What to Expect from Next Week's G20 Meeting

The World Isn't Happy With the U.S. Dollar, But Is There Anything They Can Do?

March 26, 2009

Next week, finance ministers will gather in London at the G20 meeting to discuss the global recession, and what steps they can take to avoid it becoming a global depression.

Interestingly, the last time London hosted such a meeting was in 1933 as the world was coming to grips with the Great Depression. That meeting, however, didn't go so well. The delegates from Europe wanted to return to the gold standard, even if it meant forcing wages down. The new U.S. president, Franklin Roosevelt, refused to make any concessions on his New Deal programs. The talks fell apart, and the world soon erected trade barriers and competitive devaluation of currencies.

U.S. Dollar Is the Sacrificial Lamb

Let's hope this meeting goes better. What's concerning other countries today is the U.S. government's massive spending spree. The U.S. dollar is already feeling the pain, and I think it's only just begun. The Obama administration's plan is to sacrifice the dollar for short-term economic gain. It's crucial that every investor understands this.

The first difficulties for the dollar came at the last G20 meeting in March, which was a prep meeting for next week's meeting. At the meeting in March, there was some infighting among finance ministers, and the British Cabinet Secretary was particularly frustrated by the leadership vacuum at the U.S. Treasury Department. Everyone, it seems, has been upset with Treasury Secretary Tim Geithner.

What also hurt the G20 meeting was that the U.S. was pushing for a coordinated stimulus package, but the Europeans weren't exactly thrilled with that idea. The three largest counties in the eurozone–France, Germany and Italy–are rightly worried that other euro countries would run up big budget deficits, which would turn off investors to the euro. Instead, the Europeans want to see improved regulation.

The Europeans Think We're Spending Money Like Teenagers

There's now a large perception gap between the United States and Europe. The Europeans see us as teenagers at the mall who have Dad's credit card and are on a big spending spree. Quite frankly, they're shocked by our fiscal irresponsibility.

Britain, for example, nationalized its troubled banks and the pound plunged to a 23-year low. Uncle Sam has already stepped up its borrowing plans. The U.S. government's budget deficit is officially estimated at 12.3% GDP. The Europeans, in contrast, don't want their deficits to exceed 3% of GDP. Foreign investors are clearly getting skittish. In January, the U.S. experienced a record outflow of capital.

Now that the Fed is flooding our economy with dollars, will the European Central Bank join in the money printing party?

Probably not. Jean Claude Trichet, the president of the ECB, has said that he'd rather not follow in the Fed's footsteps. Trichet's preference is to pump emergency liquidity into European banks.

The world's disgust with the U.S. dollar is having broad repercussions. In fact, a U.N. panel already recommended ditching the dollar as a reserve currency in favor of a basket of currencies. At next week's meeting, the Russians plan to propose a new supranational currency that would be issued by international financial institutions.

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Investors Should Focus on Commodity Stocks

Investors are concerned that the dollar may no longer be a suitable reserve currency for the rest of the world. As the dollar plummets, the price of all commodities priced in dollars, such as coal, corn, crude oil, soybeans and wheat will rise. On the day of the Fed's recent policy statement, the price of gold soared over 8%. The price of imported goods will also rise. Commodity stocks are already emerging as big winners.

Some of my favorite commodity stocks include Boots & Coots International Well Control (WEL, see more here), Peabody Energy (BTU) and World Fuel Services (INT). The weak dollar will define investing for the rest of 2009.