Friday, April 25, 2008

Living in Dollar Land

“When the music’s over
Turn out the lights
Turn out the lights
Turn out the lights”
- When the Music’s Over (The Doors)

Is anybody paying attention? The music is about to stop. Will we be able to keep the lights on?

The once mighty U.S. dollar – the world’s reserve currency - is going down the proverbial rat hole.

· The Euro could become the new reserve currency for the world, in spite of the unhappiness in the Euro Zone countries with the fiscal and monetary policies needed to support the common currency.

· Iran recently started up a bourse (exchange) for trading petroleum priced in Euros and other non-U.S. currencies.

· Meanwhile, the U.S. Federal Reserve is feeding the dollar’s decline by reducing short-term interest rates in what looks like an increasingly desperate attempt to head off a recession that has probably already begun.

If you live in the U.S. you are long the dollar. You are paid in dollars, earn interest in dollars, invest with dollars and pay all your bills in dollars.

How can you preserve the purchasing power of a declining currency? By going short.

You may ask: How can I short the dollar when I live in Dollar Land? In particular, how can I do this without a lot of headache?

Here are four relatively painless ways:

· Buy investments outside the U.S. – even if your investment is denominated in dollars you have more dollars after the currency exchange (assuming your investment choice is successful, of course).

· Buy commodities traded in dollars – the prime example is oil. The recent run-up in oil is in part due to the decline in the dollar (the higher price to the producer offsets the lower value of the payment).

· Buy foreign currencies – but be sure and avoid currencies pegged to the U.S. dollar.

· Buy investment funds that short the dollar.

There are mutual funds and exchange traded funds (ETFs) that follow these strategies. And, they are easily accessible to the average investor.

Some places to look:

http://www.rydexinvestments.com/

http://www.ishares.com/

http://www.pimcofunds.com/

http://www.statestreetspdrs.com/

http://www.powershares.com/

Most, if not all of the products offered by these firms can be purchased through brokerage accounts at the major do-it-yourself investor marketplaces: Charles Schwab, Vanguard, Fidelity, TD Ameritrade, ETrade, etc.

Questions? kimm@sweetwaterinv.com

Complete lyrics: http://www.sing365.com/music/lyric.nsf/When-The-Music

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