we talked about above – and all Agora Financial’s trading services and newsletters for life!

We call this lifetime package the Agora Financial Reserve, and we only open up this exclusive service to new members twice a year – and this is the last time we will offer the Reserve at this low price.

Another added benefit to the Reserve is on top of all of receiving Agora Financial’s world class investment research, Reserve members have exclusive access to very unique and small opportunities around the globe…like the AF Investment Symposium in Vancouver.

*** Back to the economy…and the markets…

The 20th century saw the first of the World Wars – I and II.

The 21st century is witnessing the first of the World Bubbles. What market is still unaffected by the current mania? What major company has not been boarded by the private equity freebooters? What asset rests quietly immune from the bubbly prices…still priced at reasonable levels?

Everywhere from Baltimore to Bombay, people yearn to get rich in the worst way – by speculating.

Like the World Wars, this bubble is far bigger than the ones of previous centuries. More people are involved. More assets…more money…more companies…more currencies…more banks…more everything! And like the World Wars, this World Bubble threatens to do far more damage than anything that came before.

The Dow hit another record high yesterday.

*** Paris Hilton is not the only one to be nabbed by the law lately. The International Court of Justice in The Hague is trying Charles Taylor for crimes against humanity. Taylor is a descendant of American slaves who was educated in Boston, and who then returned to Liberia.

You see, dear reader, not only is America no longer safe for dissolute heiresses, now the world is no longer safe for dictators either, unless they are dictators of large countries. Taylor committed an untold number of atrocities during his rampage through West Africa…and left about 300,000 dead. Hanging would be too good for him. He should be forced to watch television!

But you have to hand it to him. No man ever ran a more honest election campaign. The French paper, Liberation, reports:

“In 1997, Taylor, the former chief of the rebel group, the National Patriotic Front of Liberia, was elected president. His campaign slogan – ‘He killed my dad. He killed my mom. I’m voting for him.'”

Taylor let it be known that if he were defeated, he would set fire to the country and kill everyone in it.

*** So much hokum…so little time. We can barely keep up with it. The Americans with their preposterous War Against Terror…the Europeans with their Global Warming.

But rest assured, though we are skeptics as to both of these sordid obsessions, we will do our part. If we see a man with a suspicious-looking wooden leg, or a grandmother with a suspicious-looking bag of cookies…we will call the police. And if we see Paris Hilton, loose on the streets of Paris, France, after somehow escaping from the slammer in L.A., you can count on us, dear reader; we will do our duty.

All over the world, companies are parading their ‘green credentials’ as if they were bringing in escaped prisoners. One switches to electric delivery vehicles (as if power from power plants were less bad than power from an internal combustion engine). Another celebrates its new billion-dollar office tower, with its fancy green-conscious systems (forgetting to mention that it actually consumes more energy…not less…than the old headquarters). Everybody is going green.

We are also going green here, too, at the worldwide headquarters of the Daily Reckoning – whether we want to or not. Your author takes public transport to the London office in. His assistants ride bicycles. Some walk to work.

In Paris, the city is putting 20,600 bicycles on the streets. You pay a fee of about $60 a year, we were told, and you have the right to pick up a bicycle at one of the many stands around the city and forget to leave it off at another.

We recycle paper, too – great piles of it. And we turn off the lights at night. And turn down the heat.

Proof of our Green Good Citizenship comes from our new South American headquarters-building out at the ranch. It is so green, we are practically the Jolly Green Giant of financial publishing. There, hard up against the Andes, we are 100% environmentally friendly (if you ignore the noxious gases used to fabricate and install our solar power system). Besides, we had no choice; there were no power lines to grab ahold of. We had to put in solar-heat…and solar electricity…and take our water directly from the stream running down the mountains. Which just goes to show what a fraud this stuff is. We can advertise our Green credentials…even though the real environmental impact – as measured by the cost of the system – may actually be greater than that of a typical house on the grid.


The Daily Reckoning