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Tuesday, January 8, 2013
Greetings from the sunny, windy Dominican Republic...
I've been in the Dominican Republic for a week. I've spent hours traveling the roads, stopping in small towns along the way. And I've paid for everything in U.S. dollars, no questions asked.
You might think you'd need Dominican money while in the Dominican Republic. But you really don't... U.S. dollars work just fine here.
This trip reminded me that the U.S. dollar is clearly the most important currency on our slice of the globe. And I don't expect that to change anytime soon. A U.S. dollar crisis is certain someday... but that day is not today.
The U.S. dollar is headed for a major crisis at some point. This is certain. The U.S. government is already broke and digging a deeper hole daily. The only question is: "When will the big crisis arrive?"
My short answer is, not in the next couple years. Let me explain briefly, starting with my trip to the Dominican Republic...
For the entire trip, I haven't exchanged U.S. dollars for a single Dominican peso. I've done the same thing recently in Costa Rica, Nicaragua, Belize, Mexico, the Bahamas, and other Latin American/Caribbean countries. The U.S. dollar works just as well.
Nobody ever says, "No, U.S. dollars are not accepted here – you must pay in Costa Rican colones."
When you think about it the other way around, you see just how important the U.S. dollar is to this region...
For example, can you imagine going to your local grocery store and paying in Dominican pesos instead of U.S. dollars – even though you are in the United States? Can you imagine using money from a country that most people have never been to? That's what people in the Dominican Republic are doing today...
I talked with two successful Dominicans. Neither has left the Dominican Republic before...
"It's very hard to get a visa to leave the Dominican Republic," they told me. "It's very hard to get permission from the government to leave. The government thinks that if we leave, we will never come back."
Wow. And I thought we had it tough in the States. Successful Dominicans can't even leave their country. Ouch.
Dominicans happily accept U.S. dollars, though. And it's not just here... The U.S. dollar is the most widely accepted unit of money in the Americas... and to a lesser extent, the world.
Being the world's "reserve" currency provides the United States with an enormous advantage – we can print the world's currency.
I believe the U.S.' ability to print the world's currency will buy the U.S. government a lot of time – years – before a true debt/currency crisis would happen.
Think about this... what would replace it as the "reserve" currency here in the Dominican Republic?
The euro? The euro is actually accepted here in the Dominican Republic, too. But Europe's problems are just as bad as those in the U.S.
Gold? Hard to imagine right this second. China's currency? Not for decades.
What about a currency from some other country in the Americas?
As mismanaged as the U.S. dollar is, the currencies in many of these countries are treated even worse. For example, Mexico had its own currency crisis in 1994. Inflation grew to over 50% by the end of 1995. Even after things settled down, Mexico's inflation has doubled U.S. inflation since 2000 (4.8% a year versus 2.4%, respectively).
Argentina is a similar story. Inflation hit 40% in 2002, as the Argentinian peso collapsed. Post-crisis, inflation in Argentina still hovers around 10%... four times more than it is in the U.S.
Here's a look at the year-over-year inflation numbers since 2000 for several other key countries in the region, as well...
This trip was a great reminder of just how much the U.S. dollar is still king.
A U.S. currency crisis is certain someday. As I said, the U.S. government is broke AND digging a deeper hole daily. But I believe the day of reckoning won't be here tomorrow.
Thanks to the "Global Bernanke Asset Bubble," we have time – possibly years – to make a fortune in U.S. stocks and real estate... before the dollar's day of reckoning arrives.
DailyWealth classic: In 2009, Chris Weber shared one "currency" that outperformed all others. "Every person on Earth over the past decade, regardless of where they live, would have made hundreds of percent in terms of their own currency had they just owned" it, he writes. Get the full story here: The Greatest Currency Trade of the Millennium.
And in December, Brian Hunt updated DailyWealth readers on this idea... as this "currency" registered an incredible 12 consecutive years of price gains. Read more here.
THE "RISK ON" TREND IS BACK IN PLACE
Everywhere we look, we see signs of the "risk on" trade working.
Regular readers are familiar with the concept of the "risk on" trade (as well as its counterpart, "risk off"). The "risk" in "risk on" means the riskier, more volatile areas of the market, like natural resources, emerging markets, and infrastructure. These assets tend to move together in a big bundle. And they exhibit greater "boom and bust" cycles than the safer areas of the market (which is home to companies that deal in basic consumer products, like soda, beer, cigarettes, and toothpaste.)
The "risk on" trade enjoyed a massive rally in late 2010/early 2011. It then suffered a big bust from mid-2011 to mid-2012. Today's chart shows the "risk on" trade is recovering, however...
Below is an 18-month chart of a major emerging market investment fund (NYSEARCA: EEM). As you can see, the EEM recently put in a bottom in the $37 per share area... and has rallied to reach a new 52-week high. The trend is up for "risk on" assets.
– Brian Hunt