Bryan Rich: While much of the current Wall Street and media focus is surrounding Greece and the problems in Europe, I’d like to focus on the fallout that’s lining up beyond Europe … i.e., what’s next.

First, in my view, the fundamental flaws in the European Monetary Union (EMU) that were exposed during the first wave of financial crisis made a clear case for its ultimate break-up. And that appears to be underway, despite all of the political posturing and the empty resolution plans of the past 18-months.

The only hope for the EMU and the euro’s survival was, and is, a fiscal union of its members. It would require countries with rich history and deep-rooted cultures and national identity to give up their sovereignty. Moreover, it would require those countries to endure even more severe austerity — for longer — and undergo painful, long-term economic restructuring.

The Euro’s Demise Has Been Set in Motion: Are you protected?

"Nationalism will emerge. Healthier countries will not see fit to spend their hard earned money to bail out their less responsible neighbors."

CLICK HERE to get your Free E-Book, “Why It’s Curtains for the Euro”

Given this backdrop, the fiscal union scenario is a very low probability. Especially when you consider the more palatable alternative choice for the weak euro zone members (the PIIGS): defaulting on their government debt, leaving the monetary union and returning to their own currencies and their old ways of life – a far less painful path.

But Europe is not the start, nor the end of the global economic crisis.

And while the mainstream investment community has unimaginably

been sideswiped by the fallout in Europe, even after nearly two years of clear evidence and warnings, they are equally showing a lack of imagination and preparation for what happens next.

Dominoes Lining Up Beyond Europe

When we look back at the most thorough analysis done on historical global financial crises, by Harvard Professor Kenneth Rogoff and Maryland Professor Carmen Reinhart, we know that global financial crisis when paired with global recession tends to be long, painful and filled with economic shocks.

And we know that these crises tend to lead to sovereign debt defaults. And those sovereign debt defaults tend to be contagious.

But don’t expect the contagion to be confined to just Europe.

Here’s why …

Within this analysis of historical global financial crises, it shows that the common trigger of debt defaults tends to be a collapse in commodity prices.

And when we explore the fallout that would likely come if commodity prices did indeed collapse, a la 2008, the number of potential victims in the sovereign debt crisis begins to grow and touch areas of the world that many investors and economists have hailed as the world’s new growth engines – namely, the emerging markets.

We’ve already seen a rapid decline in commodities. And the fallout accelerated into the end of last week. Oil fell 11%, gold (NYSE:GLD) fell 11% and silver (NYSE:SLV) fell over 27%! Since May the broad commodity markets have declined by 19%.

This is all very bad news for the global economy, and even worse news for those that plowed money into the developing world, positioning for the big “transfer of economic power” trade. That is, the theory that the developed world’s decline meant a gain for the BRICs (Brazil, Russia, India and China).

This theory helped Wall Street sell stocks, but has put investors in an even more vulnerable position. Through the events of 2008-2009, we saw a clear inability for those economies to avoid the calamitous fallout from the first wave of the financial crisis. As such, we should expect the interconnectedness of economies to continue to inflict pain on the BRICs this time around.

Watch out for falling BRICs

There is a big difference between the first wave of crisis and this wave. The massive, coordinated global government stimulus that led the way to a shallow global recovery has been exhausted. Now, the developed world is at its fiscal and monetary policy limits, and China is in no position to add more stimulus – in fact, it’s removing stimulus to deal with a hostile inflation problem.

That makes the lesser developed world even more vulnerable than the developed world, to a second wave of financial crisis.

Consider this glance at Russia (NYSE:RSX) …

Over the last half of 2008, Russia endured a massive capital flight. Its central bank shed 35% of its currency reserves trying to defend its currency, the ruble, which devalued by 50% as foreign investors were hitting the exit doors. Its stock market had numerous double-digit declining days, followed by numerous multi-day shut downs in effort to halt the bleeding. And its financial system was in the worst condition since Russia defaulted on its debt in 1998.

The Russian economy then went into its deepest recession on record.

During this time, Russia’s economy, which is highly dependent its rich oil exports, endured a 70% plunge in the price of crude oil, yet still kept its head above water — even later enjoying a solid recovery after emerging from recession in late 2009.

​Why is that surprising? Because oil contributes about 40% to government revenue.

But this time, things are different. In 2008-2009 Russia’s government books assumed its oil revenue at a valuation of $50 per barrel. So even after its massive decline from $147, they were able to fund their spending.

Today, however, the Russian government needs $113 oil to meet its spending obligations (according to the Economist). The problem is it currently trades at $79, with a trajectory toward $60.

If you factor in falling oil prices and the exposure of Russia to defaulting euro zone countries, Russia is almost surely to be among the falling dominoes.

As for the most powerful of the BRICs, China, it’s already warning of recession-like times. Its electricity consumption is declining, its manufacturing activity has been contracting and its all important export shipments are running under capacity.

Given this scenario of shake-out in commodities and emerging markets, and given the broad declines across global markets, where is an investor to find shelter?

Well, when global economies start teetering and global capital markets begin looking scary, expect investors around the world to, once again, look for the best and safest alternative. Back in 2008 and early 2009, that place was clearly the United States – home of the deepest and most liquid capital markets. And the dollar and U.S. Treasuries did very well, while almost every other market in the world got crushed.

This dynamic is already returning, and it should grow even more intense. That creates opportunity.

While U.S. Treasuries are already soaring, from a risk/reward standpoint, the dollar still offers a very attractive level to buy. Moreover, the long-term cycles of the dollar argue for the potential of a huge run.

The Dollar’s Cycles Argue For Long-Term Strength

The dollar index has had five distinct cycles since the fall of the Bretton Woods system. And those five trends have lasted, on average, roughly seven years.

You can see in the table below the five cycles in the dollar and you can also see, in the “% Change” column, the broad moves in the dollar both within bullish and bearish cycles. The most recently completed trend in the dollar ended in March of 2008.

​That means we are only half way through the current BULL cycle. And given the onslaught of negative sentiment toward the dollar over the past two years, it remains just 11% off of its cycle lows.

If we assume that the dollar will have comparable performance in this cycle as it has in the past, that means we should expect, at least, another 20% gain the dollar index over the next three plus years – perhaps much more.

If you’re looking for a way to play the long dollar trade in your normal brokerage account, try the PowerShares DB US Dollar Index Bullish Fund ETF (NYSE:UUP).

Regards,

Written By Bryan Rich From Global Investor Weekly

Bryan Rich began his currency trading career with a $600 million family office hedge fund in London. Later, he was a senior trader for a $750 million leading global hedge fund in South Florida. There, he helped manage and trade a multi-billion dollar foreign exchange options portfolio. Today, Bryan runs Logic Fund Management, a currency research, advisory, consulting and money management firm.

NYSE:EWG, NYSE:GLD, RSX, SLV, UUP