Currency
China, Russia, and the End of the Petrodollar.
Say you’re an up-and-coming superpower wannabe with dreams of dominating your neighbors and intimidating everyone else. Your ambition is understandable; rising nations always join the “great game”, both for their own enrichment and in defense against other big players.
But if you’re Russia or China, there’s something in your way: The old superpower, the US, has the world’s reserve currency, which allows it to run an untouchable military empire basically for free, simply by creating otherwise-worthless pieces of paper and/or their electronic equivalent. Russia and China can’t do that, and would see their currencies and by extension their economies collapse if they tried.
So before they can boot the US military out of Asia and Eastern Europe, they have to strip the dollar of its dominant role in world trade, especially of Middle Eastern oil. And that’s exactly what they’re trying to do. See this excerpt from an excellent longer piece by Economic Collapse Blog’s Michael Snyder:
China And Russia Are Ruthlessly Cutting The Legs Out From Under The U.S. Dollar
China and Russia are not the “buddies” of the United States. The truth is that they are both ruthless competitors of the United States and leaders from both nations have been calling for a new global currency for years.
They don’t like that the United States has a built-in advantage of having the reserve currency of the world, and over the past several years both countries have been busy making international agreements that seek to chip away at that advantage.
Just the other day, China and Germany agreed to start conducting an increasing amount of trade with each other in their own currencies.
You would think that a major currency agreement between the 2nd and 4th largest economies on the face of the planet would make headlines all over the United States.
Instead, the silence in the U.S. media was deafening.
However, the truth is that both Russia and China have been making deals like this all over the globe in recent years. I detailed 11 more major agreements like the one that China and Germany just made in this article: “11 International Agreements That Are Nails In The Coffin Of The Petrodollar”.
A few of the things that will likely happen when the petrodollar dies….
– Oil will cost a lot more.
– Everything will cost a lot more.
– There will be a lot less foreign demand for U.S. government debt.
– Interest rates on U.S. government debt will rise.
-Interest rates on just about everything in the U.S. economy will rise.
So enjoy going to “the dollar store” while you can.
It will turn into the “five and ten dollar store” soon enough.
Some thoughts
Snyder goes on to note that both China and Russia are accumulating gold, which will protect them from the coming currency crisis and give the ruble and yuan greater legitimacy in global trade. In Jim Rickards’ book Currency Wars, he tells the story of financial war games conducted by the US military, in which one of the scenarios was a Russian gold backed currency that challenged the dollar. We’re apparently not far from that plan becoming feasible.
The US spends a big chunk of its $700 billion a year defense budget on dominating the Middle East in order to force the trading of oil in dollars. Let that trade be diversified into several currencies and the demand for petrodollars goes way down. Central banks and global corporations will sell part of their dollar holdings, sending the dollar’s exchange rate into a tailspin. This in turn will make it harder for the US to finance its military empire/welfare state.
The net result: America becomes Spain, no longer able to simply whip out the monetary credit card to cover its overspending. We’ll have to live within our means, cutting maybe $3 trillion a year in government largesse (including the growth in unfunded entitlements liabilities).
Cuts on this scale can’t be accomplished smoothly, as Europe is discovering. So in this scenario the coming decade will be even messier than the last one, with “Occupy” movements shutting down cities and every election producing incumbent massacres. A combination of higher prices for necessities and lower wages will demote much of the middle class to “working poor.”
Meanwhile, China and Russia will reap the rewards of stronger currencies, and will divide (or share) control over their part of the world. It’s hard to know who to feel sorrier for, Americans who thought they could depend on government programs for a middle class lifestyle, or the neighbors of China and Russia who will see the relatively light hand of the American empire replaced with something far more atavistic.
About DollarCollapse.com
DollarCollapse.com is managed by John Rubino, co-author, with GoldMoney’s James Turk, of The Collapse of the Dollar and How to Profit From It (Doubleday, 2007), and author of Clean Money: Picking Winners in the Green-Tech Boom (Wiley, 2008), How to Profit from the Coming Real Estate Bust (Rodale, 2003) and Main Street, Not Wall Street (Morrow, 1998). After earning a Finance MBA from New York University, he spent the 1980s on Wall Street, as a Eurodollar trader, equity analyst and junk bond analyst. During the 1990s he was a featured columnist with TheStreet.com and a frequent contributor to Individual Investor, Online Investor, and Consumers Digest, among many other publications. He currently writes for CFA Magazine.

WEEKLY COMMENTARY
Since 1990 the Money Talks Conference Series has established itself as the first choice for Canada’s sophisticated and active investors. The Conferences have provided individual investors access to the world’s top rated financial analysts through years of unsurpassed market volatility.
Host of MoneyTalks, Michael Campbell, is hosting events in October including two dates with me, Calgary October 29th and Vancouver October 30th. In addition, there is an event October 10th in Vancouver with market analyst David Bensimon.
I hope to see many of you at one of these events. All attendees to my event October 29th and 30th will be the first to receive my new book. During the event, I will discuss some of the important lessons taught in the book and show how you can find short and long term trading opportunities with a few minutes of work. Your ticket for the evening includes:
– Attendance at the event
– A first edition hard cover copy of The Mindless Investor (value $29.95)
– One month of my daily newsletter (value $59, new subscribers only)
– One month access to Stockscores.com (value $29, new subscribers only)
For more information, click on the appropriate link below:
Evening with Michael Campbell and David Bensimon, Vancouver Oct 10
Evening with Michael Campbell and Tyler Bollhorn, Calgary Oct 29 and Vancouver Oct 30
To get 20% off of the ticket price, use the special offer code SSTB2013 at checkout.
Trade the situation, not the stock. Learn how pro traders approach the trade plus get Tyler Bollhorn’s weekly market analysis in this week’s Market Minutes video. You can watch this week’s video on Youtube by clicking here. To receive email alerts any time I upload a new video, subscribe to the Stockscores channel at www.youtube.com/stockscoresdotcom.
Here is an excerpt from my upcoming book, The Mindless Investor, How to Make Money in the Market by Overcoming Your Common Sense. This piece is from the chapter, Bad Traders Diversify.
The traditional way to manage risk is to diversify your holdings. The hope is that owning a number of stocks from sectors of the market that are not correlated to one another will lead to more consistent returns. If one stock in the portfolio suffers a large loss, it should not have a significant impact on the overall performance as the other stocks make enough of a gain to compensate.
I don’t believe in using diversification to manage a portfolio. That doesn’t mean I think it’s appropriate to put all of your capital into just one stock; it means that the mindset that diversification is based on makes little sense to me.
Diversification Weakens Your Winners
Diversification’s aim is to remove the alpha risk component and pursue the beta component. Strong moves up or down by individual stocks will not have a significant impact on the performance of the portfolio because they get watered down by diversification. By owning a basket of stocks, the diversified portfolio should perform in a way that is similar to the index. Why not just buy the index through an ETF?
In order to beat the market, you must find alpha, not take it out of your portfolio. Diversification would not allow you to buy a number of strong stocks if they were in the same sector because those stocks will tend to move together, increasing the risk of a substantial loss if the sector moves lower and takes your stocks down with it.
If the stocks you buy are trading on their own story then they shouldn’t move together. Here is an example that shows what I mean.
Suppose you find a biotech stock that makes an abnormal break from a predictive chart pattern. The chart has everything your strategy seeks, so you buy the stock. You do some research and find that this company has a treatment for colon cancer. It’s in testing, and they expect results in a month. It is apparent that the market is speculating on what those results will be, and those who know the most seem to think the results will be positive, which is why the stock is moving up abnormally.
The next day, you’re hunting for opportunities and find another stock trading with abnormal activity and breaking from a predictive chart pattern. It turns out that this stock is also a biotech stock, but this company has a treatment for obesity. It’s in clinical trials, and the buzz is that it’s working very well. The market is speculating that this company’s treatment is going to have a dramatic impact on its long-term ability to make a profit.
Given that these stocks are in the same sector, buying both would go against the principles of diversification because the expectation is that they will move in similar fashion. As the biotech sector moves, so too should these stocks.
However, these stocks are not trading higher because of their correlation to the overall market or the sector. They’re trading up because of company-specific factors that are completely unrelated to one another. One company has a treatment for colon cancer and the other for obesity. If one company’s drug fails to work, it won’t take the other company lower, because one company’s future earnings are not dependent on the other.
The aim of diversification is to mitigate the damage from being wrong. The hope is that losses in one stock can be overcome by gains in the others. Unfortunately, stocks that aren’t trading on their own story tend to be highly correlated to one another regardless of their sector. If the S&P 500 index is down 2% in one day, you can expect that almost every stock that trades in the market will be down. Not just in the U.S.-these strong down days tend to affect the markets globally. When the markets sell off, there are few places to hide.
What you can do, however, is limit the effect the loss has on your overall portfolio. If a stock you own falls through support-if the market gives you a message that the stock is likely to fall lower still-then sell it. Take the small loss and move on.
If you really like the company (I hope you never like any company, only the trade of it!) then you’ll get the opportunity to buy it back later, probably at a lower price. When a good trade goes bad and requires you to take a loss, take it and move on.
By diversifying, you are expecting to do a bad job at picking stocks. You intend to hang on to losers and use the profits from the winners to overcome the loss. It’s better to focus on a strategy that does a better job of picking trades with a positive expected value and work on the discipline to take a loss when the market tells you to.
STRATEGY OF THE WEEK
The market gave us a sign that it is going to pull back in the near term. Here are a few vehicles to take advantage of a market sell off:
STOCKS THAT MEET THAT STRATEGY
1. T.VXX
The VXX tends to go up when the market goes down because investors buy options as insurance, raising the premium paid for the option. The VXX is based on the option premium in the S&P 500 index. It is a great hedge against market weakness and it broke a short term downward trend line today. The Canadian version trades with the symbol T.VXX.
2. QID
20% of the Nasdaq 100 is based on Apple (AAPL) and that stock has been falling for a few days. That has helped the QID go up since it is an inversely correlated ETF to the Nasdaq 100. I won’t be surprised if the sell off on the Nasdaq stalls in the next few days as AAPL is near some support, but as the month progresses I think there is a good chance the QID moves higher as the Nasdaq moves lower.
References
- Get the Stockscore on any of over 20,000 North American stocks.
- Background on the theories used by Stockscores.
- Strategies that can help you find new opportunities.
- Scan the market using extensive filter criteria.
- Build a portfolio of stocks and view a slide show of their charts.
- See which sectors are leading the market, and their components.
Disclaimer
This is not an investment advisory, and should not be used to make investment decisions. Information in Stockscores Perspectives is often opinionated and should be considered for information purposes only. No stock exchange anywhere has approved or disapproved of the information contained herein. There is no express or implied solicitation to buy or sell securities. The writers and editors of Perspectives may have positions in the stocks discussed above and may trade in the stocks mentioned. Don’t consider buying or selling any stock without conducting your own due diligence.

VRTRADER.COM Trial Signup: Use this month to kick our tires. Pay 50% for the first 30 days (No refund) and sample our Silver or Platinum service and then decide what works best for you. Just send an email to mark.vrtrader@gmail.com” or call 928-282-1275
Mark Leibovit’s Gold Letter, # 1 Gold Timer for 10 year period & #2 Gold Timer for 2011
IF YOU HAVE NOT SIGNED UP FOR THE LEIBOVIT VR GOLD LETTER, HERE IS YOUR CHANCE. THE October 5th EDITION IS HOT OFF THE PRESS. HERE IS THE LINK: WWW.VRGOLDLETTER.COM. YOU GET A 50% DISCOUNT FOR THE FIRST MONTH.
The Annual Forecast Model is now ‘on-line’ BUT YOU MUST SUBSCRIBE! It is a premium report. Call or email us today for a 50% discount.
Here is the link:
https://www.vrtrader.com/subscribe/index.asp
The Annual Forecast Model (The VR Forecaster Report) is published each and every year in early February and comprises Mark Leibovit’s proprietary cyclical forecast for the Dow Industrials and Gold. Don’t miss the opportunity to see this Report that projects market direction and/or important cyclical change points months in advance. We have called it our ‘Blueprint to the Future’. Unique to Mark Leibovit it has been published since the mid 1980s. Access to the report is provided via the website using the username and password provided to you

Note: “Hyperinflation is essentially a political event. Weimar Germany was triggered by war reparations, Zimbabwe by confiscation of property accompanied by capital flight (including human capital), and Iran by US and European embargoes (a clear act of war)” – via Hyperinflation Hits Iran; Monthly 70% Inflation Rate; Reflections on Economic Warfare by MISH’S Global Economic Trend Analysis
Ed Note: You’d think that a Government of a Hyperinflation hit, rioting populace might be eager to to distract their population with, oh….. say a Nuclear Bomb? – THINK TANK: PATH TO IRAN NUKE WARHEAD 2-4 MONTHS
Currency Collapse Has All the Markings of a Full-Blown Crisis
by Dr. Kent Moors, Global Energy Strategist
Matters are beginning to come to a head in Iran.
Iran’s currency, the rial, has collapsed.
Riots have begun. Its government has rapidly lost its authority. And the Iranian economy is unraveling.
This has all the markings of a full-blown crisis.
It will have an uncertain impact on the region and the wider oil market. This could get very unpredictable and very nasty.
Iran Takes Defensive Action
While attention is currently focused on the recent sharp drop in the rial’s value, the problem has been recurring for over a year. To combat it, Tehran established a Forex Trade Center (FTC) on September 23 to prevent a continuing drop against foreign currencies, providing dollars to importers of essential foodstuffs, medicine, and fuel at a fixed price.
In less than the first week of FTC operations, the currency’s effective market rate declined by more than 30 %.
……let Dr Moors explain further HERE
Hyperinflation Hits Iran
by Steve Hanke, Professor of Applied Economics at Johns Hopkins University
Hanke has also been following the Iranian currency crisis. He wrote these thoughts yesterday:
“For months, I have been following the collapse of the Iranian rial, tracking black-market exchange-rate data from foreign-exchange bazaars in Tehran. Using the most recent data, I now estimate that Iran is experiencing a monthly inflation rate of nearly 70%, indicating that hyperinflation has struck in Iran.”
Here is a chart and commentary from his blog Hyperinflation Has Arrived In Iran
“Since the U.S. and E.U. first enacted sanctions against Iran, in 2010, the value of the Iranian rial (IRR) has plummeted, imposing untold misery on the Iranian people. When a currency collapses, you can be certain that other economic metrics are moving in a negative direction, too. Indeed, using new data from Iran’s foreign-exchange black market, I estimate that Iran’s monthly inflation rate has reached 69.6%. With a monthly inflation rate this high (over 50%), Iran is undoubtedly experiencing hyperinflation.
When President Obama signed the Comprehensive Iran Sanctions, Accountability, and Divestment Act, in July 2010, the official Iranian rial-U.S. dollar exchange rate was very close to the black-market rate. But, as the accompanying chart shows, the official and black-market rates have increasingly diverged since July 2010. This decline began to accelerate last month, when Iranians witnessed a dramatic 9.65% drop in the value of the rial, over the course of a single weekend (8-10 September 2012). The free-fall has continued since then. On 2 October 2012, the black-market exchange rate reached 35,000 IRR/USD – a rate which reflects a 65% decline in the rial, relative to the U.S. dollar.”
The rial’s death spiral is wiping out the currency’s purchasing power. In consequence, Iran is now experiencing a devastating increase in prices – hyperinflation. As Nicholas Krus and I document in our recent Cato Working Paper, World Hyperinflations, there have been 57 documented cases of hyperinflation in history, the most recent of which was North Korea’s 2009-11 hyperinflation. That said, North Korea’s hyperinflation did not come close to the magnitudes reached in the recent, second-highest hyperinflation in the world, that of Zimbabwe, in 2008, nor has Iran’s hyperinflation – at least not yet.

For oil, the investors should guard against potential geopolitical flare-ups in the Middle East which could push up prices. “We recommend buying a bullish play, suggesting buying out-of-the-money calls at $125 a barrel or higher,”
LONDON (Commodity Online): British bank Barclays Capital recommends buying March gold futures as precious metals receive support from a third round of quantitative easing.
“With the dollar weakening and debates over inflation and fiat currency debasement now likely to move back to center stage, QE3 is likely to support the recent pickup in physical and futures market buying, which should help to bring to end gold’s position as one of the weakest commodity markets in 2012,” the bank added.
According to Barclays, the base metals have benefited from QE3, but the outlook for sluggish economic growth will hurt demand for base metals and the firm recommends shorting selective metals, including aluminum.
Cotton prices have bearish fundamentals and likely lackluster demand if the global economy deteriorates and the bank recommend shorting the fiber.
