Talk about embarrassing.
In 2009, Treasury Secretary Geithner made his first official visit to China. He spoke at Peking University, where he told the audience the “Chinese assets are very safe.” He was referring to the trillions of U.S. dollars the Chinese currently hold in their reserves.
He meant it to be serious – since it was supposed to be a serious visit. But it sounded more like stand-up comedy. The students in the audience roared with laughter at this “safe asset” remark.
Back then, Chinese students already knew that holding U.S. dollars was anything but safe…
And of course, they were right.
Shortly after the episode, the Chinese rating agency Dagong downgraded our debt here in the U.S. Dagong’s U.S. rating now stands at A+, with a negative outlook. That is much lower than how the U.S. rating agencies have ever rated our debt.
Fast forward to today, and we have another embarrassing comedy act going on. This time it’s opening in Washington, where the current budget debate is quickly becoming a joke.
These politicians keep arguing about how high is “too high” for the debt ceiling.
But as the discussions go nowhere, the whole world is realizing those young Chinese students had good reasons to laugh.
This political failure is sparking some intriguing opportunities for investors. In just a moment, I’ll introduce you to this surprising way to profit.
First, let me show you why it’s so difficult for Congress to fix our deficits…
In the End, Only Elections Matter
Jean Monnet, one of the architects of the European Union, once said that “people only accept change in necessity, and see necessity only in crisis.”
This insightful quote makes me think of America’s fiscal situation.
Our net total liabilities are estimated at over $200 trillion (yes, TRILLION with a “T”). There’s no way the government will ever be able to pay that off.
Everyone knows America’s current pace of spending is unsustainable. But no one is willing to step up to the plate and make the hard necessary decisions to fix it. Everyone wants to put it off to another day, another year – when it’s some other politician’s problem.
In fact, I bet every Congressman is in favor of reforming entitlement programs like Medicare or Social Security. And yet, they simply won’t do it.
It’s a simple choice really. If they take away programs, they won’t get re-elected. Voters will effectively “fire” them for making the tough decision to fight our debts.
Cutting Social Security and Medicare benefits is a sure way of losing tons of votes. But serious cut in the entitlement area is the only thing that can bring the deficits to a more sustainable level.
The current debt ceiling discussion shows politicians are more worried about getting re-elected than putting the U.S. on a sustainable fiscal path. Nobody is serious about getting our fiscal house in order.
(And they’re not alone – their predecessors in Washington raised the debt ceiling an amazing 74 times over the past 50 years.)
This lack of fiscal responsibility has important consequences for your portfolio.[]
How Washington is Dragging the Dollar Lower
While U.S. politicians keep pointing fingers and getting nothing done, the U.S. economy is falling apart. Our unemployment rate has already hit double-digits.
Aside from uncertainties regarding the strength of the economic recovery, businesses are now dealing with uncertainty surrounding the budget discussions. This is giving companies another reason to put off hiring new employees.
The current failure to reach an agreement on the debt ceiling and the weak economic recovery is already putting pressure on the U.S. dollar this summer. Long-term it’s one of the many reasons I see the dollar declining over the next few years.
The buck has been especially weak against emerging market currencies recently. Many emerging market economies are still booming. And because of that, their central banks have been raising rates for a while now.
Higher interest rates and stronger economies have been attracting capital, providing support to those currencies.
In the Forex market, the best way to profit from this trend is to bet on emerging market currencies, as I recommend to my Exotic FX Alert subscribers.
But there’s also a great way to profit from this trend using domestic equities.
Thinking Small and Outside the Dollar
U.S. companies that generate a substantial portion of their revenues from overseas will benefit from a weak dollar.
Most investors think only big, multinational companies have that kind of exposure to other markets. But that’s simply not true.
There are many small domestic companies that generate sales outside the U.S., including fast-growing emerging markets. So they not only benefit from a weak dollar, but also profit from stronger economies.
These companies also don’t get as much attention from investors and analysts, so many are inefficiently valued. In other words, it’s easier to find bargains.
This debt situation creates the perfect opportunity to load up on some of these smaller U.S. companies with exposure to stronger emerging market currencies.
Bottom line: the failure to address the U.S. deficit will ensure the long-term decline of the dollar remains intact. A great way to profit from that is to invest in small-cap U.S. companies that generate most of their revenues outside the U.S.
Editor, Exotic FX Alert
P.S. My colleague, Jeff Opdyke constantly scours the universe for these types of U.S. companies with exposure to emerging markets. Recently Jeff discovered one such company that’s literally recreating how we all will browse the Internet in just a few years. He has the full details on this incredible opportunity in his latest video report.
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