U.S. Federal Reserve Chairman Ben S. Bernanke and Congress agreed Friday that the financial system – not the American taxpayer – should bear the costs of bank bailouts. Sheila Bair, head of the Federal Deposit Insurance Corp. (FDIC), wants the banks to ante up $45 billion – three years’ worth of deposit-insurance premiums – to bail out the fund that insures bank deposits.

When it comes to bank stocks, we all know that there were a number of Money Morning readers shrewd enough to buy Citigroup Inc. (NYSE: C) shares when the foundering giant’s stock price was below $1 a share.

If you’re one of those investors, good for you: With Citi’s shares now trading at nearly $4.70 a share, that shrewdness – or courage – has been amply rewarded.

But the question we have to ask at this point is: Why would anyone buy banks stocks right now?

Bailouts Revisited

When the Bush administration bailed out the banks last autumn, I opposed the bailout. But I understood the rationale for it. The Lehman Brothers Holdings Inc. (OTC: LEHMQ) bankruptcy had clearly done a lot of damage to market confidence. Thus, a series of high-profile failures – however well merited – could push the market into a behavioral funk that might take years to emerge from.

After all, as we were incessantly reminded, the banks were all intimately inter-connected – not in the least by the diabolical credit-default-swap market. So a big failure could trigger a mass-market meltdown.

That justified the immediate bailout back then. But it did not justify the continued existence of those banks and other financial institutions – especially Citi, Bank of America Corp. (NYSE: BAC) and insurance giant American International Group Inc. (NYSE: AIG) – a year after the bailout.

Even if there was an argument for preventing the immediate meltdown of those companies – to prevent panic – there was no good argument for allowing them to continue in business as zombies, distorting the market forever after. An orderly liquidation was what was really needed.

But if the plans called for these three bad actors to be liquidated, it should surely be happening by now. Two of the three have even kept their top management for the intervening year. The exception has been BofA, where Chief Executive Officer Ken Lewis is now being shoved – kicking and screaming – toward the exit. (However, I have no doubt he’ll end up being well rewarded for the indignity).

Japan’s ‘Lost Decade’

Economically, keeping banks and other companies alive after they should be dead is the mistake Japan made back in the 1990s. After Japan’s massive stock market meltdown, most of the banks were technically insolvent. A decline in the value of the stocks the banks held had gnawed away their capital, while their assets were shredded by the collapse in the value of their real-estate loans.

Despite this, Japan opted to prop up many insolvent companies, which kept the country’s entire banking system on life support until 1998 – hence the “Lost Decade” of financial legend. And a true resolution of the problem did not come until it was forced by Prime Minister Junichiro Koizumi in 2003. The result was more than a decade of economic stagnation and a mountain of public debt that actually exceeded 200% of gross domestic product (GDP).

For the banks themselves, the fallout can be even worse.

An ‘Artificial’ Market

At first blush, the profits of the last few months look pretty good. And the record bonuses being threatened on Wall Street suggest that all is fine. However, there are two problems. First, bank earnings have been propped up by an extraordinarily bank-friendly monetary policy, keeping short-term interest rates at close to zero and buying up more than $1.5 trillion of bad bank loans from the markets.

That simply can’t last. If it does, we’ll end up with a bad case of hyperinflation.

As for the bonuses, does anybody think that if Citi had gone bust, and ex-Citibankers were now selling apples on the street corners of New York, bonuses would be zooming so high?

If the market for overpaid bankers had been allowed to clear properly, they would no longer be overpaid.

If the Japan’s Nomura Securities (NYSE ADR: NMR) wanted to double its U.S. staff, as it announced Monday (an extraordinarily shareholder-hostile decision, given Nomura’s lousy U.S. track record), it could just lean out of its office and whistle, and a parade of ex-Citibankers, ex-AIG executives and ex-BofA execs would rush in, begging for scraps.

It appears that the concerns that Soros expressed are well justified.

A Grim Reaping For Bank Investors

Since there are more competitors in the market than there should be, once the Fed’s over-generous monetary policy is corrected, there will be too much competition, so bank profits will be squeezed. Conversely, there will be too many jobs in the industry, so banker pay scales will be artificially propped up.

If that’s a recipe for good shareholder returns, I’m a Dutchman.

There’s more. The populist fury against the banking system doesn’t look like it’s doing much about banker pay. However, it will almost certainly result in special extra taxes being levied on surviving banks, to pay for the bailouts.

The costs of those taxes will be passed through to shareholders, because competition from all the zombies that are still in business will prevent banker pay from being squeezed much. The extra levies that Bair, the FDIC chief, is employing to keep the deposit-insurance fund solvent also will fall on banks, although in this case it will be the small and medium-sized that will suffer the worst.

Squeezed profits, expensive staff, extra taxes and special FDIC levies – it doesn’t look to me as if there will be much left for bank shareholders.

Expect 2010 to be a grim year for them.

Source: Hidden Traps Make Bank Stocks a Bad Deal

On one hand, the $130 billion he spent on acquisitions – FleetBoston Financial Corp., MBNA Corp., LaSalle Bank Corp., Countrywide Financial Corp., Charles Schwab Corp.’s (Nasdaq: SCHW) U.S. Trust private banking unit and Merrill Lynch – that more than tripled the size of Bank of America, making it the largest U.S. lender both by assets and deposits.

On the other, his open-wallet policy and the example it set forth almost perfectly encapsulates the boom, bust and nascent rebound of the U.S. housing and banking crisis – which later became the financial plague that devastated markets all over the world.

In the second half of 2007, the extent of the U.S. housing crisis began to crystallize when Countrywide’s freewheeling subprime-lending policy irreversibly sank the nation’s largest home lender. Lewis moved in and acquired the troubled lender for $4 billion the following January, and in doing so, he put Bank of America on the hook for Countrywide $1.5 trillion loan portfolio.

In the second half of 2008, the extent of the how much havoc the destruction of investment banks and brokerage firms would wreak upon the world became clear. The vortex of it was Sept. 15, the day the Lehman Brothers Holdings Inc. (OTC: LEHMQ) declared bankruptcy and Bank of America agreed to pay $29 billion for world’s largest brokerage firm, Merrill Lynch, which probably would have failed had it not found a partner.

Lewis’ spending got Bank of America into this mess. The question now is whether continued  spending – using the $45 billion bailout courtesy of the U.S. Treasury’s Troubled Asset Relief Program (TARP) – will get BofA out of it.

And Lewis seems to acknowledge both in the news release announcing his voluntary departure.

“Bank of America is well positioned to meet the continuing challenges of the economy and markets,” Lewis said. “We are in position to begin to repay the federal government’s TARP investments. For these reasons, I decided now is the time to begin to transition to the next generation of leadership at Bank of America.”

Lewis naturally defends his actions just as much as critics chide him for them.

“Their loan portfolio is horrible looking and it’s not going to be easy for them,” Mike Williams, research director at Gradient Analytics in Scottsdale, Arizona, said in a Bloomberg News interview before Lewis announced his departure. “They would have been better off without the Merrill and Countrywide acquisitions over the next few years.”

Money Morning Contributing Editor Martin Hutchinson, a leading banking expert, says that Bank of America has a very difficult journey ahead of it.

“Lewis followed [predecessor CEO Hugh] McColl’s strategy of expanding BofA by acquisition,” he said. “The trouble is that his last 2 deals were both lousy. Countrywide was at the epicenter of all that was bad about housing finance, and that was obvious in January 2008, when he bought it. Just a terrible deal.”

In fact, Hutchinson believes there’s only one viable option for Bank of America.

“BofA will have to be broken up, but may need to be sorted out by a liquidator/ the government,” he said.

Spinning Merrill

The Merrill merger was perhaps the defining moment in Lewis’ tenure, and he Lewis has played the victim and hero of the saga.

Lewis testified that U.S. Federal Reserve Chairman Ben S. Bernanke and former U.S. Treasury Secretary Henry M. “Hank” Paulson Jr. pressured him not only to move ahead with a merger with Merrill Lynch despite reservations, but also to stay quiet about the mounting losses at the crumbling investment bank.

And in a note to employees announcing his departure, he took credit for the fact that Merrill has contributed 24% to the Bank of America’s first-half profit, boosted trading and investment-banking revenue, Bloomberg reported.

“I am gratified that even some of the critics of our acquisition of Merrill Lynch have come to acknowledge how well the deal is working out for our clients,” Lewis wrote. “This journey has been a rocky one and not for the faint of heart, but perseverance is paying off.”

But to the rest of the world, Lewis was most often seen sitting under the hot light of probes by Congress, the U.S. Securities and Exchange Commission (SEC) and New York’s attorney general all trying to determine if Lewis misled investors about Merrill’s losses and bonuses.

And even if shareholders agreed with Lewis’ decisions, they didn’t prefer him to be the company’s face. In April, shareholders voted 50.34% in favor of stripping Lewis of his chairman title.

Changing of the Guard

When Lewis steps down from his post Dec. 31, he joins the ranks of fellow financial firm executives – James Cayne of The Bear Stearns Cos., Charles Prince of Citigroup Inc. (NYSE: C), Stanley O’Neal of Merrill, Kennedy Thompson of Wachovia and Richard Fuld of Lehman Brothers, John Thain of  Merrill Lynch – that resigned, many in disgrace, either during or in the aftermath of the global financial crisis.

Among the survivors, Lloyd Blankfein, CEO of Goldman Sachs Group Inc. (NYSE: GS), and Jamie Dimon, CEO of JPMorgan Chase & Co. (NYSE: JPM).

Bank of America said it will find a replacement by Lewis’ last day, and media outlets have already began making lists of possible successors.

Among the names frequently mentioned:

• Brian Moynihan, head of Bank of America’s consumer and small business banking unit.
• Sallie Krawcheck, former Citigroup Inc. (NYSE: C) CFO and president of Bank of America’s global wealth and investment management unit.
• Tom Montag, former Merrill executive and head of Bank of America’s corporate and investment banking unit.

An outsider might well be the best choice, says Money Morning’s Hutchinson.

Lewis is “leaving a company that no human being could manage, with vast problems, and far too broad a franchise,” Hutchinson said. “North Carolina retail bankers haven’t a clue how to run a top international investment bank like Merrill and vice versa. There’s nobody available to succeed him that can do the job.”

Source: Boom, Bust and Rebuild: Bank of America and the Kenneth Lewis Legacy

Good day… Welcome to October! And a Tub Thumpin’ Thursday to you! No real reason to get Tub Thumpin’, but I thought why not? The non-dollar currencies have given back their gains made yesterday to the dollar, in a game of what seems to be, give and take… A tennis match with the dollar, one day the ball is in the dollar’s court, and the next day it’s not! Really, kind of giving me a rash, watching this… I want some direction here!

So… When I turned on all my screens this morning, and then waited about 20 minutes for the new programs to be installed on them that the IT people left for the next time the computer started up… Hmmm, where was I? Oh! I was talking about when I first saw the currencies this morning… I saw that the euro had fallen back to 1.4560… And of course wanted to find out why…

Well, it seems that the G-7 Finance Ministers are going to meet this week, and there is already some discussion that the euro’s rise will be discussed… OK… Currencies traders took this to mean that these mental giants in the G-7 will do something to stem the rise of the euro… Of course, the G-7 Fin Mins might just be discussing how impressive the euro’s gains have been VS the dollar this year! HA!

This plays well with the thought I had and shared with you the other day, regarding Central Bankers from Japan and the Eurozone propping up the dollar… Trust me folks, these guys are smart puppies, and can see the writing on the wall for the dollar, just like you, me and the guy down the street that cuts his grass early in the morning… The last thing they want to happen is for everyone to get the idea that these Central Bankers won’t prop up the dollar, for if that were to happen, it would spring open Pandora’s Box of currency disasters for the dollar!

The Eurozone did receive some strong data this morning…. The latest Eurozone PMI printed. Eurozone PMI is just like here in the U.S. it’s a measurement of the manufacturing activity. But only in the Eurozone it takes in all 16 member countries. This activity is then put into an index so that it can be easily monitored. And just like here in the U.S. the line in the sand of whether manufacturing is contracting or expanding is 50…

Eurozone PMI rose for the 5 straight month, but remained under 50, posting a 49.3 in September… But the trend is manufacturing’s friend here, I would think, as it has risen steadily for the past 5 months.

Let’s talk about something other than the Eurozone… The other day, I was interviewed by Reuters about dollar / yen. I told them that the Japanese yen did not have the fundamentals to support an 88 figure, which it had hit on two occasions in the past week. Well… The Japanese Tankan report, which takes the pulse of the economic activity in Japan, backed up what I had said earlier, when it reported that “Japanese companies plan to deepen investment cuts as profits slump, inhibiting the recovery from the nation’s worst postwar recession.”

Speaking of interviews… I did a quick one in a chat room at DTI, which is an investment education company. This quick interview was just a “teaser” for a full fledged 30 minutes of “Chuck speak” that will happen next Monday at 1:30 CT… It will be a power point presentation that comes across on your computer, with me talking over it… Sounds like it will be tre’ cool… If you want to find out more click here… http://www.dtitrader.com/trading_education_MMM_everbank.htm

With the euro backing off this morning, the rest of the non-dollar currencies are doing the same. Aussie and kiwi have not been able to hold onto gains they made yesterday, and the rest of the currencies just fall in line. You know what I always say when this happens don’t you? That’s right… It gives everyone an opportunity to buy at cheaper levels than yesterday!

The other day, after the S&P/CaseShiller Home Price Index number printed and showed a month-to-month rise in home prices, I thought to myself, is this really something that can catch hold and continue to rise? I then began to put together a list of the “risks” to continued Home Price increases… The list as I have it:
1. 1.5 million homes on the dockets for foreclosure
2. 10% unemployment, with 39% unemployed for more than 6 months…
3. The potential stock market correction
4. The end of the 8% tax credit for first time home buyers, (that son, Andrew took advantage of this summer!)

Long Time Friend… Ed Bonawitz, agreed the list and added that if we just look at how the auto industry fell back into an abyss after the cash for clunkers program ended, imagine what the end of the 8% tax credit program will do…

I was talking with a customer yesterday that has traveled quite a bit over the years, and had businesses in China and Indonesia, etc. I asked him the question that everyone asks me all the time, regarding China’s data… When I’m asked whether this is good data or not, I usually reply that I don’t live there, so I have no other choice but to take it as printed… But, my customer, told me that he believed that, for instance, if China printed a 10% GDP, that it’s probably inflated by 50%! YIKES!

So, with that in mind, China printed their PMI for September last night, and, according to the Chinese, it rose .3% to 54.3%… Again, a number for a PMI above 50 indicates expansion… So… Even if the Chinese inflated the data, their manufacturing sector would still be performing in an expansion mode…

And… What’s good for the goose (China) is good for the gander (Australia)! I told you earlier that the Aussie dollar (A$) was not able to hold it’s gains made yesterday that brought the A$ to .8859, a 14-month high for the currency. China is now on holiday for the next week, so the A$ will have to find some traction from other areas… So, it’s not out of the realm of possibilities that the A$ drifts in the next week…

I see where Big Ben Bernanke will be giving some prepared remarks to lawmakers this morning about the need for strong consumer protection of financial services… Hmmm… This makes me laugh, and laugh hard! Isn’t this kind of like the fox telling the farmer the need to secure the hen house after it’s been raided?

I mean, the Fed had the control, the supervisory power, to protect consumers from the lending practices that went on but did they? NO! They turned their heads and looked the other way, while the mortgage mess grew and grew… Just like a child… If you look the other way when they misbehave, then the misbehaving will get worse, and worse…

Seems Big Ben was a little upset a couple of months ago, when it was proposed that there would be a new Consumer Protection Agency… He felt like the Fed was being knocked down a notch, and he criticized the proposal… I doubt he’ll go down that road again, as I’m certain, he received a “memo” from the powers to be, which told him to shut his trap and go with the President’s plan…

The data cupboard today yields the U.S. version of PMI, which we changed to ISM a few years ago… The ISM in the U.S. went back above 50 in August, and is expected to have gained a bit in September. This is good news for the economy… But one has to wonder about what happens after the all the build up for the cars for clunkers program filters through… But, with the dollar much weaker than 6 months ago, manufacturing certainly gets a lift.

We’ll also see Personal Income and Spending, which unfortunately has shifted back to the days of us spending more than we make… Didn’t we learn anything? It’s Thursday, so the Weekly Initial Jobless Claims will print… And then rounding out the data today are reports on Vehicle Sales, and Pending Home Sales… So a very busy day at the data cupboard!

OK… Before I go to the recap and the currency round-up, I just had a thought about today’s actions in the currencies VS the dollar. The Asian and European sessions sold the currencies and bought dollars… When the NY guys and girls arrive and see what has happened overnight, I suspect we’ll see more selling, as they will have orders to fill… So… The cheaper levels could be still to come today…

Then there was this… Bank of America’s CEO Ken Lewis announced his retirement… I find this to be somewhat strange… Very strange indeed…

To recap… The ball is back in the dollar’s court today, as G-7 gets set to meet this weekend and maybe discuss the euro’s rise… Japan’s Tankan supports my belief that there are no fundamentals that support a yen at 88, and the Eurozone posts its 5th consecutive gain in manufacturing…

Currencies today 10/1/09: A$ .8790, kiwi .7210, C$ .9315, euro 1.4555, sterling 1.5990, Swiss .9590, rand 7.6645, krone 5.80, SEK 6.99, forint 185.65, zloty 2.9050, koruna 17.45, RUB 30.09, yen 90, sing 1.4125, HKD 7.75, INR 47.76, China 6.8265, pesos 13.55, BRL 1.7665, dollar index 77.10, Oil $70.10, 10-year 3.30%, Silver $16.61, and Gold… $1,005.25

That’s it for today…

Chuck Butler

Source: G-7 to Discuss Currencies?

Good day… And a Marvelous Monday to you! My weekend turned out to be quite grand, as all the things I said that would make it special came to pass! My Cardinals clinched their division. My beloved Missouri Tigers won on Friday night, and my little buddy’s 8th grade Flyers won their game against their arch rival… WOW!

Well… Here we go with the last 3 days of September… A month that saw Gold return to $1,000, and the non-dollar currencies all return to levels they held a year ago, having withstood the onslaught of flight to safety trades that benefitted the dollar after the Lehman Bros collapse.

We’ve seen the Fed Chairman sound the “all clear horn” and me question, why anyone would still be listening to this guy! And our country is becoming quite divided over the health care issue… So… There we have it… September all rolled up in a nice package, to take out the trash!

Ok, we’re all caught up now… On Friday, the currencies gravitated toward weaker levels, as the dollar buying continued, with stocks leading the risk assets lower… But it hasn’t been a “taken to the woodshed event” for the currencies yet… So, the question remains if this is the correction we’ve been waiting for or not…

Last week I gave you some quotes by Nassim Taleb, but forgot to tell you that he was the author of the book, “The Black Swan”… Nassim Taleb was talking to a group of business people in Hong Kong this weekend, and asked the same question I’ve been asking, as he wanted to know why Big Ben Bernanke, and Treasury Sec. Tim Geithner kept their posts after failing to foresee the collapse in global credit markets. Taleb said, “Bernanke, Geithner, and Summers didn’t see the crisis coming so why are they still there? Bernanke is like a pilot who didn’t see a hurricane.”

Good stuff, eh? Especially, when you read the Washington Post and see that the Fed was ignoring pleas from Consumer Groups, as far back as 1999, that subprime lending was expanding… Turning a deaf ear on the Consumer Groups, the Fed left rates low, and accommodating… What the heck do we have these guys for any way! The Fed has been the root cause of every financial problem we’ve had in this country since they were created in 1913…

OK… Last week, the Financial Times ran a story regarding the dollar laying claims to being the top Carry Trade Currency… Let’s read a bit from the FT… “For years, the yen was the currency of choice to fund international Carry Trades. Analysts say negligible U.S. interest rates, its quantitative easing measures and little sing that the country is set to withdraw from its ultra-lose monetary policy anytime soon leaves it in a similar position to Japan at the start of the decade.”

Well… I had already told you all that, but when you see it in the FT, it obviously gives it more credence, eh?

But, let’s talk about that for a minute… If the dollar begins to become the new funding currency of the Carry Trade, that means that people will be selling the dollar short, and using the proceeds to buy a higher yielding asset… Well, in today’s markets, there aren’t what we would traditionally consider to be “high yielding assets”… For the Carry Trade is quite risky, therefore you need to have some cushion from the “buy side” asset… The only “real interest differential” in the world resides with Brazil… But the real is traded on a non-deliverable forward, which means it’s just as liquid as say Aussie or kiwi, which were the main beneficiaries when the yen was the funding currency.

So… This new Carry Trade, might have to wait a bit before getting into 4th gear. When the Reserve Bank of Australia (RBA) begins their rate hike cycle, probably by year-end, then it might begin to make sense… Which is just another thing in the gauntlet the dollar has to run through every day!

Speaking of the Japanese yen… The yen reached a 8-month high of 89.30 overnight. I told you last week that yen is getting a lot of love from Japanese exporters that are repatriating their profits in yen, ahead of the end of the month / quarter.

I had to laugh out loud when I read a story about the Japanese Finance Minister, Fujii, who apparently hadn’t gotten the memo about how Finance Ministers are supposed to jawbone the yen lower… Recall, I had told you that he said over and over again that he supported a strong yen… Well… That all changed once he got the “memo”… Fujii said last night that, “people were mistakenly saying he supported a strong yen.”

Hey Fujii, got the memo now? Is it clear?… Crystal… OK, now go out there and jawbone the yen weaker, or you’ll be falling on a sword!

This week is chock-full-o-data all over the globe… In the U.S. we’ll end the week with the Jobs Jamboree, while Japan will print their latest Tankan report (which checks the pulse of the economy), Canada will print their latest GDP, China will print their latest Manufacturing Index, and Australia will report on Retail Sales…

In the Eurozone, Germany re-elected Angela Merkel as chancellor… Now, she just needs to figure out how to deliver those tax-cuts she promised during the campaign!

The euro had climbed back to 1.4720, but the election results were not taken as “euro friendly”… Remember, I told you that there could be tax-cuts coming in Germany, which is the Eurozone’s largest economy. Tax-cuts are great, if you are in a fiscal position to do so… Germany has a nascent recovery at best going on right now, so the timing is not what traders are happy with… Therefore the euro dropped like a stone to 1.4570, but then bounced off that is back to 1.4635 as I write…

And the Reserve Bank of Australia, (RBA) which I mentioned earlier was in the news overnight, as the RBA Gov. Stevens gave a speech, that was hawkish… Stevens mentioned that the interest rates needed to move off their “unusually low levels”. He also pointed out something that should be quite recognizable by all Central Bankers now, but apparently not here in the U.S…. And that is that “imbalances build up when rates are left too low for too long.”

Well… The highly touted G-20 meeting last week ended not with a bang, but with some newfound strength as a group… Recall on Friday I told you that they would replace G-8 as the watchdog for the economies of the world. That news was announced later on Friday… G-20 ended with leaders from the G-20 nations saying that they plan to cooperate on an overhaul of financial regulations to prevent arbitrage in the global system. By the end of next year, banks will be required to hold more capital, and compensation policies will need to be linked to longer-term performance.

You know… When the media reports “Bankers compensation” they’re not talking about real Bankers, per se… They’re referring to the Merrills and Goldmans of the world that pay out Billions in bonuses, or did at least… Just thought I would clarify that point…

And then there was the British Pound sterling, which I kept saying over and over again, that this dance is gonna be a drag, no wait! I kept saying over and over again, that the pound sterling strength was a house of cards… Well, that house of cards is collapsing under the pound sterling… Even the speculators that were buying it because it was a part of the mix of currencies that made up the IMF’s SDR’s (Special Drawing Rights), are backing out now…

Data in the U.S. besides the Jobs Jamboree at the end of the week, include the S&P/ CaseShiller Home Price Index for July which will print tomorrow, along with Consumer Confidence, which is expected to be stronger… I guess the people they surveyed haven’t seen the Bernanke video collection of his statements that couldn’t be more wrong, and still believe him when he says it’s all OK! Wednesday brings us the final print of 2nd QTR GDP. Thursday has two of my faves, Personal Income and Spending, and then Friday’s Jobs Jamboree…

So, if the data continues to show some strength, but nothing to speak about… I would think that the risk takers will remain confused, and it could lead to further selling in stocks, and other risk assets… Don’t really know… Just an opinion on what might happen…

OK, to recap… The dollar has rebounded, but nothing too strong to speak of as of this morning. G-20 is the new world economic watchdog, there’s a ton o’ data to print this week, all over the globe, and Japanese yen continues to outperform the other currencies VS the dollar.

Currencies today 9/28/09: A$ .8665, kiwi .7135, C$ .9135, euro 1.4650, sterling 1.5870, Swiss .9695, rand 7.44, krone 5.82, SEK 6.9750, forint 184.20, zloty 2.88, koruna 17.22, RUB 30.11, yen 89.30, sing 1.4190, HKD 7.75, INR 47.98, China 6.8274, pesos 13.57, BRL 1.7890, dollar index 76.90, Oil $65.77, 10-year 3.32%, Silver $15.99, and Gold… $992.10

That’s it for today…I hope your Monday is Marvelous!

Chuck Butler

Source: A New Carry Trade Currency?

Good day… And a Thunderin’ Thursday to you! It’s Thundering and raining here, so I felt that naming today a “Thunderin’ Thursday” was bang on! We had a wild and wacky Wednesday yesterday, with the Fed Heads playing the part of the court jester… And… I want to know, right here, right now, why the media isn’t blasting Fed Head Honcho Big Ben Bernanke! I’ll tell you why they should be, in a minute…

OK… As I said, we had a wild and wacky Wednesday yesterday, as the non-dollar currencies went for a spin on Mr. Toad’s Wild Ride, with Big Ben Bernanke in the role of Mr. Toad! HA! That makes me chuckle! Here’s the skinny, and what everyone should be up in arms about…

The FOMC meeting concluded with interest rates remaining at near zero… But what happened next was, well, exactly as I said it would happen, but we’ll get back to that in a minute… What I’m talking about here is that the Big Ben’s band of merry men announced that the U.S. economy’s return to growth was insufficient to withdraw stimulus, and that quantitative easing would remain until March next year… WHAT!

HEY BIG BEN! I read in the Financial Times the other day, yes, the Financial Times, that you said the recession was likely over! I also read in another publication that you said basically the same thing… So! If what you told these fine publications is true… Why then do we need stimulus in place along with Quantitative Easing until next March? You could almost hear Big Ben saying… “Oops, did I say that out loud?” HA!

Doesn’t that just tick you off? Big Ben and the President going around telling people that it’s all clear and consumers can come out now and resume their spending, only to find out it was nothing but “feel good” stuff… Yes, stuff to make us “feel good”… So we would take our eye off the ball… But not me! You can’t fool a wiley old veteran like me, right Jack Milner? I’m not falling for that change-up… And it ticks me off that they thought I was so stupid to fall for that!

Ok… Let’s take a trip back to Monday of this week, when I was trying to explain why the dollar had reversed the negativity toward it… I said this in the Pfennig on Monday… “Seriously though, the markets are of the belief that the Fed will keep rates near zero, but will announce that they will begin to remove stimulus, as Head Fed Honcho, Big Ben Bernanke, believes the recession is over…

I think this is wishful thinking on the markets’ part, as I really don’t see the Fed Heads doing anything, but talking about doing this, that and the other thing. You see, the Fed Heads know all too well that the Commercial Real Estate problems are just beginning and with Unemployment.”

I’ve been more right about what the Fed Heads were going to do, for the last 2 years, than Big Ben!

OK… So, here’s where the wild and wacky comes in… The non-dollar currencies were hanging around on a corner trading in a tight range, when the announcement of further stimulus and Quantitative Easing was made… You should have seen the non-dollar currencies begin to run up VS the dollar… It was crazy, I mean in a manner of minutes the euro traded from 1.4765, to 1.4850, and Gold? It was soaring too! But then it was one of those a-ha minutes, and no, I’m not talking about the 80’s group singing Take Me On! No, it was one of those head slapping moments when you say… Wow, I could have had a V-8!

Basically, investors figured out that by leaving the stimulus in place longer than originally planned, the Cartel, I mean the Fed, is confirming that the U.S. economic recovery isn’t nearly as robust as Big Ben and his compatriots have led everyone to believe. Stock markets fell, and the Treasury rates rose.

With the stocks backing off, the risk assets of currencies and precious metals backed off VS the dollar… And, we ended the day, where we started it… A wild and wacky Wednesday for sure!

The overnight markets were very confused as to what direction they should take… So, as I turn on the screens this morning, the euro is 1.4775, and Gold is $1,014… About the same as yesterday morning… If you weren’t around for the spin on Mr. Toad’s Wild Ride, then you would think… “How boring these currencies and metals are”… HA!

The thing that keeps haunting me here with yesterday’s stock sell off… Could it be the next leg down that I keep warning you about? Could yesterday’s sell off be the harbinger of more selling? We’ll have to keep an eye on this, folks… If we see 3 or 4 days of consecutive selling, it could very well be the indication that the next leg down is here…

Well… The other day I mentioned that the dollar could very well be the last man standing when it comes to near zero interest rates, and that could lead to the dollar becoming the next funding currency for the Carry Trade…

Ty brought to my attention this fact that plays quite well with that thought… For the 1st time since 1933, 3 month LIBOR rates in the U.S. (.28563) are lower than Japanese Yen 3 month LIBOR rates (.34875)

And one wonders why, the dollar is getting beaten like a rented mule? (no animals were hurt!)

A reader called in yesterday and wanted to know what I thought regarding… how a new SDR would affect the currencies. (Specifically NOK, AUS, BRL, CHF)

Well… That’s a tough one! Because if we do end up with a new SDR, no one knows what the makeup of that SDR will be… So, I can’t say how it would affect any currency until we begin down that road to a new SDR… If the current makeup of an SDR is used, then euro, yen, sterling and dollars would benefit… But one has to think that if things come to pass and we start down that road of a new SDR (Special Drawing Rights) that the makeup would be quite different, and could possibly even have some Gold as a component!

So… Sorry, I can’t really answer the question, because it’s an unknown… I hope my beautiful bride reads this part, as she usually only reads the first and last paragraphs, because she always contends that if I don’t know the answer to a question that I just make something up… See, dear? I said I couldn’t answer the question!

Ok… G-20 begins today… Look for these knuckleheads to take a toughened stance on speculation, with Oil in mind… I think that all they will do is make things tough for the Commodity Currencies of Australia, New Zealand, Brazil, Canada, South Africa, and Norway… There’s also an outside chance that these knuckleheads will attempt to do something to limit the rise in currencies VS the dollar… In other words, prop up the dollar… I’m not convinced they could do that, and I am convinced they shouldn’t do that!

Speaking of Norway… The Norges Bank (Norway’s Central Bank) did as I thought they would with rates, and what I hoped they would do with their statement… Here’s the skinny… The Norges Bank left rates unchanged… But… Said after the rate announcement that “they were CONSIDERING a rate hike”… The Norwegian krone went on a moon shot immediately after that statement.

In the race between Norway and Australia as to which will be the first to hike rates, Norway takes the lead, with that announcement yesterday… But, it really doesn’t matter, as no one will get the checkered flag or anything… The thing that makes the difference is that the yield differentials to the U.S. will begin to grow wider… And that, my friends, will go a long way toward currency strength for the currency that rewards investors with higher yields!

Speaking of Australia… The Reserve Bank of Australia’s (RBA) semi-annual Financial Stability Review gave a generally clean bill of health to the banking system and noted sentiment among households and business had improved considerably in recent months… But… The RBA went on to caution that it was not strong enough yet… Which then puts the Aussie rate hike forecast further behind Norway’s…

In New Zealand overnight… It’s been a good week o’ data for the Kiwis… Last night, it was the latest Consumer Confidence Index which jumped to a 4 – year high of 120.3 (previous reading was 106)! WOW! So… The highest Consumer Confidence in 4 years! This news helped kiwi to remain above 72-cents… Even with the risk assets sell off…

In Germany this morning… The Business Climate Index, as reported by the think tank IFO, disappointed a bit, as it came in (91.3) lower than forecast (92), but… The 91.3 marked the 6th consecutive monthly increase for the data… So, the trend is still in place…

And it’s good to be the yen, eh? I mean, recently, we’ve seen yen rally when the other currencies rally VS the dollar… And before that, we’ve seen yen rally along with the dollar… Last night, yen rallied alongside the dollar, and is trading with a 90 handle this morning…

And then there was this… The Federal Reserve System has disclosed to the Gold Anti-Trust Action Committee Inc. (GATA) that it has gold swap arrangements with foreign banks that it does not want the public to know about. WOW! This is a BIG DEAL folks, as the Fed as recently as 2001 (Big Al Greenspan) denied that these swap arrangements existed…

GATA believes that this letter suggests that the Fed is indeed very much involved in the surreptitious international central bank manipulation of the gold price particularly and the currency markets generally.

So guess what I think regarding the Fed now? That Ron Paul’s bill to audit the Fed needs to get on a roll! Remember, it comes before a committee tomorrow, I believe, where it will be decided to forward the bill on or kill it… So, call your representative and tell them you believe they should back Ron Paul’s bill to audit the Fed! I’ve got a bag full of names to call these guys at the cartel, I mean Fed… But, those are verbally used only… Nothing in writing… Hey! This is a family safe letter!

OK… So, to recap… The Fed is leaving stimulus in place along with Quantitative Easing until next March. So much for Big Ben, and the President’s claim that the recession is over, eh? The currencies rallied at first on the Fed’s announcement, but later realized the rot on the economy’s vine has been exposed by the Fed, and then the currencies sold off VS the dollar to end the day unchanged…

Currencies today 9/24/09: .8745, kiwi .7235, C$ .93, euro 1.4775, sterling 1.6220, Swiss .9770, rand 7.3850, krone 5.7630, SEK 6.8380, forint 183.15, zloty 2.82, koruna 17.04, RUB 29.99, yen 90.60, sing 1.4110, HKD 7.75, INR 48.03, China 6.8273, pesos 13.37, BRL 1.7980, dollar index 76.25, Oil $68.36, 10-year 3.41%, Silver $16.81, and Gold… $1,014.10

That’s it for today…I hope everyone arrives to work dry, as it’s a Thunderin’ Thursday!

Chuck Butler

Source: Oops, Did I Say That Out Loud?

Good day… And a Wonderful Wednesday to you! Well, the Fed Head put away the board games today, and make an announcement this afternoon… Yawn… Norway’s Norges Bank will also make an announcement with theirs coming this morning. I still contend that the Norges Bank will keep rates unchanged and give a hint as to when their rate hike cycle will begin. If that were to happen as I think, then it would be very bullish for the krone…

Well! The non-dollar currencies held ground gained yesterday, giving back, oh-so-little to the profit taking. The euro didn’t hold 1.48, but it’s so close it could spit in the 1.48’s back yard! The negativity toward the dollar, and all that goes with it, like Huge Deficit Spending, low yields, economic depression, inflation fears, and more, just keeps mounting… All these pundits with their “discovery” that the dollar has bad fundamentals, just make me laugh. Welcome to my world! In this world, we don’t wear rose colored glasses… We call dolts for what they are… And we fully understand the bad affects of building deficits…

HEY! One of the first books I ever read about the dollar, was written in 1972, by a guy named Gerald Krefetz, called, “The Dying Dollar”… But, the one that really pushed things to the forefront in 2003 was Richard Duncan’s “The Dollar Crisis”… For the longest time, when someone would ask me what book they should read to get started, I would give them Richard Duncan’s “The Dollar Crisis”…

The Dollar Crisis was followed by two books by Addison Wiggin and Bill Bonner, “Financial Reckoning Day” and “Empire of Debt”… Addison also wrote “The Demise of Dollar”, and then Craig Karmin wrote, “The Biography of the Dollar”, in which he writes one chapter around my story… All of these have done a wonderful job of explaining things to people that normally wouldn’t understand all that’s going on, financially…

The reason I brought this up is that Richard Duncan was in the news last night, as he gave an interview in Hong Kong yesterday… Let’s listen in to Richard Duncan…

“The bad news is at the end of a 10-year period we’re still not going to have fixed the problem. Eventually it will lead to high rates of inflation well down the line and really destabilize things to the point where they may be irreparable damage. A kind of “Fall of Rome” scenario.”

Of course Mr. Duncan was talking about the U.S. Budget Deficits, which he feels will continue to pile up in the next decade, eventually reaching an unsustainable level that may result in an economic collapse…

I think it would behoove us to listen to Richard Duncan, for in his book, “The Dollar Crisis” published in 2003, he told us that persistent Current Account Deficits by the U.S. were creating an unsustainable boom in global credit that was destined to break down, resulting in a worldwide recession… Hmmm… Does he have everyone’s attention now? Good!

Ok… Enough of the “book tours”! I was listening to the Evening News while icing my knee last night, and something that Brian Williams said struck me as strange… He said…”The poll of more than 1,000 adults, taken within the past week, shows growing optimism that the economy has begun to turn around.” Hmmm… I guess they didn’t ask one of the 7.4 Million people that have lost their jobs!

I’ve got two things to talk about here with this… 1. is that people would be listening to Big Ben Bernanke which is where I believe this “optimism on the economy” is coming from… I have a YouTube video at home, that you can find, I’m sure, that’s titled “Bernanke” that has shot after shot of him saying something that was so completely wrong, that you have to wonder how the heck he kept his job! Any way… I can’t get to it here at work, you know they would never want me “wasting my time looking videos of the Fed Chairman!”

And then 2. is the question that I have regarding those people surveyed… How could they have optimism when 7.4 million Americans have lost their jobs during this depression (what they call a recession)… But that wouldn’t be bad if these 7.4 million Americans turned around and found jobs right away, eh? Well… Unfortunately… The average duration of unemployment at 25 weeks is now the longest since the Department of Labor started tracking the data in 1948. By the end of August, nearly five million people had been unemployed for longer than six months…

Whew! Now that was a depressing piece… Hmmm… What can I talk about that brings the smiles back on everyone’s faces? I’ve got it! Gold!

I was telling Jen yesterday that the commercials for Gold on TV are really starting to add up… You’ve got Gordon Liddy, Jay Johnson, and others telling you how Gold is a store of wealth, and inflation fighter, and more dependable than fiat currencies… And of course you should buy Gold where “they buy their Gold”! I really think we should have our own Gold commercial, and say, “yes, you can buy it from those other guys, but why pay more for your Gold?”! HA! Now that would get ‘em!

But seriously… There is a guy, well known guy, out there right now, writing about how the price of Gold is about to collapse… So… At least you know that I give you both sides of the story, eh? I don’t agree with this side of the story, but there it is for you!

OK, now we’re back on the “happy tracks”! So, let’s head to the South Pacific! New Zealand pushed out of their recession in the 2nd QTR, after seeing its economy contract for five consecutive quarters… Now, don’t get too lathered up over this initial news… The New Zealand GDP only increased slightly less than 0.1%. But! That technically ends the nation’s worst economic downturn in three decades.

This was very bullish for kiwi, as now the markets are beginning to talk about a rate hike in New Zealand… I would say that’s a little premature, wouldn’t you? I mean, they have barely climbed out of the red, and the talk turns to a rate hike? Yes, definitely… That’s premature… But! The talk has kiwi on the rise… Let’s hope that traders don’t get disappointed too quickly!

And then back in the Eurozone… Germany’s Manufacturing PMI came in less than forecast, but! Hit a 13-month high of 49.6! Still not above 50, but the trend is Germany’s friend right now in the manufacturing sector! Tomorrow, we’ll see the think tank IFO’s Business Climate, and I truly believe this will be strong, and these two together, strongly suggest that the euro is trading at a proper level!

I’m still waiting for news from the Norges Bank…

I read some real disheartening news last night regarding foreclosures in the U.S. It seems that they are really backlogged… As of July, mortgage companies had not begun the foreclosure process on 1.2 million loans, according to LPS Applied Analytics. Also, 1.5 million seriously delinquent loans were still caught up in the foreclosure process… Hmmm… You don’t think the processing of these foreclosures are being held back by someone do you? I mean, what better way to get people “feeling good again” than to not have them hear “bad news”…

OK, that’s just the conspiracy blood in me… Sorry…

Things have been quiet in Japan since the election… And the Japanese yen has range traded… Waiting for a direction from the new Gov’t… What will they do? Will they promote growth? Will they continue to authorize intervention to keep the yen weak? Lots of questions here in Japan…

I had a reader send a note that made me chuckle… He asked if the Chinese were going to sell Treasuries to buy the IMF’s Gold… He called it… “junk for Gold”… HAHAHAHAHAHA!

Speaking of China… Have you noticed that the renminbi has ever-so-slightly gotten stronger VS the dollar? This is micro-moves… But, “moves” nonetheless! And not weaker!

Further with China… Did you see where China was arguing their position in the World Trade Organization (WTO) regarding not allowing Hollywood Movies, and other Western media into their country? The Chinese invoked a defense of “Public Morals”… We’ll have to keep an eye on that to see how that turns out!

I’ll come back to North America, before I head to the recap and Big Finish…

Yesterday, I told you that Canadian Retail Sales was the only “real” data to print that day… Well, I might as well, tell you what printed, eh? Canadian Retail Sales backed off the consecutive gains of 1.1% in May and June, and posted a negative -.6% in July… This won’t do anything to get the Bank of Canada off their duffs… However, one would have thought that data like this would hurt the currency, in this case the loonie… And it did… But only for a short time… The loonie is back on the rally tracks this morning!

OK… So… The FOMC ends today, we’re still waiting for the Norges Bank’s announcement, and the dollar is holding on for dear life! The negativity toward the dollar has returned, and Richard Duncan gives us his latest forecast…

Currencies today 9/23/09: A$ .8740, kiwi .7250, C$ .9365, euro 1.4780, sterling 1.6440, Swiss .9775, rand 6.8250, krone 5.8225, SEK 6.83, forint 183.50, zloty 2.8275, koruna 17, RUB 30, yen 91.30, sing 1.4125, HKD 7.7505, INR 48.02, China 6.8261, pesos 13.35, BRL 1.7925, dollar index 76.14, Oil $71.15, 10-year 3.47%, Silver $17.13, and Gold… $1,014.45

That’s it for today…make this a Wonderful Wednesday!

Chuck Butler

Source: Catching Up With Richard Duncan…

Good day… And a Marvelous Monday to you! Here we go… Starting a new week all over again… I have a blank page to start each day, and then 2 hours later… The Fabulous Pfennig! A work of art, I must say! HAHAHAHAHAHAHAHA!

Well… Recall on Friday, I said that the non-dollar currencies would probably just follow whatever the stocks did, since the data cupboard was empty? Well, the non-dollar currencies didn’t even follow that theme, as stocks pretty much wallowed around in the mud all day… The dollar began to push back at the gains the other currencies had made during the week… And overnight, the dollar has continued pushing back.

And… I don’t really have a problem with that, as long as it remains, short-lived, for the non-dollar currencies had really moved higher without any push-back from the dollar… I love it when the markets create dips, so that investors that can’t make up their minds, can finally get in!

The BIG NEWS this week surrounds the 2-day FOMC meeting that begins tomorrow… Long time readers know that I’ve always wondered what the heck the Fed Heads need 2-days to flip a coin and decide whether to raise rates or cut them (HA!)… In fact, I’ve always contended that the Fed Heads sit around and play board games… No not Candy land… But something like Battleship! By Joe, you’ve sunk my battleship!

Seriously though, the markets are of the belief that the Fed will keep rates near zero, but will announce that they will begin to remove stimulus, as Head Fed Honcho, Big Ben Bernanke, believes the recession is over…

I think this is wishful thinking on the markets’ part, as I really don’t see the Fed Heads doing anything, but talking about doing this, that and the other thing. You see, the Fed Heads know all too well that the Commercial Real Estate problems are just beginning and with Unemployment near 10%, to remove stimulus now could be disastrous…

In addition to the 2-day FOMC meeting, we will also see the Treasury auction off $112 Billion of 2, 5, and 7-year Treasury Notes, which just happens to be a record amount for that combination of notes… The previous record was $109 Billion about a month ago…

So… Here’s what I see going on here… The Treasury sees that $109 Billion was taken up a month ago (remember, this is the one that the Fed bought back a few billion from Primary Dealers), and just like a baseball pitcher that gets a strike called for him on the outside of the plate, he’ll just throw it a couple of inches further outside, and see if the umpire will call that a strike too… The Treasury is simply pushing the strike zone… What’s another $3 Billion? “The foreigners will take them”, you can hear the Treasury dudes saying… Hmmm… When do you think foreigners will simply say “no mas”? I really don’t think the Treasury dudes, or the current administration believes that will or can happen, so why not continue to push the deficit higher and higher? That’s what those dudes are saying folks… Not me!

Like Sly Stone, as Woodstock… I want to take you higher!

OK… I had better go on to something else, before I begin to throw rotten fruit and vegetables at these guys for doing this to our country and our grandkids!

The other Big thing going on this week is a G-20 meeting in Pittsburgh that begins Friday ( I think!) When a French official that was going to attend the G-20 meeting was asked about what would be talked about, he said that currencies would NOT be on the agenda…

I guess that’s because Brazil, Russia, India and China aren’t going to be there! For I believe if there were… Currencies, specifically the dollar would be a heated discussion!

No… You know the G-20 members have far “more important” (NOT!) things to talk about, like how bankers get paid! Mental giants all of them! Again… NOT!

On Wednesday, when the Fed Head finally get around to putting their board games away, and give their statement and rate announcement, Norway’s Central Bank, the Norges Bank will also be making a rate announcement… And for my money, I’d rather hear what the Norges Bank has to say, for they won’t be speaking out of the side of their collective mouths… I do expect the Norges Bank to leave rates unchanged, but look for them to give some indication of when they expect to begin their rate hike cycle… I’m sure they have to keep as much cold water on their statement as possible, as to not get the markets all lathered up too soon…

Most of Asia is on holiday today… And, the currency guys took that opportunity to sell yen, bringing it back to 92 and change, which is where yen was before the big move in the currencies last Tuesday / Wednesday… As I said above, this is welcome, as it keeps the non-dollar currencies from going too far, too fast… I truly do not believe this is a short-term strong dollar trend, but a mini-correction, if you will…

In New Zealand, the country will print their 2nd QTR GDP tomorrow… The forecast is for a drop in economic growth, which would not allow the Reserve Bank of New Zealand (RBNZ) the opportunity to follow Australia’s lead, when Australia gets around to hiking rates before the end of this year… And that, will allow the Australian dollar (A$) to outperform kiwi… At least, that’s how I see it!

Kiwi is already feeling the heat, dropping 1/2-cent overnight…

In Germany this week, we’ll see this month’s Business Sentiment as measured by the think tank IFO on Wednesday… Business Sentiment is expected to reach a high since September of last year… That should help underpin the euro.

Gold and Silver have also backed off their highs of last Tues/ Wednesday… Gold is hanging by the skin of its teeth to $1,000, as I write, but I doubt it will be able to hold on, as of right now, it just appears that risk taking has waned a bit with the FOMC coming…

Remember though… I said a couple of weeks ago, that I might have to raise the bar with Gold… Remember how I used to give you the wink and nod whenever Gold would fall below $900? I said that I might have to change that to whenever Gold falls below $1,000…

The data cupboard has a few items this week worthy of our viewing… Like today, we’ll see the latest Leading Indicators, which I think will be good short-term, but long term would show some cracks in the economic growth foundation. Then we don’t really see anything with the FOMC going on Tuesday and Wednesday, till Thursday, when Existing Home Sales print… So, we might as well wait until later in the week, to talk about the Friday stuff!

And then there was this… Over in Germany, campaigning for the election of Chancellor is going on… And the opposition has proposed a tax increase for the wealthiest, and a value added tax… The current chancellor, Angela Merkel, saw that, and proposed a “tax cut”! Talk about a great campaign move! Even if she never cuts taxes in her next term, this is a great campaign move…

OK… And one more thing, although it doesn’t have anything to do with currencies or economies, well, maybe with spending in the U.S…. But… The top U.S. and NATO commander in Afghanistan warns in an urgent, confidential assessment of the war that he needs more forces within the next year and bluntly states that without them, the eight-year conflict “will likely result in failure.” Just one word come to mind when I read that in the Wall Street Journal this morning… Vietnam…

So… To recap… The dollar has pushed back VS the other currencies, but doesn’t appear to be taking any step toward a new short-term strong dollar trend. The FOMC meets this week, along with Norway’s Norges Bank, and G-20 later in the week. Gold and Silver have also backed off their highs last week, as risk taking has waned…

Currencies today 9/21/09: A$ .8615, kiwi .7040, C$ .9280, euro 1.4660, sterling 1.6185, Swiss .9665, rand 7.5275, krone 5.90, SEK 6.9150, forint 185.60, zloty 2.8350, koruna 17.1925, RUB 30.37, yen 92.20, sing 1.4185, HKD 7.7505, INR 48.14, China 6.8289, pesos 13.33, BRL 1.8080, dollar index 76.85, Oil $70.53, 10-year 3.46%, Silver $16.77, and Gold… $1,001.85

That’s it for today…Time to get this Marvelous Monday going!

Chuck Butler

Source: FOMC Week…

The Standard & Poor’s 500 Index is up 58% from its March lows, gold has finally broken through the $1,000-an-ounce level – and may go higher – and bond yields have fallen substantially in spite of the huge U.S. budget deficit.

It’s really not difficult to tell when you’re in a bubble. What’s tough is trying to figure out how to invest while it’s developing.

When current Fed Chairman Ben S. Bernanke doubled the monetary base in a few weeks last fall, it was pretty obvious that the extra money would appear somewhere, either as zooming asset prices or as surging inflation. After all, the rapid increases in the U.S. money supply after 1995 produced a stock-market bubble and then a housing bubble.

And don’t forget about interest rates. When oil prices doubled in less than 12 months between 2007 and 2008, it was because Bernanke aggressively cut interest rates after the recession first hit in late 2007. So you’d have to believe that money supply was irrelevant not to expect markets to start behaving oddly at some point.

Silver and Gold …

That’s why – since late in 2007– I have been recommending investments in gold and other hard assets. While the recession had sharply reduced demand for oil, causing its price to drop from its record high of $147 a barrel in July 2008 to around $30 in February, the gold price had dropped only from its March 2008 peak of $1,000 to around $700, before rebounding. Gold prices remain far below the inflation-adjusted equivalent of their 1980 peak, which would be around $2,300 per ounce today.

Likewise, silver prices are even further below their 1980 peak, which would be around $130 per pounce, or nearly 10 times the current level. Since both gold and silver markets are relatively thin compared to the money available – annual gold production is only $100 billion at current prices – the potential for a run-up is considerable.

The difference between a bubble and a sound bull market is that a bubble happens more quickly. Normal valuation metrics get ignored. You couldn’t rationally justify – on any sort of long-term basis – the dot-com stock prices of 1999, the California house prices of 2005, or the $147-per-barrel record oil prices of 2008.

Similarly, today’s cost of extracting gold is nowhere near $1,000 an ounce. Mining costs have increased. But extraction costs are still only about $400 an ounce for top-tier miners.

Likewise, with inflation at 2% and U.S. budget deficits at more than $1 trillion per annum, there’s no justification for a 10-year U.S. Treasury bond yield below 3.5%.

Let’s look at stocks. And let’s say that the market of early 1995 – when the Dow Jones Industrial Average was at 4,000 – is a reasonable base for estimating a fair value for the U.S. stock market. If that were the case, then inflating the Dow in line with nominal gross domestic product to keep it at fair value would bring us to a current day estimate of 7,800.

[The Dow closed yesterday (Thursday) at 9,783.92. To reach this “fair-value” level, the Dow would have to drop 1,984 points, or 20% – enough of a decline to qualify as an official “bear market.”]

However 1995 wasn’t a bear market, and economic and earnings prospects that year were really good. Besides, the Internet was just starting its rise to prominence. Today, we’re in a deep recession, with huge budget deficits and high unemployment, yet the Dow is closing in on 10,000.

In other words, U.S. stocks are overvalued. Even after the bearish trauma of last year, we remain in a stock-market bubble.

Four “Bubble” Investing Strategies – Including the One That Works

Bubble investing is different from bull-market investing. There aren’t many “good” values, so you have to be very careful.

One bubble-market strategy is to just put everything in cash and hide under the bed. How boring! Plus, as your neighbors brag about their profits at cocktail parties, you’ll feel like an idiot until the bubble bursts. Remember, even after your neighbors’ profits have turned to losses and you look smart, you can never get those cocktail parties back!

That doesn’t mean you should abandon prudence, however. You should certainly keep much higher cash reserves than normal. Indeed, consider investing a chunk of that cash in one of the non-dollar-denominated WorldCurrency Access Deposit Accounts offered by EverBank.

At the same time, it’s a pity to completely miss out on the returns one can earn in a bubble environment. But you have to careful and smart.

A second bubble-investing strategy is to find something that isn’t overvalued, and buy only that. That strategy worked great for me back in 1999. I was working in Croatia, which was going through a deep economic crisis. NATO was bombing neighboring countries in the Kosovo War. That played merry hell with tourism, Croatia’s main foreign currency earner. Croatian shares – there were about six at the time – were each selling at less than five times earnings. So I invested in Croatia and made out nicely when the war ended and things returned to normal.

The problem with that approach is globalization. It was just possible in 1999 to find undervalued investments, if only by putting your money close to a war zone. It isn’t really possible now, at least not to any great extent. Three months ago, there were lots of shares even in the United States, which had been bombed out by the downturn and hadn’t recovered. There aren’t many left now; if a share is bombed out today there’s probably good reason for it.

A third potential strategy is to try to time the bursting of the bubble. For example, you could buy the ProShares UltraShort Trust (NYSE: TBT), inversely related to twice the Lehman Brothers Holdings Inc. (OTC: LEHMQ) 20-year bond index. Then you’d wait for the bond market to crash, and TBT to soar.

But there are two problems:

• First, the ProShares UltraShort Trust has a fair-sized tracking error, because they have to rebalance the fund daily. Thus if you hold it too long, you won’t do as well as you should.
• Second, the bubble can take a long time to burst; meanwhile it goes on inflating and you get killed. In the long run, it was a good idea to short Cisco Systems Inc. (Nasdaq: CSCO) in 1999. In the short run, it wasn’t so clever.

The Winning Play

The normal investment approach, to buy only the most conservative companies in an overvalued but bubbly sector, also doesn’t work. Everybody else is looking for them, too. And that means they end up being overvalued. Besides, they will advance only modestly with the inflating bubble, so you won’t make enough to compensate for the risk of buying too high.

The best alternative, therefore, is to buy bubbly investments – but the junk, not the cream. Buy gold and silver mines that even at $900 an ounce have only been running at close to break-even, because they have expensive deposits.

Don’t buy political risk (i.e. mines in dodgy countries), because if the gold price goes up, the local dictator will seize your company’s winnings. But operating risk is okay. And high operating costs are fine. If your mine has operating costs of $800 an ounce, you’ll make out like a bandits if gold goes from $1,000 an ounce to $1,200. That way, you need only put a modest amount in the investment, and it will zoom up to several times what you paid, making as much profit as if you’d put your entire fortune in something conservative.

Make sure to put only a portion of your money in such a play. Keep the rest in cash.

When to sell? Well, start selling at the first signs that the Fed is beginning to take inflation seriously, meaning the central bank will be pushing up interest rates. You’ll know when this is because you’ll likely start hearing a lot about Fed “exit strategies.”

Don’t be greedy – better to sell too early than too late. Better to leave the theater at the first wisp of smoke, than to wait until the entire crowd is panicking and heading for the exits.

I hate bubbles. And I hate Bernanke and the other central bankers for causing them by their misguided monetary policies. But you can make money out of them. Just don’t get carried away.

Source: The Only Way to Profit from a Stock Market Bubble

First, the political left and National Association of Realtors are in the process of extending the now famous “first time homebuyer tax credit.” The initial plan, which was passed around this time last year and allows first-time homebuyers an $8,000 tax credit, is on track to cost about $15 billion — double the projected budget.

Heh, and just like “cash for clunkers” going massively over budget must be a sign of scorching legislative success. Thus, the new plan is to extend the tax credit into the summer of 2010, boost the credit to $15,000 and make all potential homebuyers eligible. Those who are content with their current home and/or unwilling to invest in a new one… well, they get the prideful assurance of knowing they played it safe — and their kids get the bill.

Also, the IRS has changed some rules to help keep commercial real estate afloat. It’s a technical matter (aren’t all American tax laws hard to understand?), but basically, the IRS fudged their rules on tax penalties for real estate investment pools. Under the new laws, certain commercial real estate loans could be modified or refinanced without hitting investors with a tax penalty.

We’ll save the details for more seasoned analysts, like our resident CFA, Dan Amoss. But you get the gist… the government is going out of its way to keep commercial real estate from going down.

“The fundamental outlook for REITs and commercial real estate remains bleak,” says Mr. Amoss, “and the market will soon wake up to this fact.

“The core of the bear case for REITs rests on falling comparative property values, falling rents, falling occupancy rates and tight to nonexistent refinancing conditions. Refinancing conditions are important because if lending remains tight, this will push up the amount of property foreclosures and liquidations. And conditions will remain tight because the regional and community banks that typically lend against commercial real estate collateral are not answering phone calls from desperate borrowers. They’re nursing hangovers from their existing commercial real estate loans, and have regulators watching their every move…

“Richard Parkus, head of mortgage-backed security research at Deutsche Bank, estimates that cumulative commercial real estate charge-offs will be in the range of 10% of the banking system’s $1 trillion in core commercial real estate loans. That’s a $100 billion hole in the banking system’s capital that many banks will not be able to ‘earn their way out of.’ I think 10% cumulative charge-offs could be conservative.

“Thus far, according to SNL Financial data, commercial banks have charged off just 1-2%. So in baseball parlance, ‘We’re only in the first inning’ of the process of recognizing and writing off whole commercial real estate loans sitting on bank balance sheets.

“As this occurs, this will lead to a flood of foreclosures and liquidations, which will push down market prices for commercial properties — the same types of properties owned by REITs.”

Source: The Coming Commercial Real Estate Crisis

“Even though, from a technical perspective, the recession is very likely over at this point,” Bernanke said, “it’s still going to feel like a very weak economy for some time, as many people still find that their job security and their employment status is not what they wish it was. So that is a challenge for us and all policy-makers going forward.”

The real challenge for Fed policymakers will be to gingerly dismantle all of the programs they set in place to backstop the markets – such as the Commercial Paper Funding Facility – which holds $109.2 billion in short-term IOUs issued by corporations – and the Term Asset-Backed Securities Loan Facility (TALF) – which has lent $25 billion to investors to buy securities tied to auto and other consumer and business loans.

In all, Bernanke has injected more than $2 trillion into the U.S. financial system. He’s also lowered the Federal Reserve’s benchmark lending rate to a record low range of 0.00%- 0.25%.

Earlier this month, Bernanke said that the central bank’s program to buy U.S. Treasury securities would be shut down by the end of October. He’s also pointed out that some of the Fed’s emergency lending facilities automatically wind down as the economy recovers, because they have onerous pricing and terms.

The central bank could undertake two key steps to accelerate that whole process. It could:

• Increase the amount of interest paid on balances held at the Federal Reserve by depository institutions (banks).
• Sell securities from the Federal Reserve’s portfolio with the agreement to buy them back at a later date.

However, Bernanke has provided very few clues about what his so-called “exit strategy” will involve, or how it will be implemented. That is, at what point will inflation become enough of a concern, and at what point does U.S. growth become sustainable enough, to warrant a change in Fed policy?

At some point, Bernanke will have to raise the Fed’s benchmark rate from its current record low range. However, doing so to soon could undermine the fragile recovery, while waiting too long could lead to a surge in inflation.

The Federal Open Market Committee (FOMC) voted unanimously to keep the benchmark Federal Funds Rate at its at its record low range. But as the economy recovers, there is likely to be more disagreement over whether or not the withdrawal of monetary stimulus is moving at the appropriate pace.

“In my career, I have never witnessed a situation like the one that exists now, when views about inflation risks have coalesced into two diametrically opposed camps,” said San Francisco Federal Reserve Bank President Janet Yellen. “My personal belief is that the more significant threat to price stability over the next several years stems from the disinflationary forces unleashed by the enormous slack in the economy.”

Yellen, like Bernanke, acknowledged that an economic recovery appears to be underway, but said that it will “remain vulnerable.” Unemployment will remain high, she said, and “threatens to push inflation lower.”

Still, Yellen was steadfast in her assertion that the Federal Reserve will keep a close eye on inflationary pressures.

“We at the Fed are ready, willing, and able to tighten policy when it’s necessary to maintain price stability, ” she said. “We don’t want to wait until we’re at 5% unemployment and 2% inflation because if we wait that long, given the lags in monetary policy, we’d clearly overshoot.”

Source: Fed: Recession ‘Very Likely Over’, but Threats Remain