Sunday, November 18, 2007

Canadian Silver Bug- Predictions for 2008 PT 1.

I’m going to break my predictions for 2008 into a few bite sized posts, to make them easier to digest, discuss and to drag this out for more days of content, ha!

A Bigger war in Persia,


While I do believe that Bush and Darth Cheney are stupid enough to do it, I don’t believe they can because of the weakness in the system. I think a war would cause Generals to quit, protesting bad orders. There has to be strife in the military, they are over stretched, they’ve been stealing tracks from armoured vehicles in Korea to meet their need for spares. They have too many soldiers putting in multiple tours, too many National Guard acting as full time soldiers, too many soldiers failing to re-up, too few new recruits and with the banning of Blackwater and possibly other contractors in Iraq, it is going to leave the U.S. with no wiggle room to enlarge the conflict.

Iran has them by the short hairs and the U.S. dependency on foreign oil from hostile states like Venezuela means any war would lead to an immediate energy crisis world wide.

Between modern air defense (unlike Iraq’s), subs, massive missile stockpiles, super sonic anti ship missiles, and suiciders, any fleet in Arab waters will be sunk, oil terminals for the Saudi’s , Kuwait, UAE, etc will all burn. China who would lose a lot of its energy supply and would likely pull the currency bomb destroying the U.S. dollar. There is no marginally winnable scenario for an Iran conflict up to and including enough neutron bombs to sterilize every town over 100 souls

Dollar Pegged Currencies

I expect to see most or all of the Gulf states turn on the U.S. and drop the dollar peg as Kuwait did in May. The massive devaluation and over creation of U.S. dollars is creating strong inflation and big losses in the currency reserves of Gulf states. As protection from a falling dollar many are already shifting reserve ratios to include more Euros, Pound, Swiss Franc, and Gold. This trend will continue further weakening the Dollar and the problem will snowball.

Other pegged countries include non oil producers like Lebanon, most of the Caribbean, and Jordon. Inflation will also force some of them to re peg to the Euro or mixed currency baskets.

Countries Using Dollars as Domestic Currency

Its one thing to peg your dollar to the U.S. but there are also a handful of countries that actually use the U.S. dollar as their own. These include British Virgin Islands, East Timor, Ecuador, El Salvador, and a few others. Panama's currency is U.S. notes traded in tandem with domestic coinage. I predict Ecuador and likely a couple of others on this list to institute new domestic currency or switch to Euros. These States are relatively small economies and the damage would be more image than substance. Still, as soon as one country make the move the chances that other will follow increases.

I suspect there to be some serious talk about a South American regional currency. I don't believe it will go anywhere however; Chavez and his big mouth will likely sour the process before a deal can be made.

Dollars for Oil

I also predict more States will begin to price oil and demand payment in Euros rather than Dollars. Iran has begun demanding Euros and soon other countries will follow. This is a huge market and the demand for Dollars will drop greatly when this break is made, the dollar with plummet. The last hold out will be the Saudis. Since Kuwait has already moved from the dollar peg I expect they will be the first, if not them, Russia.

U.S. Dollar

There will be ups and downs but buy the end of 2008 the U.S. dollar will have lost almost 15% putting the USD index about 11.3 lower than today's level of 75.75 or 64+-.

It would even be more but by mid 2008 both the ECB and the BoC will have no choice but to start cutting interest rates and weaken their currencies in response. I think China will make some small (under 5%) revaluation of the Yuan(Renminbi)upwards as a anti inflationary move that the west can claim as progress in trade issues.

The main factors of the USD index will be a worsening U.S. Economy and a drop in interest rates to 2% by 3rd Quarter

The Yen

You can't decrease your interest rate when you barely have one. The Yen will be the big gainer as other big players join in a new rate cutting cycle. Try as they might I don't think the Japanese will be able to indefinitely suppress the Yen against the Dollar.

That's enough for now, maybe I'll get the rest of it out by weeks end.