The 19th century belonged to Britain, the 20th century belonged to America and in the 21st century, China will rule the business world. Whether you like it or not, this transition is already underway and it will intensify over the coming decades.

Throughout history, no empire has managed to rule forever. Instead, empires rise to power, they prosper and spread their influence. Thereafter, they over-extend themselves and then break down in some fashion. In fact, all the glorious empires of history had one thing in common – a spectacular collapse.

Now, there can be no doubt that America ruled the economic world for the better part of the previous century. However, this powerful nation has now entered a terminal decline. The recent credit crisis and the failure of some of the largest American financial corporations is compelling evidence that the world’s largest economy is well past its prime.

Today, America finds itself heavily in debt and to make matters worse, its demographics are also worsening. Unfortunately, the American leaders are attempting to postpone the day of reckoning by taking on even more debt! It is noteworthy that over the past year alone, America’s federal debt increased by approximately US$2.1 trillion and its projected budget deficit over the next decade is now slated to be almost US$9 trillion! If this does not shock you, then consider the chart below which shows the total obligations of the US government.

Click here to read the rest of Puru Saxena’s article.

Investors must be pondering the future.

What will the future look like? No one knows. But investors thought they saw things they liked.

For one thing, there was the Federal Reserve governor from New York, who told the world that there was no risk of a rate hike anytime soon. Bill Dudley knows which way the wind is blowing. He said the Fed would hold money policy loose “indefinitely.”

Indefinitely is otherwise known as “as long as it takes.”

But as long as it takes for what? Ah…as long as it takes until the economy appears strong again.

How long will that be? Ah…maybe longer than anyone realizes.

Yesterday, we were calculating how long it would take to get the jobless number back down to ’90s levels…that is, around 5%. There are now about 131 million jobs in the United States…and about 15 million people who would like a job but can’t find one. Meanwhile, population growth adds about 1.5 million new workers every year. That means the economy has to grow at 1% (in real terms) just to stay even with population growth. Currently, the economy is going in the wrong direction – backwards. It’s losing jobs…maybe 3 million this year…and maybe another 2 million or so before it finally stabilizes (who knows?)…for a total of 20 million jobs down (about 13% unemployment) by the time unemployment bottoms out.

Let’s suppose, by some miracle, the economy turns around…and begins growing at 3% per year. That should be about 3 million new jobs per year. Half of those, remember, are just to keep up with population growth. So the other half – 1.5 million – gradually reduce unemployment. Now, let’s get out the calculator…20 million divided by 1.5 million equals a little more than 13. By these numbers you can expect full employment again in 2022!

But what if the economy doesn’t grow at 3% per year? Ooooh…that’s the problem, isn’t it? All the feds – and practically all other economists too – are projecting a return to normal. They expect a ‘recovery.’ But what if there never is a recovery?

Heck, yesterday, the central bank of Australia said it was so sure that everything was going well it raised its key lending rate by 25 basis points.

“Canberra says risk of serious retraction over,” The Financial Times reports.

But they get a lot of sunshine down under. Possibly, the heads of the Reserve Bank of Australia got a little too much of it yesterday. Australia is also a supplier of natural resources to China; possibly, the sun burnt bankers failed to notice that China is a bubble.

Or maybe they failed to notice that China’s biggest customer is broke.

Right under The Financial Times’ article about Australia is the following headline:

“No sign of credit revival for US households.”

“The latest data from the Federal Reserve show consumer credit declined at an annual rate of 10.4% in July – the fastest rate since the crisis began two years ago.”

Yes, dear reader, Americans are shedding debt. They are cutting back. They are saving.

Another headline in The Financial Times tells us, “Holiday sales [are] set to fall.”

Hold on. Who makes all that junk that Americans buy for Christmas? And how can China buy more raw materials from Australia when it is selling fewer finished products to Americans?

Perhaps China is focusing more sales on the domestic market; we don’t doubt it. But you don’t refocus the world’s second or third largest economy in 12 months. It takes years. And you don’t get this kind of rebirth without some kind of suffering. The big, old oak tree has to fall down before the sapling can take its place. And when the oak falls – it makes one helluva mess.

Meanwhile, President Obama is adding more gin to the party punch. He says he’s considering ways to create more jobs without a new stimulus program. Among the schemes under consideration is a $3,000 new job tax credit.

Hey, why not! They had such great success with the Clunker tax credit…and with the first time house buyer tax credit. Of course, when you pay people to do things, you can’t be too surprised that they do them. And then, you can’t be too surprised when they stop doing them after you stop paying them. Thus, when the Clunkers program conked out in August car buyers stopped buying. And when the new house purchase tax credit expires in November, don’t be surprised if house sales collapse too. So, if the feds are going to pay people to hire other people, they better be prepared to do it for a long time.

Which brings us back to our calculations. How long will it be before this economy can walk without the feds clutching both arms? A few months ago, we wondered how long it would take consumers to put their finances back in order. Five years? Ten years? There are so many assumptions required that the numbers barely make sense. Still, if you think the total debt burden is headed back to under 200% of GDP, where it was for most of the last century, that would require the elimination of debt equal to about 160% of GDP…or more than $20 trillion worth. How do you eliminate debt? Well, some of it simply disappears…through defaults, foreclosures and bankruptcies. The rest is paid off. How? By saving. Now, imagine that the United States could put an amount equal to 15% of GDP to work paying down its debts. That’s savings and capital formation of all types – corporate as well as individual. It ignores government, which is going in the other direction. At 15% of GDP per year, paying America’s private debt down to under 2 times annual output is still about a 7-year project.

So, prepare for a long dry spell. In the best of cases, the American public has to stay on the frugality wagon for 7 to 13 years.

And in the worst of cases? Oh, well…that’s a different matter. The aforementioned US government is desperate to short-circuit the process of balance sheet repair. It is propping up the old tree every way it can. Thus, the whole period of adjustment may take much, much longer than it should. Instead of coming down with a crash, the limbs fall off one at a time. At this rate, the whole process could take nearly forever.

As the private sector eliminates debt, for example, the feds add it. The deficits are scheduled – by the Congressional Budget Office – to be monstrous, but controllable. Cash for clunkers, cash for houses, cash for jobs – it adds up. But the CBO projections are based on very optimistic assumptions, in which the economy ‘recovers’ quickly and grows strongly. They do not take into account the real nature of the slump. It is not a pause…it is a permanent change. The Obama administration cannot, ultimately, prevent change. But it can slow down the process so much that the depression begins to seem eternal.

Until tomorrow,

Bill Bonner

Source: The Eternal Depression

Well… Friday’s Jobs Jamboree did disappoint as I had the feeling they would, printing a disappointing -263,000 jobs lost in September. The Unemployment Rate also rose to 9.8%… Now we all know that when all the people that are truly unemployed are counted, that the Unemployment Rate goes to 16%, but the Bureau of Labor Statistics (BLS) will have none of that so-called counting ACTUAL Unemployed people!

On a sidebar, a reader sent me a note and said that I need to remember that the difference between the weekly initial jobless claims, and the Jobs Jamboree is that the Jobs Jamboree “nets” out the jobs created to the ones lost, while the Weekly Claims only counts jobs lost… And that’s fair… I truly understand… The point I’ve tried to make and probably didn’t do such a good job at, was to say… The BLS could use the Weekly Claims as their starting point… But they don’t… They use a “survey” instead… Dolts all of them!

So, the non-dollar currencies acted a little strangely on Friday after the Jobs report… The trading pattern for 9 months now has been to reward the non-dollar currencies whenever the data was good for the U.S. (one realizes that this is the exact opposite of what currencies trading on fundamentals would do). However, on Friday… When the disappointing jobs report printed, the currencies reacted as they SHOULD! The rallied against the dollar! Holy Cow Batman, are we returning to Fundamentals? I don’t know, folks… But we did on Friday…

Then this past weekend the G-7 Finance Ministers met and left… Without a word about the currencies… So, the rumor going ’round on Friday morning that G-7 was going to hand over the currency watchdog duties to G-20, must be true… The thing that a lot of traders are looking at right now, is the fact that G-7 hasn’t said that they were handing over their currency watchdog duties, and they ended their meeting with no statement whatsoever that they were concerned with dollar weakness…

So… Traders not willing to believe the rumors, and still thinking that G-7 is the currency watchdog until otherwise stated, believe that G-7 was giving the green light to further dollar weakness… For, if it’s not a concern of the G-7 Finance Ministers, then why should it be a concern of those wanting to take the dollar lower?

And take it lower they have… But, not by leaps and bounds mind you… No, this has been a 1/2-cent move… It’s as though the traders are “testing the waters” to see if their thoughts on G-7 are correct or not…

The euro also breathed a sigh of relief when the results of the Lisbon Treaty vote in Ireland printed yesterday… In a substantially decided vote (67% to 33%) the Irish voted in favor of the Treaty, which now goes to Poland and Czech Republic, who are the only two left to ratify the Treaty… There are some rumors going around that the Czech Republic (CR) might hold it up, causing a delay, which could deep six the whole thing…

Speaking of the euro… The European Central Bank (ECB) meets this Thursday… Look for rates to remain unchanged…. However, recently, ECB President, Trichet has been propping up the dollar with statements about dollar strength here and there… Remember, he HAS TO DO THIS! He can not be seen banging the drum for a stronger euro… That could deep six the dollar in a heartbeat… So…on Thursday this week, the markets will be listening to Trichet’s statement following the rate announcement to see if he “props up the dollar” again…

And speaking of rate announcements… The BIG ONE tonight is the Reserve Bank of Australia’s (RBA) While I think that Rocktober is too early for a rate hike, what I’m looking for is any indication that November will be the month we see the first rate hike after the 2 years of rate cuts around the world. I’m going out on the limb here and saying that the RBA will hike rates 25 BPS next month! So… Put that in your calendar to see if I’m bang on or just plain whiffed at the pitch!

Recall, that at one time it looked as though Norway’s Norges Bank would be the first to raise rates, but the RBA has edged in front now… But, that’s not that bad of thing to be the first loser, or 2nd place as most people call it, as long as the Norges Bank comes through on the rate hike… Right now, it looks as though the Norges Bank will wait until December…

Rate differentials can and should go a very long way toward currency strength… It’s not the end-all, as the Japanese yen can attest to… But, for the most part, it carries a lot of weight in currency valuation… And that’s the reason I make such a big deal out of the RBA And Norges Bank being the first Central Banks to raise rates… They already enjoy a rate differential to the dollar… And rate hikes will simply widen that differential…

So, when investors around the world want to find yield… They will look for countries that have rate differentials to the base rate in their country… And the wider the better!

Well, that is, as long as we’re not talking about a country that is whacked out, corrupt, politically unstable, or unable to attract foreign investment, so they hike rates up to levels that stand out like a man with a hatchet in his head!

So… Back to Australia for a moment… The A$ really recovered nicely after the G-7 “no-statement” I’m sure some traders are taking a flyer that the RBA would spring a surprise rate hike tonight… So, the downside risk for the A$ tomorrow is there, slightly… But today, it’s all seashells and balloons for the A$!

Gold remained above $1,000 overnight… It sure looks to me, as though the price of Gold is simply forming a new base at $1,000, before moving on to higher levels… But, that’s just me… I don’t have a crystal ball, and I don’t read tea leaves! Just an opinion on what it looks like to me… Which is why I’ve changed my line… Remember, 6-9 months ago, when I would say that I thought it to be a good idea to look to buy on the dips below $900? Well, I’m changing that to look to buy on the dips below $1,000…

Not that I want to “jinx” the Indian rupee, but I’ve noticed the past couple of weeks, how the rupee has been gaining VS the dollar… Inch by inch, the moves aren’t anything to shake the earth, but they are positive moves VS the dollar nonetheless! So… Good show rupee!

You know… Over the past couple of years, you’ve got to have noticed how the once “fringe countries” like India, and Brazil, are the ones doing all the right things and pulling the right strings with their economies, while the U.S. continues to walk the plank of catastrophe!

Well, after last week’s data deluge, the data cupboard takes a break today and tomorrow, coming back on Wednesday with the Monthly Budget Statement… The Budget Deficit in the U.S. has become the focal point of dollar bears… The Budget Deficit continues to grow, as the deficit spending continues to go on and on, like the Energizer Bunny! The rest of the week is pretty low-key with regards to data. Friday, we’ll see the latest Trade Deficit… So, the “Twin Deficits” on display this week…

So… To recap, the Jobs Jamboree was very disappointing with job losses shooting up to 263,000 in September. G-7 did not make any statement about the currencies, so traders have taken that to mean they don’t care about how weak the dollar is… The RBA meets tonight, and I’m looking for them to raise rates next month, not tonight. And Gold is back above $1,000…

Currencies today 10/5/09: A$ .8745, kiwi .7205, C$ .9310, euro 1.4625, sterling 1.5940, Swiss .9675, rand 7.6090, krone 5.7770, SEK 7.04, forint 182.85, zloty 2.8840, koruna 17.3870, RUB 30.08, yen 89.90, sing 1.4105, HKD 7.75, INR 47.55, China 6.8264, pesos 13.60, BRL 1.7815, dollar index 76.86, Oil $69.16, 10-year 3.20%, Silver $16.23, and Gold… $1,004

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

Chuck Butler

Source: Jobs Disappoint…

Throughout the “sh*t hitting the fan” events of last fall, and the subsequent policy response, we’ve listened intently on what this Canadian had to say. The picture he paints today is one of bearish conviction. That’s exactly the reason he’s come under recent criticism as his ilk of ivory tower economists have started calling an end to this recession.

Though we don’t think he has anything to prove, he released a special report reaffirming his key points. You can read it in full here. But if you don’t have the time to peruse the twenty-two page (slightly wonkish) document, we’ve broken down the basic takeaway for you.

The equity markets have moved too far, too fast, and a correction is coming. Rather than buy into this rally, you should look at commodities. That’s because David believes that since 2001commodities took off on a secular bull market run.

Also, rather than hold US dollars, Rosie bets that the Canadian buck is a safer bet due to Canada’s smaller national debt (26% of GDP vs. 62% in the US), smaller budget deficit (-3.4% of GDP vs. -11.2% in the US), stronger banking sector (no Canadian bank needed a bailout), lower unemployment, and an economy more reliant on commodity exports like lumber, oil, natural gas and precious metals.

But the scariest–for holders of US dollars—forecast Rosie makes is that the US has yet to use a power policy tool: the devaluing of the greenback.

As Obama continues to take pages out of FDR’s playbook, he’s yet to devalue the dollar as FDR did in 1933. Rosenberg doesn’t say that the US policy wizards will directly devalue the dollar. Rather, he thinks it will happen by the expansion of the Fed’s balance sheet and the creation of freshly printed dollars.

We think he’s dead on about this call. The US’s “strong dollar” policy has become the latest oxymoron to enter the American vernacular. There is only one direction the value of the US dollar is going over the long-term—down.

Where exactly should you invest amidst this economic malaise? Here are the seven places to park your cash. Not surprisingly, our favorite precious metal tops the list.

1.) Gold

2.) Commodities

3.) The Canadian dollar

4.) Resource sectors of the stock market

5.) US sectors that have high foreign exposure (materials, tech, staples, healthcare)

6.) Canadian sectors that benefit from lower import costs (consumer stocks) but lose export competitiveness (manufacturers)

7.) Canadian bonds (a higher Canadian dollar will keep inflation low, hence reinforcing positive fixed income returns)

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…

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

Fortunately for us, we foresaw this scenario a while ago. On April 20, I recommended that investors diversify their portfolios by adding the SPDR Gold Trust ETF (NYSE: GLD).  The fund is up about 14% since that recommendation, but it’s not yet time to sell, as there are still a number of factors working in gold’s favor.

For starters, there is more and more talk of the U.S. dollar losing some of its luster as a reserve currency.  But this debate is moot for the moment.  The reality is that it will take a long time to reduce the preeminent role of the dollar as the store of value of choice for central banks around the world.

Earlier in March and later in June, Zhou Xiaochuan, governor of the People’s Bank of China made a pitch for the creation of an international global currency delinked from sovereign currencies.  This increased speculation about the probability of China deemphasizing the dollar within their extraordinary high foreign reserves of almost $2 trillion.

Some 64% of global reserves are in U.S. dollars, according to the International Monetary Fund (IMF). So if China and other holders of U.S. debt were to reduce their holdings, it would have a substantial impact on the greenback’s value, as well as on U.S. interest rates, given that those countries would be selling U.S. Treasuries.

Zhou suggested the use of the IMF’s Special Drawing Rights (SDRs) as an alternative. The SDR is a currency linked to a basket of four major international currencies in the following approximate weightings: U.S. dollar (44%), euro (34%), Japanese yen (11%) and British pound (11%).

But the reality is that this would be highly impractical. To begin with, there are almost no instruments denominated in SDRs that China and other countries could invest their reserves.  And if the IMF issues the instruments, then it would be taking the other side of the trade, which means it would have to start lending in SDRs, too.  This is very unlikely.

Furthermore, no other currency on the planet is large enough to serve as the world’s main reserve currency.  The sole exception, in terms of having a comparable size of the economy, is the euro.  The euro serves 16 members countries of the European Union (EU) and a few others peg their currency to it.  But the problem with the euro is that even though the entire EU is comparable in size to the United States, it is comprised of many countries with very different fundamental strengths and weaknesses.

Therefore, each of these countries issues bonds and each of these, by themselves, are too small and offer too little liquidity for central banks to accumulate as reserves.

But right now – given the large size of the current and projected U.S. deficits and the easy monetary policy – the incentives for holding dollars have diminished.  The risk that inflationary pressures will build up next year, and in turn lead to higher interest rates, are not negligible, even though the U.S. Federal Reserve keeps assuring the markets that it will stifle these pressures before they materialize.

Last Friday, John Taylor, a renowned economist and an expert in monetary policy, opined that the Fed would need to start raising interest rates in early 2010 in order to stem price pressures.

In the meantime, emerging markets such as China and Russia complain about the vulnerabilities of the U.S. dollar.  But these visible complaints have to be construed merely as verbal intervention.  These countries are acting in their own self-interest, because they have very large holdings of U.S. Treasury bonds.  They are trying to “encourage” both the Fed and the U.S. government to act very prudently and conservatively with monetary and fiscal policy.

The United States has offered plenty of assurances to China that it will remain vigilant about inflation. But the trick is being able to identify these inflationary pressures and to take action way before the actual inflationary pressures become entrenched in the economy.  And the Fed will need to rely on its projections to do that.

In this uncertain environment, making economic projections is much easier said than done.  And one would rather err on the side of being a bit late in raising interest rates and reducing quantitative easing. If the Fed is slower than needed, and some inflationary pressures build, it they can resort to raising rates a bit faster and resolve the problem. But if the central bank raises rates – and reduces the quantitative easing policy too soon – it could send the economy into another recession.

This could be problematic since it would increase the risk of the U.S. economy falling into a deflationary spiral and put additional pressure on the U.S. financial system.  Therefore, it seems reasonable to assume that the Fed has greater incentive to err on the lenient side than on the hawkish side.

Remember that we are not out of the woods by any means.  Unemployment, which is a lagging indicator, is still increasing and there are many other large problems to resolve in the economy. Without even considering the impact that healthcare reform will have on the U.S. budget deficit, we see the following important headwinds:

• Consumers are very weak.  It’s not just the jobless that have been affected.  The uncertainty about continued employment for those who still have jobs led to an increase savings rates as would be consumers postpone spending.
• The huge drop in home prices has put about one in four homes in an “upside down” mortgage situation. That means consumers cannot sell their houses without taking a loss, and cannot borrow against their homes to make other expenditures.
• The drop in home values has had another effect:  It has increased the need for consumers to save.  This need has been reinforced by the large hit to 401(k) savings and other retirement plans.  As a result, savings rates have zoomed to 7% of personal income. The savings rate could even hit 10% as consumers strive to rebuild their nest eggs.  Additionally, the “Baby Boom” generation has saved too little and retirement is just around the corner.  Consumers make some two thirds of the U.S. economy, so this new predisposition to saving will be a drag on consumption for a long time.
• Capacity utilization is still low, which greatly reduces producer pricing power.  This, along with very high unemployment, gives the Fed time for now.  Low capacity utilization also keeps investments in factory expansion low.
• Recent banking data revealed that many smaller U.S. banks will be closing their doors, taxing the already overstretched resources of the Federal Deposit Insurance Corp. (FDIC), which will have to be recapitalized, adding to the U.S. fiscal deficit.
• We have not yet seen the fallout from the commercial real estate drop, which Money Morning has warned will be severe.  Since the U.S. consumer is not buying as much, many properties will not be able to keep up with their payments and will default on their loans.  Commercial real estate generally follows the trends in residential real estate with one or two years of lag.
• Last, but not least, we are going to see an economic acceleration in the United States in the third quarter, but that acceleration might be driven to a large extent by inventory rebuilding.  The U.S. economy will probably surprise to the upside in the third quarter with growth.  Among other things, the government’s Car Allowance Rebate System (CARS), popularly known as “Cash for Clunkers,” should show up positively in the numbers.  But once the levels of inventories are brought up to their necessary levels, that extra growth will not be present in the following quarter.  And the demand from Cash for Clunkers will cease to be a factor.

All of these reasons warrant caution for the Fed.  Some economists, including Nobel Prize winner and former World Bank Chief Economist Joseph Stiglitz, have highlighted the risk of a “W-shaped” recession/recovery scenario, and have even suggested the need for another stimulus package.  While that might do more harm than good, this position highlights the dovish bias that the Fed is likely to maintain.

What About the Rest of the World?

China enjoys many degrees of freedom to move its economy forward and has had resounding success in doing so.  It has no debt and more than $2 trillion in foreign currency reserves.  Its banking system is small in relation to the size of its economy, which gives the country a lot of room to expand credit, and the savings rate of its consumers is sky-high.  This leaves China with the capital resources to deploy growth strategies.  Since the largest companies are all government-owned, when the government decides to deploy capital, it gets done swiftly and powerfully throughout the economy, with great effect on growth.

As a result, China’s economy grew at the breakneck annualized pace of 14% in the second quarter.

Other emerging markets, like Brazil and India, are in similar, though not as potent, positions to move their economies forward. And they are doing so aggressively. India is expected to post on average 7% plus of annual gross domestic product (GDP) growth.

Emerging economies – those that did not splurge the bonanza of the prior five years of strong growth in commodity prices and other exports — are now in the position of stimulating their economies with easy monetary and fiscal policies.

Massive stimulus packages, the scorching demand growth from capital investments, and reborn consumers in emerging Asia, have combined to rekindle global growth.

Resurgent Growth in Europe

Both Europe and Japan are emerging from their recessions – even though Japan may post a negative growth number in the fourth quarter – and Britain and Italy are lagging behind in the recovery.  But the most important European economies, led by Germany and France, are pulling ahead.

It is understandable that European Central Bank (ECB) President Jean Claude Trichet, recently mentioned that the recovery was uneven in Europe.  Most market pundits took this as a sign that Europe would not be raising rates as fast as previously anticipated.

However, keeping interest rates low is much harder to do than it is to say.  Unlike the Fed, which has symmetric objectives – promoting economic growth and controlling inflation – the ECB’s only mandate is to control inflation.  The reason for this notable difference in objectives is that the European economy is much less flexible than the American economy, mainly due to its very rigid labor laws and other regulations.

Thus, the Europeans start running into inflationary problems when their economy grows above 2.5%.

The ECB just raised its own growth forecasts.  Similarly, the Organization for Economic Cooperation and Development (OECD), which comprises the 30 most influential free-market representative democracies, indicated that the global recession is coming to an end much faster then they previously thought, but said that the recovery will rely on massive spending and low interest rates for some time.  The OECD cited the strong rebound in Asian economies as having jumpstarted this global reacceleration.

Because the Federal Reserve will have to err on the cautious side, and because of the institutions’ differing mandates, the ECB will probably tighten monetary policy before the U.S. central bank does. That means the euro and emerging market currencies will keep appreciating against the U.S. dollar and the price of gold will soar.

The protests that will come from time to time from Chin and Russia will be just that: verbal intervention.  They will not resort to sudden changes in the composition of their foreign reserves, at the risk of doing further damage to the dollar.

In fact, China and other countries generate some 90% of their large current account surpluses in U.S. dollars.  But their holdings of dollar-denominated assets are only about 64% of their total reserves.  That means they already consistently sell the difference, and this selling so far has not decimated the dollar.

So do not expect a sudden devaluation of the greenback, nor fear China currency reallocations.

But we can and do expect a gradual weakening of the U.S. dollar to occur next year.

And as much as we all hate it, we will be able to take comfort in the fact that we avoided a much worse evil: Deflation.

So we are going to remain playing it with gold.  Also, this “currency” play gives us added diversification to the portfolio.

Source: Buy, Sell or Hold: The SPDR Gold Trust ETF (NYSE: GLD) Continues to Offer Investors a Hedge Against Inflation

Good day… And a Marvelous Monday to you! I hope your weekend was grand… I was supposed to be traveling back from Williamsburg today, so this is a bonus day for you all! HA! On Friday morning, I told the early arrivers that the currencies were strong, Gold was strong, it was all good, and we needed to close up shop and go home, because it wasn’t going to get an better than that, and that the rest of the day had nothing but disappointment risk! Boy did I nail that one on the head! Let’s get to the goings on.

The currencies added to their gains during the Friday morning, only to see them give the gains back later in the day, as the “boys” in NY all closed shop and headed to the Hamptons. I checked the markets last night before going to bed, and they were trading very close to Friday’s close as they are still this morning.

The one currency to buck the trend, and remain hot as a fire-cracker, is the Japanese yen… Not that it had any fundamental reason to do so, but that didn’t matter, as yen bulls looked around and found something to hang their hats on.

The news that pushed yen higher came from the U.S. where the Administration announced a tariff on Chinese tires… Passenger and light truck tires to be exact… This really heats up the trade protectionism between the U.S. and China, folks… And… If China and the U.S. are going to be battling it out on the Trade Protectionism front, the Japanese yen would look to be the “better bet” in Asia…

If you all recall, a couple of months ago I told you that protectionism was going to become the “thing to do”… At that time, I really thought that countries would use their currencies as bargaining tools, in trade… But leave it to the U.S. to pull a rabbit out of the protectionism hat…

You know… Back in 2001, the then President Bush, slapped a tariff on Chinese steel… And I remember telling everyone that would listen to me that this would be the Big Shift in the strong dollar trend that existed then… I was credited with calling the secular shift of the dollar to a weak dollar trend. Now, we have this tariff… What do you think this will do to U.S. / China relations? YIKES!

You know… If the U.S. Trade Commission was really concerned about the shipments of tires to the U.S. and what they felt to be a displacing of thousands of jobs, why then didn’t the Trade Commission work with the U.S. tire companies and work out a price adjustment? Ahhh, grasshopper, that would be too difficult to do! It’s far easier to slap tariffs on the one country that has bought your debt year after year, without batting an eye…

OK… So, could this new tariff be the juice that moves the dollar to the next big leg down? It very well could, but it won’t happen overnight, folks… These things need to work themselves through… Just like in 2001, it took several months before the dollar really began a strong downward trend… But, keep this in the memory bank…

Oh… And China, feeling that they had to retaliate… Announced a probe of U.S. auto, and chicken imports… See how this works folks? If you get this going really heated, it could spread throughout the globe, and push all the hard work to get out of the global recession into the dumpster! This is plain stupid! And our Gov’t should have known better!

Well… We had our first bank casualty from the Commercial Real Estate meltdown… Corus Bank in Chicago, is the second largest bank to fail this year, and will cost the government between $1.5 Billion and $2.4 Billion in losses, depending on the performance of the bank’s outstanding loans.

Speaking of Gov’t losses… I saw some math on the Cars for Clunkers program… Don’t believe what the Gov’t tells you that it was a success… Unless of course they are talking about successfully spending Billions!

OK… Lets get off this Gov’t stuff, they give me a big rash anyway!

At this time every year, economists meet in Davos, Switzerland, and normally you can get a few thoughts that remind everyone about “what’s really going on in the world”… And this year was no exception… The Big Boss, Frank Trotter, was kind enough to send a few of those thoughts to me this weekend…

First off, one of my fave economists, Stephen Roach, had this to say… “The American consumer is dead and this is a wake up call for the Chinese & Asian export industry.”

Then we had a guy from China that’s a “think tank” guy… His name is Yu Yongding, and he had this to say… “I have tremendous doubts about US households to finance the budget deficit.” and… “Why are people still so confident in the strength of the dollar? It’s a myth!”

And then there was this… Remember the talks I’ve had with you regarding the IMF wanting to issue their own “global currency”? Well… Zhu Min Bank of China had this to say… “IMF should provide stable reserve currency regardless of format. Very volatile reserve currency is difficult for Asia.”

The Wall Street Journal had a good story regarding the weak dollar this weekend… Let’s check it out… WSJ… “The dollar could continue its weeklong decline this week, especially if data on U.S. retail sales show improvement. The dollar hit a nine-month low last week against the euro and a seven-month low against the yen. Investors are moving into higher-yielding currencies such as the yen as the global economic picture brightens.”

Sounds as if the WSJ writer is a Pfennig reader, eh?

Since the WSJ brought up Retail Sales, we might as well go to the data cupboard to see what’s up this week… The cupboard is empty today… But tomorrow it will yield the stupid PPI report, along with Retail Sales for August, which are expected to be stronger, based on the Cars for Clunkers program which ended in August. We would have normally seen the August Retail Sales report to be stronger anyway, given the “back to school” purchases… The Butler Household Index (BHI) tells me that besides Cars for Clunkers we would see a jump…

On Friday last week, we saw the U. of Michigan Consumer Confidence report jump 5 figures to 70.2, and the Monthly Budget Deficit print at $111.4 Billion, not as bad as forecast, but still, not good in any stretch of the imagination, folks!

The Bank of International Settlements (BIS), issued a report yesterday that said the BIS expects longer-term bond yields to increase on the Swelling Budget Concern…

OK… Let me explain what they are talking about… As the Budget Deficit grows, we have to issue more bonds (our debt) to finance the deficit… The BIS believe, like I have said for some time now that eventually, the buyers of these bonds are going to require the yields to be more attractive… And as yields grow higher, the losses in these bonds grow wider for the holders…

Commodities have sold off since Friday morning, and that hurts the Commodity currencies… Oil, which was up to $72, is back to $68 this morning, as it was reported that “demand was slowing”… Hmmm, not when it comes to filling my gas tank! HA! Especially when I had to turn around and drive 45 minutes home to get Alex’s cleats for his football game Saturday, and get back in time for the game! Sorry, my fat fingers just started typing that and I couldn’t stop them!

That’s about all I can talk about today regarding the currencies and economies… I do have to say before I head to the recap and Big Finish, that thanks to Chris Gaffney, I can now see the TV! We used to have this old TV in the office, and the picture on it had gotten so bad I couldn’t see much… But Chris brought in an extra TV from home, and WOW! It’s amazing! And the best part is now I can see Robin Meade better! HA!

OK, to recap… The Currencies gave back some ground Friday afternoon, but remain at those levels this morning. Japanese yen is stronger on the news of a protectionism war between the U.S. and China, as the U.S. administration slapped a tariff of Chinese tires. The annual meeting in Davos is going on, and Retail Sales tomorrow is important data for this week.

Currencies today 9/14/09: A$.8580, kiwi .6995, C$ .9185, euro 1.4550, sterling 1.6545, Swiss .9615, rand 7.5120, krone 5.97, SEK 7.0550, forint 188.50, zloty 2.90, koruna 17.5375, RUB 30.85, yen 90.60, sing 1.4250, HKD 7.75, INR 48.75, China 6.8290, pesos 13.46, BRL 1.83, dollar index 76.95, Oil $68.53, 10-year 3.35%, Silver $16.42, and Gold… $997

That’s it for today…I hope you have a Marvelous Monday!

Chuck Butler

Source: Protectionism Wars, Here We Come!

Good day… And a Wonderful Wednesday to you! Well… The currencies, for the most part, kept the heat on the dollar throughout the day and in the overnight markets. The euro, did rise to 1.45 and change yesterday, while it is hovering right at that figure this morning, so it did give a little bit back.

There were no big announcements last night like we saw on Monday, so the currencies didn’t have anything to push them further. In fact, there may be a “letting the dust settle” period of time, with the Big Dog, euro, before we see any further advancement, given the euro’s huge gains yesterday…

We did have “Mr. Yen” Sakakibara, tell a crowd of people that he believed the dollar would remain the world’s reserve currency for 20 years… Hmmm… Apparently, the IMF and UN haven’t let him in on the news that they desperately want to do something about the dollar! Not to mention the BRIC countries of Brazil, Russia, India and China, of whom, have already stated their case for a change!

Chinese stocks were up again last night, so that could lead the way to further gains by stocks here in the U.S., which would bring even more risk takers out of the walls… That is, of course as long as the trading pattern that has existed for 9 months remains in place!

I did read something last night about a complete collapse of Consumer Borrowing here in the U.S…. Hmmm… Well, on one hand, if that’s true, that would mean that Consumer spending is down, and saving has replaced it, and that would be a good thing! On the other hand… Consumer Spending is like 70% of our economy… Or was 70% of our economy I guess I should say! And if we’re going to see a further slowing of spending, then you can kiss the thought of a “V” shaped recession good-bye! Bye now… Don’t go away mad… Just go away!

Gold was unable to hold $1,000 yesterday and last night… I was talking to my Publisher for the Currency Capitalist letter yesterday, and I was telling her, that while I’m a firm believer that this stock market rally is going to crash and burn, bringing all risk assets along to the fire, which would adversely affect the prices of currencies, and commodities, including Gold… There’s no mistaking the appearance of a rush to Gold in the past week… And why did the rush occur? Well, to me, as I explained yesterday, it’s simply an understanding that inflation is on the other side of what we are now experiencing, and if you can pick Gold up now at those levels that existed last week (sub $1,000), why not, before it takes off?

So… I was assigned to write a piece on Gold… See how that works in the Publishing biz? You mouth off with your thoughts, and the next thing you know, you’re doing research for a piece that has to be done in 3 days or so! UGH! But… The thing I thought of was simply this… We may, and I’m not sure yet, but we may be getting to a new level, where I used to say I thought it was good to buy Gold when it dipped below $900… That might have to be changed to $1,000… That is, if we don’t have the crash and burn…

Getting back to the crash and burn thing… I know, I know, I’ve been talking about this for a couple of months now… And no sign of crashing or burning… Yet! But, then maybe there won’t be any crashing and burning as long as the markets are manipulated… I was doing some research the other day, and came across something that plays well with my manipulated theory… The stocks of Fannie (NYSE:FNM), Freddie (NYSE:FRE), AIG, and… Oh shoot! I’ve forgotten the 4th one… It’s a Gov’t owned company… SHOOT! Oh well, it doesn’t matter, these 4 stocks were accounting for over 40% of the volume each day in the stock market… Usually these 4 account for about .3%… What’s going on here folks? I’ve got a boat load of conspiracy theories about what’s going on… But I’ll leave that up to your imagination!

The Commodity currencies, that were so strong yesterday, have given some ground back VS the dollar overnight. The only thing that makes sense to me here, is that it is profit taking… For, these Commodity Currencies, (except Canadian loonies) have yield advantage over the dollar… Shoot Rudy, they have yield advantage over all the major currencies… Euro, yen, sterling and dollars! And for the most part, interest rates in these countries will be the first to rise beginning later this year… So, it had to be profit taking!

But, what do I always say, when there’s profit taking? That’s right! It gives us a chance to buy at cheaper levels!

One currency that continues to baffle me and probably many others with its rise from the ashes, is pound sterling… (cable, as currency traders call it) I’ve had quite a few readers send me notes asking me about sterling’s strength, given the fact that the U.K. is probably in more dookie than the U.S…. There are two things I can think of that probably explain it… But even these don’t do that good of a job explaining this rise in sterling…

1. the talk of using SDR’s… SDR’s currently consist of: euro, yen, sterling and dollars. So, if SDR’s get wider use, then more sterling will have to be bought by the IMF (who issues the SDR’s)
2. The crosses… Because most of the currencies are rallying and have been rallying against the dollar since March, sterling gets dragged higher in the crosses…

I’ve explained these crosses many times in the past, so I’ll just touch on it here… Whenever you buy a currency, you have to sell a currency… So the two currencies that make up that trade are called a “pair”… These are also called “crosses”… Here in the U.S. we only think of dollar VS a currency… But all over the world, people are crossing euros for yen, and vice versa, Swiss francs for Aussie dollars, etc. A lot of those crosses, have sterling in them, and therefore, sterling gets dragged higher… Not a fundamental thing…

But we’ve seen this over the years, especially with yen… And the dollar of course!

Well… You might have missed this news yesterday… But the U.S. Senate is going to have to raise the federal debt limit beyond $12.1 Trillion by mid-October! Hmmm… Anyone have a guess as to who blocked the raising of the debt ceiling in 2006 and said… “Washington is shifting the burden of bad choices today onto the backs of our children and grandchildren”? It’s the same person that is now that same person is asking Congress to raise the debt ceiling to $13 Trillion…

But, the reality of this is that our Budget Deficit this year will be $1.6 Trillion, by Gov’t accounting standards… By Chuck standards, it will be $2.5 Trillion when it’s all said and done… And we just keep finding more ways to spend money we don’t have, don’t we? I’m going to stop here, because this all just ticks me off, and I don’t want to say something that will fill my email box with name calling emails…

Did you see the story in the Washington Post regarding the resetting of ARM’s? and I’m not talking about the arms that get broken on the playground and have to be reset… I’m talking about Adjustable Rate Mortgages… Here’s the skinny from the Washington Post story…

“Between now and 2011, roughly 70% of option ARMs, with a total value of about $189 billion, will reset.” The rating agency, Fitch, put together the numbers and did the research… And none of spells good times for home owners that are already stretched to make mortgage payments.

Here’s how I believe they work… Option ARMs, also called pick-a-pay loans, allow borrowers to choose how much to pay each month. Nearly all the borrowers who took out this type of loan from 2004 to 2007 chose to pay less than the interest due. Sometimes they paid as little as 1 percent interest. But the loans eventually require the borrowers to start paying the principal and full interest rate, so the payments shoot up.

So… This mortgage meltdown will continue to remain in the news, eh? $134 Billion of these ARMs will reset in the next two years, and the monthly payments are expected to jump 63% on average, or $1,053 per month, for loans adjusting this year and next… Can you imagine getting that letter in the mail? Dear Homeowner, your next mortgage payment will be xxxxxx…

That’s a really sad thing… Very sad…
But… Another reason why I say this is a depression and not a recession! It’s going to carry on, and on, and on…

There was more Happy Days (NOT!) news in the Washington Post yesterday… “There is little chance U.S. taxpayers will recover all of the billion spent on rescuing Chrysler and General Motors, according to a report by the Congressional Oversight Panel.”

Great! But in reality, we didn’t expect to recover it did we? I know I didn’t! The Gov’t doesn’t have a good track record of preventing losses much less recovering them.. And I’m not just talking about the current brand of Gov’t… It goes back many years…

My friend, David Galland, gave a quick history lesson in his letter this past weekend… While this may be depressing, it does give what I said above, credence…

A Quick History Lesson

The U.S. Post Service was established in 1775. So they’ve had 234 years to make it work. It is broke.

Social Security was established in 1935. They’ve had 74 years to make it work. It is broke.

Fannie Mae was established in 1938. They’ve had 71 years to make it work. It is broke.

Freddie Mac was established in 1970. They’ve had 39 years to make it work. It is broke.

The War on Poverty started in 1964. They’ve had 45 years to make it work. About $1 trillion of taxpayer money is confiscated each year and transferred to “the poor.” It hasn’t worked.

Medicare and Medicaid were established in 1965. They’ve had 44 years to make it work. They are both broke.

AMTRAK was established in 1970. They’ve had 39 years to make it work. Last year it had to be bailed out and today continues running at a loss.

$700 billion bailout of 2008. It has yet to create a single new private-sector job.
Cash for Clunkers in 2009 went broke after 80% of the cars purchased turned out to be produced by foreign companies.

Now that it’s put like that in black and white, it sure doesn’t look good does it?

I really got on a roll today regarding the goings on in the U.S. and didn’t pay much attention to the currencies… But, that’s because they are trading in yesterday’s clothes this morning… With no data to talk about yesterday, and so on…

The data cupboard only yields the Fed’s Beige Book for us this afternoon… For those of you who don’t know what this entails… The Fed’s Beige Book is a summary of Commentary on Current Economic Conditions by each Federal Reserve District. It’s printed 8 times per year, and usually about two weeks before a FOMC meeting. (Federal Open Market Committee) It was once believed that the Fed Heads would use the findings in the Beige Book to help them make their decisions on monetary and fiscal policies…

I say, “It was once believed” because… After reading Bill Fleckenstein’s great book about Ignorance at the Fed Reserve, Greenspan’s Bubbles, I was scratching my head asking, but I thought the Beige Book was used to help make those decisions that Big Al Greenspan made?

So… Again, no real data today… So the currencies will get their direction once again from stocks… And like I said above, the Chinese stock markets was good to go overnight…

OK… So… Before I go to the Big Finish, let me recap today… The currencies held onto gains, albeit giving back small amounts in what appears to be profit taking. The Senate needs to raise the $12.1 Trillion debt ceiling. $189 Billion in Option ARMs are coming due in the next three years, and no data today should leave currencies to be directed by stocks, that is if the trading pattern holds.

Currencies today 9/9/09: A$ .8615, kiwi .6969, C$ .9245, euro 1.45, sterling 1.6505, Swiss .9560, rand 7.5525, krone 5.9375, SEK 7.0575, forint 186.70, zloty 2.84, koruna 17.60, RUB 31.18, yen 92.40, sing 1.4260, HKD 7.75, INR 48.50, China 6.8285, pesos 13.35, BRL 1.8290, dollar index 77.29, Oil $70.90, 10-year 3.48%, Silver $16.36, and Gold… $996.35

That’s it for today

Chuck Butler

Source: Currencies Hold Their Gains…

Gold broke through the psychologically important $1,000-an-ounce level for the first time in 18 months yesterday (Tuesday) as the U.S. dollar slumped against key foreign currencies, exacerbating investor fears that loose fiscal and monetary policies will spur inflation as the U.S. economy recovers.

The thinly traded September futures contract for gold traded as $1,006.90 an ounce on the COMEX division of the New York Mercantile Exchange, or NYMEX (Nasdaq: CME), the highest level for a short-term futures contract since March 18, 2008, MarketWatch.com reported. The contract closed the day yesterday at $997.90, up $3, or 0.3% for the trading session.

The London gold fixing – a global benchmark – traded as high as $1,000.75 an ounce yesterday. Its previous high was also on March 18, 2008.

Now that gold has pierced that technical barrier, some analysts are looking for the yellow metal to return to its all-time-record high of $1,033.90 an ounce – a record set last March.

“The higher the price, the higher the volatility, but this market is so concerned with inflation possibilities and dollar weakness that momentum is bringing more investors to the ‘Buy’ side,” George Gero, a precious-metals trader for RBC Capital Markets (NYSE: RY), told MarketWatch.com.

Gold struggled to breach the $1,000 price level last week. Yesterday’s surge corresponded with a drop in the value of the U.S. dollar, which fell to its lowest point versus the euro this year.

“We had a good technical break higher last week and now the weaker dollar is helping gold progress higher,” Saxo Bank senior manager Ole Hansen told Reuters. “We are finally taking out some levels we haven’t seen for a while, especially in the currencies. On that basis, I would assume we will go up to test the highs from last year.”

The dollar fell as low as $1.45 per euro in morning trading yesterday, its weakest level since Dec 18, 2008, according to Bloomberg News. The euro has risen by about 15% against the dollar in the past six months.

Analysts have warned for months that the combination of a soaring budget deficit and expansive monetary policy could weaken the dollar and spur inflation.

The federal budget deficit for 2009 will reach a record $1.6 trillion, more than three times 2008’s record deficit of $455 billion, the White House’s Office of Management and Budget (OMB) and the Congressional Budget Office (CBO) said last month.

From 2010 to 2019, the deficit will balloon to $7.14 trillion, the CBO says, while the White House paints an even uglier, $9 trillion picture for the same period.

Meanwhile, the U.S. Federal Reserve has injected more than $2 trillion into the U.S. financial system and its benchmark lending rate remains at a record low range of 0.00%- 0.25%.

U.S. Federal Reserve Chairman Ben S. Bernanke has provided few clues about exactly what his so-called “exit strategy” will involve, or when it will be implemented. However, the Fed chairman has said that the Federal Funds rate will remain “exceptionally low” for “an extended period” of time, as the U.S. economy trudges toward recovery.

Few analysts believe Bernanke will even start to rein in the Fed’s fiscal stimulus before he’s absolutely certain an economic recovery is underway. Now, with the belief that inflation is hiding around the corner, investors are piling back into gold to hedge against the dollar’s decline.

“In the last year alone, the U.S. Federal Reserve has actually doubled the U.S. monetary base,” said Peter Krauth, a Money Morning contributing editor who is also the editor of the Global Resource Alert trading service. “That can only lead to serious inflation, perhaps even hyperinflation.  This will cause the value of the U.S. dollar – which has been eroding since 2001 – to decline at an even-more-frenetic pace.”

Krauth expects that gold prices will shoot even higher in the months and years to come, not just because of the dollar’s devaluation, but because demand is on the rise and global mining output is in decline. Global mine output has decreased at an annual compound rate of 0.8% from 1999 through 2008, according to GFMS Ltd.

In the meantime, demand for the yellow metal has skyrocketed. During the fourth quarter of 2008, for instance, North American and European purchases of gold coins and gold bars rose 811% over the same period the year before. And while demand for jewelry has flattened, new investment vehicles have made purchasing gold much easier for the average investor.

“Exchange-traded funds (ETFs) have been a tremendous catalyst for swelling gold demand,” said Krauth, noting that the SPDR Gold Trust (NYSE: GLD) – the largest physically backed ETF on the planet – is now the sixth-biggest holder of gold bullion in the world.

The SPDR Gold Trust fund held 1,077.63 metric tons of gold totaling more than $34 billion in value as of yesterday, according to its Web site.

“Indeed, the fund’s influence on the market is such that it actually seems as if every year or so it moves up past year another nation in the global rankings of gold-bullion holders,” said Krauth.

Buying the SPDR Gold Shares is one way to get in on the gold rush. The fund’s price fluctuates in concert with the price of gold and it’s more convenient than buying gold bars directly.

For investors who are looking to hedge against the enormous inflationary pressures that are believed to be filtering through the U.S. economy, buying stakes in gold miners is another potential strategy to follow.

In this case, the Market Vectors Gold Miners ETF (NYSE: GDX) – composed chiefly of major gold miners – offers both company and geographic diversification, while including substantial leverage to the price of gold.  Market Vectors is based on the AMEX Gold BUGS Index (HUI), which represents a portfolio of 15 major gold mining companies that do not hedge their gold production beyond a year and a half.

Source: Gold Aims to Retest Record Highs After Breaking Through the $1,000 Mark