u.s. dollar to lose 40 percent of its value?

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    The legendary investor predicts the U.S. dollar will lose 40 percent of its value.
    By MICHAEL BRAGA
    [email protected]

    SARASOTA -- Legendary investor Sir John Templeton is worried about the U.S. economy and stock market.

    Gary Moore, a Sarasota investment adviser who met with Templeton last week in the Bahamas, says Sir John has never been more bearish.

    Moore says Templeton is telling investors to avoid U.S. stocks and sell off excess residential real estate. He's also suggesting they buy bonds -- not U.S. bonds, but Australian, New Zealand, and Canadian bonds.

    The reason for all this, Moore says, is that Sir John, who founded the highly successful Templeton Growth Fund and Templeton World Fund, believes the dollar will lose 40 percent of its value against foreign currencies in the coming months, especially the Japanese Yen and Chinese Yuan.

    This depreciation will cause the Chinese and Japanese, who own 36 percent of all U.S. foreign debt, to sell their bonds and mortgage obligations and take their money out of the country.

    When that happens, market forces will cause interest rates to rise, choking off investment in residential real estate and forcing the construction industry to contract.

    Stagflation, a combination of economic stagnation and inflation, will then set in, Moore said.

    U.S. manufacturers will face higher costs of production, but they won't be able to pass on price increases due to continued competition from lower- cost manufacturers in China and India. Profit margins for U.S. corporations will be squeezed and stock values will suffer.

    "Stagflation is hell on equities," Moore said.

    In turn, U.S. consumers will see their living standards decline, causing them to pull back on spending, sending another negative shock through the economy.

    Templeton, who is 92, could not be reached for comment. But investment advisors contacted by the Herald-Tribune did not dispute his logic.

    They all agreed that the greatest fear hanging over the world economy at the moment is the possibility that the value of the U.S. dollar will crash.

 
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