I don’t know about you, but I don’t think were done yet. If you watch the talking heads on TV it seems the US Government is riding in on a white horse to save the economy. It sounds like the bank rescue package – all $700 Billion of it – will save the day. I’m certain it’ll help a little. But what if it doesn’t? What if this is just the beginning of something much bigger?
Let me explain.
Right now credit markets are seizing up. You don’t need me to tell you this. Just open any major newspaper in the country. Over the last 2 weeks they’ve done nothing but report on the dire situation companies and individuals are facing.
The best example is recent spikes in LIBOR rates.
LIBOR is the rate that banks charge each other to borrow money. The cost of borrowing money spiked up because banks are desperate for financing. But there’s a problem. Many banks are looking at other institutions with a suspicious eye.
They don’t know who’s going to survive the week, let alone the night.
If you run a bank, you know being able to borrow money is central to your business. What’s happening is just like the great depression. Banks will stop lending to each other. More banks will fail, and that will cause lending to tighten even more.
It’s a vicious cycle.
These banking problems are starting to spread all over the world. Right now Europe is witnessing the greatest collapse of their financial system in the last century.
Remember Northern Rock? The Bank of England was forced to nationalize that institution after it experienced a run on the bank. Recently Ireland did something unprecedented. Irish citizens were questioning the stability of their banks. As a result, massive withdrawals started.
This pushed several Irish banks perilously close to failure.
So the government responded in the only way it could. They guaranteed all of the deposits at the nation’s banks. Some estimates place that commitment at close to $300 billion dollars. Then Greece did the same thing. Amazingly, Germany – one of the most influential economies in all of Europe followed suit.
Just last week a handful of European banks needed to be bailed out. Let me tell you, I think it’s just the start. This is like watching dominos fall. One knocking over the next, then the next, then the next. Nobody knows where it’s going to end.
On a global basis investors are hoarding money.
How do I know this? The US dollar is considered the safest currency in the world. It is, after all, tied to the world’s largest economy. So when fear strikes, global investors move into safe currencies like the US Dollar. Global investors start hoarding the US dollar . . . and that’s what’s going on now.
This global movement to the US Dollar is happening despite horrible US economic data.
Bad economic data should scare away investors. But it’s not. Investors are buying the US Dollar in huge quantities and hoarding it. Safety is the key issue. Because of this the US Dollar continues to climb.
How long will this last?
To be honest, I don’t know. But I’ll say this. It’s a strong trend that could go on for quite a while – and longer if we enter a global recession. It’s definitely something we can profit from.
You can also profit from the move in the US Dollar by purchasing PowerShares DB US Dollar Index Bullish (UUP). It’s an ETF that buys a basket of US Dollar futures contracts. As the value of the US Dollar rises so to should this ETF. Consider adding some to your portfolio as an easy way to profit from a global recession.