Good day… And a Wonderful Wednesday to you… Instead of a “turn around Tuesday”, we’re seeing a whiplash Wednesday! And for once in a month of Sundays, the Big Dog, euro didn’t lead the other little dogs (currencies) off the porch to chase the dollar down the street!

No… This time it was the currencies of Australia and New Zealand that led the charge VS the dollar… The euro has taken up the charge since opening the doors to a new day of trading in Europe, so… It looks like it’s a “take the dollar to the woodshed day”…

OK… Let’s start first with the goings on yesterday and then build to a big crescendo! Yeah, right, like I can do that! HA! Any way…

As a reminder, yesterday we had the Russian rate cut, and the Japanese Fin Min giving the dollar a boost… We then saw some data that at first glance seemed to be good, but a quick look under the hood told the markets otherwise… Home Prices fell in July VS June, but are still down 13.3% VS last year… And Consumer Confidence surprised everyone by falling this month. It was expected to gain. So… As the day went on, it just didn’t look like the U.S. data would be strong enough to cause dollar selling…

But then, overnight, we had a strong Retail Sales report in Australia, and a strong Business Confidence report in New Zealand, and the “global recovery thoughts” were back on! Game on, as Wayne and Garth would say! Yesterday morning, the Russian rate cut said “step back on the thoughts for a global recovery”… And then overnight, the reports from Australia and New Zealand said, “step forward on the thoughts for a global recovery”!

And so it is… We end the month, and quarter with the dollar on the losing end VS many currencies… This marks the second consecutive quarter of dollar losses… Does that sound like a trend to anyone? To me, I do not consider this to be a “new trend”, but instead, simply a return to the underlying weak dollar trend, that went dormant for 6 months while the world sorted out the financial meltdown.

This is where, when I go out on the road and speak to people, I say that trends are not One Way Streets… There can be volatility within the trend. And thus this explains the 6 months from August of 2008 trough Feb of 2009… For most people that got into diversification using currencies and precious metals, they saw it for what it was, and simply battened down the hatches, and looked for deep discounts to add to their diversification… For some people, who got in for all the wrong reasons, and never thought about diversification, then they panicked and sold out at losses… For those that battened down the hatches, they were rewarded with this latest 6-month move… And that’s all I’m going to say about that!

The boys and girls over at the IMF are trying really hard to keep the currencies in check and not let this become another rout on the dollar. The IMF issued a statement saying that there are still risks in the global recovery… Unfortunately, for the IMF, nobody is listening to them, judging from the dollar selling I’ve seen since I came in this morning!

Hey! I don’t give the French much credit for anything… But I did see last night that they are cutting taxes on business! WOW! What a novel idea! And one that I think would behoove the current U.S. administration to follow… This is really a great way to get real traction in the economy… Give Businesses more room to breathe, and they will hire people, expand capital purchases, etc. Good show!

Yesterday, I was interviewed by Reuters for a story on dollar / yen… I was then quoted in a story that ran later in the day. I had said when I hung up the phone, that it would have been easier if the writer had just read the Pfennig that day! All I did was tell them what I had already told you in the Pfennig much earlier in the day! But… It was great to see my name in a national story anyway, eh?

OK… Getting back to Aussie and Kiwi… The Aussie Retail Sales report for August climbed .9%, erasing the -.9% loss in July! This report plays well with the recovery story and the thoughts that the Reserve Bank of Australia (RBA) will raise rates before year-end…

New Zealand saw their Employment Confidence Index climb to 103 last quarter, from 96.1, the previous 3 months… The report showed that 32.2% of companies surveyed, expected sales and profits to rise over the next 12 months… I know that doesn’t sound like a resounding vote of confidence, but the previous number was 26%… So that’s quite a jump!

Of these two, I expect The RBA to lead with the rate hikes, while the Reserve Bank of New Zealand (RBNZ) will drag its feet… They don’t need the kiwi to start rising aggressively, as exporters in New Zealand are having a tough time now, with kiwi as strong as it is now!

Whenever the Commodity Currencies of Australia and New Zealand have good performances VS the dollar, the other Commodity Currencies get to play along… So that means the performances VS the dollar of Canada, South Africa, Norway, and Brazil have been good.

There is some risk in the currency markets today though… First, we have some data due, and second we have Fed Vice Chairman Donald Kohn, and European Central Bank (ECB) President, Trichet, due to speak today… Could this be more Central Bank parlance for propping up the dollar, that is seen as being on the skids again this morning? I think it just might… Especially, if Kohn doesn’t mention that the Fed is going to keep rates at near zero for some time to come. If we don’t hear that… Then I think the “con” is on to prop up the dollar…

But don’t let that bother you too much… These guys can only affect the currencies for short periods of time with their verbal jawboning… After that, they need to walk the walk with coordinated intervention, if they’re going to talk the talk!

Speaking of the data… We’ll see the color of the 2nd QTR GDP, and the wild and wacky ADP Employment Change reports… The Chicago PMI (manufacturing for that region) will also show its colors… All of these are expected to show improvement in the U.S. economy… And, if the trading pattern remains in place… Any signs of improvement in the U.S. economy normally results in more dollar weakness!

So… In the end, the data inducing dollar weakness, might be offset by the Central Bank jawboning… In which case, we’ll spend the day in a tight trading range for sure! But what happens if Kohn and Trichet, don’t support the dollar in their speeches? Then it will all be up to the data!

This morning, Canada will print their latest GDP report… The forecasts are for a very weak report… I’m going to go out on a limb, yes it will be a big fat one to support me, and say that I expect Canada’s GDP to surprise on the up-side… If so, the loonie would look to add to gains it already has booked this morning VS the dollar.

With the Commodity Currencies on the rise this morning, Gold has returned to $1,000! Gold remained below $1,000 for about 5 days, in which there were ample opportunities to buy the dips below $1,000…

And… As we close out the month and quarter, the Russian rate cut is all but forgotten about, which is exactly how I told you it would play out… The global recovery theme is back with a vengeance!

OK… I’m going to step up on the soap box now, so if you do not care to listen to another Chuck soap box rant, then skip ahead two paragraphs!

You know… We wouldn’t be having these discussions about dollar weakness every day, if the Budget Deficits weren’t piling up on top of other deficits… Hey! Remember when I used to take the previous administration to the woodshed for piling up $450 Billion dollar Budget Deficits? Well, that certainly seems to be but a drop in the bucket of the nearly $2 Trillion Budget Deficit that will post this year, and the forecast for $9 Trillion more in the next 9 years…

That all leads me to this… We need to express to our representatives in Washington D.C. that is very important, and the they should focus their attention on this first and foremost! I doubt that we’ll ever get there again, but, wouldn’t that be nice for our grand kids? I just don’t understand why we go around spending money on this that and the other things, and don’t ever stop to think about the immoral things we are doing to our future generations… I guess I mean to say that the “we” I’m talking about is not you and me! It’s the knuckleheads in D.C… That is, other than Ron Paul, who seems to be the only person in D.C. that understands all this deficit spending…

Ok, down from the soap box now… You’re free to move about the Pfennig!

To recap… Aussie and kiwi lead the currencies higher VS the dollar overnight, after each respective country printed a strong economic report, thus putting the global recovery thoughts back on track. We have data, and Central Bank speeches to navigate through today. The non-dollar currencies close a second consecutive quarter of gains VS the dollar, and Gold has returned to $1,000….

Currencies today 9/30/09: A$ .8835, kiwi .7220, C$ .9330, euro 1.4665, sterling 1.61, Swiss .9725, rand 7.4240, krone 5.7675, SEK 6.96, forint 183.90, zloty 2.88, koruna 17.1570, RUB 30, yen 89.50, sing 1.41, HKD 7.75, INR 48.11, China 6.8264, pesos 13.48, BRL 1.7870, dollar index 76.56, Oil $67.78, 10-year 3.31%, Silver $16.48, and Gold… $1,003.45

That’s it for today…Be sure to make today a Wonderful Wednesday!

Chuck Butler

Source: Whiplash Wednesday!

Today, we light a candle and try to interpret the shadows on the wall…

Yesterday, the Dow fell 81 points. Gold dropped $5 to $1009.

Will the feds succeed in causing inflation? Or will they fail? Will the dollar continue to go down? Or will it prove to be a safe haven currency in a time of deflationary trouble?

According to the papers, the feds have already done it. “Fed says recovery underway,” says a headline from yesterday’s press.

Another headline tells us that the feds are considering how and when to ease themselves out of their interventions. But what would the economy look like after they stopped meddling? Just look at auto sales. People bought cars when the feds bribed them to do so. When the bribes stopped, so did car sales. Now, the clunker program has ended and spiders are busy building their webs in showrooms again. Sales fell 38% from August to September… to a 28-year low.

House sales too have been goosed up by the feds’ tax credits. According to an estimate we reported yesterday, 350,000 new house sales since January were assisted by federal intervention – about 80% of the total. What will happen when this program ends in November? Hey… let’s guess… uh… housing sales will fall, right?

And speculators are worried about what will happen when the feds stop their intervention in the financial industry, scheduled for December. Thanks to taxpayer money, the bankers were spared the consequences of their own stupidity. Instead, taxpayers will pay for their mistakes. No one is particularly upset about it. The taxpayers don’t know what is going on. And bankers are happy to continue living in the style to which they have become accustomed. Reuters reports:

“You wouldn’t know it by his pay stubs, but Jiang Jianqing heads the world’s largest bank.

“Jiang, chairman of Indus trial and Commercial Bank of China, made just $234,700 in 2008. That’s less than 2 percent of the $19.6 million awarded to Jamie Dimon, chief executive of the world’s fourth-largest bank, JPMorgan Chase & Co.

“The contrast illustrates the massive differences in pay among the CEOs of the world’s top banks. The compensation of the CEOs of the largest U.S. banks towers above what’s paid to banking chiefs in other parts of the world, according to a Reuters analysis of pay at the 18 biggest banks by market value.

“The United States is home to four of the nine largest banks in the world — JPMorgan, Bank of America Corp, Wells Fargo & Co and Citigroup Inc. It is also home to four of the six most handsomely rewarded bank CEOs.

“China, for example, boasts three of the world’s four biggest banks, yet the leaders of those banks — Industrial and Commercial Bank of China, China Construction Bank Corp and Bank of China — are among the lowest paid of those surveyed by Reuters. The chairman and the president of each of the banks are paid roughly $230,000 per year.”

If America’s make-believe capitalists want to pay their CEOs exorbitant wages, that’s their business. A pox on all of them. But in come the feds… and now we’re all paying the price. And if the program ends in December, as scheduled, we’ll get to see how far the economy goes without taxpayers’ money in the gas tank. Let’s see… it comes to a complete stop?

But no matter how malign and imbecilic the feds are, the public is rooting for them. People think Bernanke has avoided a ‘second great depression,’ and that the government has rescued the economy. Now they see nothing but clear highway ahead… perhaps with a little bump from time to time.

What’s ahead? We don’t know. Neither does anyone else. There is no precedent. Never before has a major central bank reacted so recklessly to a market correction. Never before has the monetary base exploded so violently. Never before have so many people with so many bills to pay had to face such a downturn.

But amid all the confusion, uncertainty and noise… your editor is calmly, cheerfully and confidently awaiting a depression. Yes, dear reader, we don’t know what markets will do. We don’t know how much gold will sell for next year… or what the actual GDP will be. But when we look at the shadows… we have a strong hunch that we are entering a depression… and that we won’t get out of it soon.

That said, we caution readers not to expect soup lines or people selling apples on the street corners. This is a depression à la 21 st century. A depression with Iphones and Twitter. This is NOT your grandfather’s depression.

It’s not your grandfather’s depression, but it has many elements that your grandfather would recognize. This from David Rosenberg:

“FRUGALITY THEME IS SECULAR, NOT JUST CYCLICAL

We came across two articles that truly resonated on this score — about how U.S. households are changing their entire approach to the family budget and this transformation cuts a wide swath on a socio-demographic basis. See Census: Recession Had Sweeping Impact on U.S. Life on Bloomberg news (by Hope Yen) as well as Consumer Spending Cuts Reach Across Incomes in the Associated Press business news section (by Eileen Connelly).”

With so much noise… and so many distortions… it’s hard to tell what is really going on… and impossible to know how the markets will react. Still, there are some patterns that make sense. After a long period of credit growth, credit is now shrinking. At least in the private sector. And that is not likely to change. Well, it’s not likely to change unless the Fed goes nuclear. If they push the hyperinflation button, the whole picture changes radically and immediately. But that’s not likely to happen any time soon… so let’s ignore it for the present.

What we have before us now is a consumer economy where the consumer is cutting back. Despite the odd shadow shapes on the wall, that means a slowdown in hiring, business revenues and real prices… and tax revenues.

New York says its budget deficit will grow to $3 billion. And over on the sunny West Coast, California is selling $8.8 billion in notes to try to close its deficit.

Apartment rents in New York City are falling. Credit card defaults hit a new record. And the Wall Street Journal says that holiday jobs in the retail sector are likely to be scarce.

All of those things are about what you’d expect.

Another thing you’d expect is a decline in America’s relative economic power and political influence. Richard Duncan, along with your editor, has been following the story. Bloomberg reports:

“Sept. 23 (Bloomberg) — U.S. budget deficits will continue to pile up in the next decade, eventually reaching an unsustainable level that may result in an economic collapse, according to Richard Duncan, author of “The Dollar Crisis.”

“The U.S. has little chance of resolving its deteriorating financial position because the manufacturing industry continues to shrink, leaving the nation with few goods to export, said Duncan, now at Singapore-based Blackhorse Asset Management.

In “The Dollar Crisis,” first published in 2003, Duncan argued 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.

“The bad news is at the end of a 10-year period we’re still not going to have fixed the problem,” Duncan said in an interview in Hong Kong yesterday.

“Eventually it will lead to high rates of inflation well down the line and really destabilize things to the point where there may be irreparable damage. A kind of ‘Fall of Rome’ scenario.”

*** Fall of Rome? Hey, Addison Wiggin and your editor wrote the book on the fall of Rome idea. “Empire of Debt,” we called it. It was such a hit that the publisher asked us for a new edition… which was released this summer.

[Editor’s note: You can get Bill’s book here.]

Richard Duncan, with Bloomberg on lead guitar, was singing our song:

“The federal budget deficit will total $1.6 trillion this year, while combined shortfalls are forecast to total $9.05 trillion in the next 10 years, according to projections from the nonpartisan Congressional Budget Office.

“The U.S. has run a current account deficit every year since 1982 except one, with a peak of $788 billion in 2006. Foreign purchases of U.S. debt has propped up the dollar and allowed a credit-fueled spending boom by the nation’s consumers, according to Duncan.

“ U.S. workers are now likely to face declining wages and that may create a political backlash against free-trade policies, he said. The nation’s jobless rate jumped to a 26-year high of 9.7 percent in August, while wages logged a 2.6 percent increase from the previous year.

“As unemployment remains above 10 percent well into the foreseeable future, it won’t be long before Americans start voting for protectionism,” Duncan said.

“That’s going to be bad because protectionism will mean world trade will diminish and will overall reduce global prosperity.”

Once the U.S. debt burden becomes too large and the government can no longer sell debt to the public, the Federal Reserve will likely step in and monetize it, resulting in high levels of inflation, he said.

Source: Awaiting the Depression

In a report to be released this week, the Obama administration will boost its 10-year projection for the federal budget deficit to about $9 trillion – an increase of roughly $2 trillion, or 29%, from its prior projection, Fox News reported over the weekend, citing a source from the Office of Management and Budget (OMB).

The new cumulative deficit projection – for 2010-2019 – replaces the administration’s previous estimate of $7.108 trillion. Changes in budget projections – whether they result in a surplus or a deficit – are often refined as economic conditions change. This new projection was necessary because the recession has gone on for so long, causing federal tax receipts to plunge – and because the economic rebound will be prolonged and weak, resulting in lower forecasts for future federal revenue.

Although most of the news media focuses on the Obama administration’s $787 stimulus measure, the fact is that the federal government was pushing forward with nearly $12 trillion in rebound-related financing commitments, Money Morning reported this spring.

The administration earlier this year predicted that unemployment would peak at about 9% without the financial-jump-starting initiatives and 8% with them. But U.S. joblessness zoomed skyward anyway, and stood at 9.4% last month, although many economists now say that a double-digit unemployment rate – one of 10% or more – is easily possible.

The nation’s debt now stands at $11.7 trillion. In the scheme of things, that’s more important than talking about the deficit, which only looks at a one-year slice of bookkeeping and ignores previous debt that is still outstanding.

Back in June, the non-partisan Congressional Budget Office (CBO) predicted that the federal deficit would reach $1.825 trillion this year. The CBO and the Obama administration will tomorrow (Tuesday) separately release new budget-deficit predictions. Last Wednesday, a senior White House official, speaking on the condition of anonymity, told The Associated Press that the administration estimate would reach $1.58 trillion – or triple last year’s deficit.

The report for the budget year that ends Sept. 30 also will predict Washington to spend $3.653 trillion this year, although revenue will reach only $2.074 trillion, the unnamed senior official told The AP.

“Whether it’s $1.6 trillion or $1.8 trillion, it’s pretty bad,” said Robert Bixby, executive director of the bipartisan fiscal watchdog The Concord Coalition, told Fox News. “I hope no one tries to spin that as good news.”

Total U.S. debt has soared to $11.7 trillion (the budget deficit is the “shortfall” in the annual deficit, while the debt is cumulative), having balloned to that level as a result of the multiple annual deficits that have become the norm, it seems.

Market Matters

Just who is the world’s great economic superpower these days?  At times, it seems, “as China goes, so go the world equity markets.”  Early in the week, the Shanghai Composite Index (SSE) suffered its largest percentage decline since late 2008, with the index plunging more than 20% for the month on concerns about the sustainability of China’s recovery.

The global markets watched as the Japan, Europe, and the U.S. indexes followed the SSE downward.  By mid-week, however, all eyes were back on the domestic market as another sell-off in China was overshadowed by signs of growing U.S. economic strength and reports of enhanced energy demand.

The global bailout plans moved into a new stage as the Swiss government relinquished its control over banking giant UBS AG (NYSE: UBS) by selling off its investment for a $1.13 billion profit, or a 30% annualized return.  While the U.S. government has yet to reap similar benefits, several major banks have paid off their Troubled Asset Relief Program (TARP) loans and the CEO for one of the poster children for financial distress, American International Group Inc. (NYSE: AIG), announced that his firm should be able to pay back the government and may even be able to “do something for shareholders as well.”

While many auto dealers complained about the rebate process on the “Cash for Clunkers” program, General Motors Corp. (NYSE:GRM) stepped forward and will begin providing advances to participants who continue to wait for the government to move through its traditional red-tape.

The healthcare debate (and political infighting) raged on (complete with widespread town hall civil disobedience).  Rumors that the government would remove its public-health-plan option sent related health-care stocks soaring early in the week, though the jury remains out as to how this will really play after U.S. President Barack Obama guaranteed approval of an overhaul and then bashed congressional Republicans for their efforts in blocking any plan whatsoever.

On the earnings front, the housing sector received mixed signals as Home Depot Inc. (NYSE: HD) bested expectations, while rival Lowe Companies Inc. (NYSE: LOW) fell short and reduced its outlook. Cost-cutting was widespread among retailers as The TJX Cos. Inc. (NYSE: TJX), The Gap Inc. (NYSE: GPS), and even Target Corp. (NYSE: TGT) benefited from increased margins, though sales remained lackluster at best.

Hewlett-Packard Co. (NYSE: HPQ) struggled in its PC and printer-business segments, though management expects a healthy rebound in its fiscal fourth quarter.

Fixed income benefited from some early “flight-to-quality” trades and a report that showed strong foreign demand for U.S. Treasuries in June (despite ongoing rumors to the contrary).  Stocks fell sharply in sympathy with the China sell-off, though buyers reemerged in a big way on positive signs from the earnings and economic reports.

Likewise, oil prices shook off some early week negativity and surged to 2009 highs, as a surprising plunge in inventory levels revealed growing demand – perhaps to coincide with the beginning of a global economic rebound?  On that note, U.S. Federal Reserve Chairman Ben S. Bernanke’s comments about the prospects for recovery (though slow at first) were extremely well-received as investors seemed to all but forget about following Shanghai and the U.S. markets assumed the leadership role once again.  The major domestic indexes shrugged off the weak start and pushed to new highs for the year.

Market/ Index	Year Close (2008)	Qtr Close (06/30/09)	Previous Week (08/14/09)	Current Week (08/21/09)	YTD Change
Dow Jones Industrial	8,776.39	8,447.00	9,321.40	9,505.96	+8.31%
NASDAQ	1,577.03	1,835.04	1,985.52	2,020.90	+28.15%
S&P 500	903.25	919.32	1,004.09	1,026.13	+13.60%
Russell 2000	499.45	508.28	563.90	581.51	+16.43%
Global Dow	1526.21	1,629.31	1,803.83	1,819.50	+19.22%
Fed Funds	0.25%	0.25%	0.25%	0.25%	0 bps
10 yr Treasury (Yield)	2.24%	3.52%	3.56%	3.56%	+132 bps

Economically Speaking

In addition to the Home Depot and Lowe’s earnings reports, housing news was prevalent during the week and the results were somewhat confusing.  The National Association of Home Builders reported that its Housing Market Index climbed for the second month in a row and reached its highest level in over a year.  Likewise, applications for mortgages increased for the third straight month on declining interest rates.

However, foreclosure rates remain on the rise and, according to the Mortgage Bankers Association, 13.2% of mortgages are delinquent or worse (in foreclosure); in fact, subprime mortgages are no longer the only area of concern as the unsettled labor picture has prompted homeowners with strong credit to fall behind on their prime mortgages as well.

Though housing starts fell in July, the decline was entirely attributable to apartment activity and construction of single-family homes actually rose for the fifth straight month.  Additionally, existing home sales in July surged by more than 7% as buyers took advantage of the misfortunes of others (in foreclosure), though prices continue to fall because of transactions related to these distressed properties.

In non-housing news, separate regional reports from the New York and Philadelphia Feds boosted the outlook for the domestic manufacturing sector and the overall economy.  Wholesale inflation remained benign as the producer price index (PPI) fell by a wider-than-expected 0.9% in July and prices have plummeted over the past 12 months by the largest percentage (6.8%) since records have been kept, dating back to 1947.

Be forewarned: Oil just hit a 2009-high.

U.S. Federal Reserve policymakers met for their annual conference and Fed Chair Bernanke shared a favorable assessment about the recovery process from “the most severe financial crisis since the Great Depression.”  Of course, Bernanke tempered some of his remarks and reiterated that, while the recession seems to be coming to an end, the rebound would likely be slow, with unemployment remaining a concern.

Bernanke also spoke of the need for financial regulatory reform in order to ensure the current financial debacle isn’t repeated.  The Fed also extended its Term Asset-Backed Securities Loan Facility (TALF) lending program in order to help stem the potential “challenges” that remain among commercial mortgage-backed securities.

Weekly Economic Calendar

Source: In the Race for a U.S. Economic Rebound, Growing Debt and Budget Deficits Remain the Biggest Possible Roadblock

Treasury Secretary Timothy Geithner is once again traveling abroad to assure foreign nations that their investments in the United States are safe But this time it’s not China he’s trying to assure; it’s another large supporter of the dollar: Saudi Arabia.

While inflation has held steady in the face of increasing budget deficits, the purpose of Geithner’s multinational tour will be to repeat assurances that such deficits will not trigger a strong bout of inflation and in turn sink the value of the dollar and foreign holdings. Last month, Geithner was in China – the largest holder of U.S. treasuries – to make the same assurances.

Geithner reiterated the Obama administration’s commitment to protecting the value of the dollar and maintaining investor confidence in the U.S. financial system in an interview broadcast on CNN’s“Freed Zakaria GPS.”

“A strong dollar is in the interest of the United States. Of course, I deeply believe that,” Geithner said. “Our commitment … to the world and of course, the American people, is to make sure we’ll put in place the policies that can sustain confidence in this economy and this financial system.”

While rising unemployment – well beyond what the Obama administration expected – is prompting talk of a second stimulus package, Geither said it’s too soon for that. Only 11% of the $308 billion stimulus funds allocated to discretionary programs will be spent in the current fiscal year, and only half by the end of fiscal 2010,Money Morning reported last week.

“I don’t think that’s [deciding on a second stimulus is] a judgment we need to make now,” Geithner said Sunday on the CNN program. “We can’t really make it prudently or responsibly.”

Assurances from the man in charge of the world’s largest economy are important to those whom have invested in it, but several economists believe the Obama administration needs to do more to address worries about U.S. deficits.

“We have a fiscal policy that will ultimately undermine the value of their holdings and that has got foreign investors nervous,” said Mark Zandi, chief economist at Moody’s Economy.com told The Associated Press. “They are seeking assurances that the U.S. is committed to dealing with its long-term deficit problems.”

Geithner will also discuss with officials from Saudi Arabia and the United Arab Emirates the lack of stability of oil prices, which rallied about 115% to $73 a barrel after falling below $34 a barrel in February. The Commodity Futures Trading Commission (CFTC) last week said it will hold a series of hearings this month and in August to determine whether or not it should place new limits on energy futures contracts.

There’s a good chance that the United States and other economies will start growing again, Geithner said in a Reuters interview.

“In my view there are significant risks and challenges ahead,” he said. “We have a very powerful set of policies in place, coming on stream. I think there is a very good chance we will see the U.S. economy and the world economy get back to recovery, get growing again, over the next few quarters.”

Source: Geithner Takes Dollar Assurances to Mideast ]]> http://www.contrarianprofits.com/articles/geithner-takes-dollar-assurances-to-mideast/19081/feed 0 http://www.contrarianprofits.com/articles/the-18-trillion-question/16714 http://www.contrarianprofits.com/articles/the-18-trillion-question/16714#comments Fri, 15 May 2009 12:49:30 +0000 Eric J Fry http://www.contrarianprofits.com/?p=16714 What comes after a trillion? Inflation…and lots of it. Just about one year ago, in the May 8, 2008 edition of the Rude Awakening, your editors asked, “What comes after a trillion?” Today we know the answer: two trillion…and then three…and then four.

But in May of 2008, the answer was not as obvious as it is today. And so we wondered aloud, “How much is one trillion anyway?”

We answered the question from a variety of perspectives. For example: “One trillion seconds equals 31,546 years. One trillion dollar bills placed end to end would reach 96.9 million miles, far enough to reach the Sun. The average new car costs $28,400. $1 trillion would buy more than 35 million cars.”

Why did…

Last week Drew/Jack used the phrase “financial obesity”.  Now of course this was viewed in a humorous manner, but it sent me down a different path.

The term financial obesity may sound like fun, if you are the one fat with cash.  But I kept thinking about obesity in another form.  The obese budget deficit we are looking at in this country is extremely daunting.  Democrats can blame the Bush administration for the deficit that President Obama inherited and Republicans can blame the various stimulus packages of the Obama administration, but pointing fingers isn’t going to solve the problem.

When I was thinking about this article I shared my thoughts with my colleagues and I pointed out how if a person is overweight, they didn’t gain 100 pounds overnight and they aren’t going to shed the extra weight overnight either.  My colleague Jon Herring pointed out that you aren’t going to lose the extra weight by eating more ice cream either.

Not only are we eating more ice cream, we are eating the cake as well and then we are washing it down with chocolate milk.

I could care less who you want to blame when it comes to the budget.  The only two things I want to know are how are we going to fix it and how can I profit from it?

As for now, inflation is being kept in check.  But you can guarantee that inflation will rear its ugly head at some point in the future.  There is simply too much money being printed and eventually all those dollars floating around in the economy will be chasing a supply of goods that simply isn’t large enough.

So how do you invest for inflation that isn’t here yet?

First, you want to wait until you see the Consumer Price Index and the Producer Price Index creeping up a little bit.  Don’t wait until it is a concern and then react, when it starts increasing slightly you want to take action.

The actions you will want to take are as follows: diversify your portfolio with appropriate allocations to bonds, precious metals and stocks.  How much do you allocate to each?  That is really up to you, but you will want to factor in things like your age, your comfort level with risk and how many years you have until you retire.  There are other factors, but my point is you want to diversify with a balance of investment vehicles, not just diversify within the stock market or bond market, you have to diversify among asset classes as well.

And if you think you can diversify with foreign investments, you are only partially right.  I was reading some data from Dimensional Fund Advisers, a mutual fund company that applies extreme levels of academics to their investing practices, Thursday evening.  Included in that material was a table showing the performance of various global equity markets over the last 24 years.  There were two things that jumped out at me from that table.  First, the only equity market that was positive in the bear market of 2001 was the Australian market (+1.68%).  This list doesn’t include all equity markets, but it includes all the countries I would consider developed markets.  The second thing that jumped out at me was the fact that over the last 24 years, the U.S. equity market has never been the top performing market.  Among the other markets that have not been the leading market over the last 24 years are France and Germany.

These two pieces of information tell me two things: one, diversification among different countries only gets you so far and secondly, the thought of seeking safety in the most developed markets leads to underperformance in most instances.  This should all tie back in to your comfort level.

As far as my plan, I will probably leave approximately 50% of my portfolio in equities (diversified among various markets and sectors of course), and then put approximately 25% each in bonds and precious metals.  And when I talk about my portfolio, I am talking about the 80% I view as long-term.  The 20% that I trade on a short-term basis changes from day to day.

Make a plan for when the U.S. is forced to go on a diet, and don’t expect to shed these extra pounds in a few weeks.  It is going to take time to shed the extra weight we have put on in the last nine years or so.

Source: Financial Obesity

This from Taipan Daily:

It’s certainly no challenge finding stocks under $10 these days. Unfortunately, many of them used to trade for at least twice that much. To make matters worse, in most circumstances, these sad sacks deserve this ignominious fate.

Take your pick: Homebuilders who put up pasteboard shacks alongside highway interchanges and called them “mini-mansions”… banks that sold mortgages to undocumented workers… brokerage houses that bought and sold worthless bonds… retailers who based their business model on the idea that folks could spend twice what they earned forever… credit card companies that figured if they could just charge enough interest, it wouldn’t matter if no one paid off the principle…

Deadbeats, crooks and idiots one and all, each one thoroughly deserving of the punishment the recession has doled out.

Deeper and Longer

Because it is a recession, and not one of those quickie two-quarter deals like we saw around the turn of the century. No, this bout is showing every sign of running deeper and lasting a good bit longer.

As recently as last July, the Pollyannas at the Federal Reserve were still calling for 3% growth per annum as far as the eye could see. Now they have done a complete 180-degree turnaround. Their current estimate for GDP growth in 2008 is now between 0.3% and just plain zero. For 2009, they are now calling for a possible loss of 1.1%.

And they are the optimists in the house. At a recent meeting of Major League Baseball team owners (oh, the sordid places you have go to find the truth!), former Fed Chairman Paul Volcker warned that the recession was a greater threat than had been previously understood, and would in all probability impact even this venerable institution’s bottom line.

Unemployment Scrapes 10%

What threatens to empty baseball’s bleachers? Employers cut another 533,000 jobs in November. Jobless claims haven’t been this high since July 1992, when the U.S. had already been in recession for two quarters. Worse yet, the number of workers still collecting unemployment benefits has risen to over 4 million and has held at this level for three consecutive weeks.

As the economy grinds to a halt, state and local governments are staring at massive deficits totaling some $40 billion. New York and California have already approached Washington D.C. for bailouts that could dwarf anything we have paid to Wall Street.

While annual numbers are not in yet, New York is already complaining of a massive shortfall, with forward deficits through 2010 as high as $14 billion. Nor is the Empire State alone in its misery: just across the bridge and tunnels, New Jersey is already logged in a $258 million deficit in the first four months of the new fiscal year.

Cities Shut Down

As tax receipts collapse, states and cities are shutting down programs willy-nilly: California has already laid off 10,000 part-time and temporary state workers… Ohio is closing two mental health facilities… Rhode Island can’t afford to help out pensioners with discounted electricity and heating oil – just as temperatures dive below freezing… New Jersey is welching on promised property tax breaks… Georgia is closing library branches and denying fire departments new fire trucks.

Does such a dismal forecast as this mean that there are no opportunities about? Nonsense! In bad times, those with both cash and nerve can rule the roost. For example, this very breakdown in both employment and public services offers us a unique opportunity.

When times get this hard, crime skyrockets. And yet local government can do very little to prevent or protect this inevitable wave of both personal and property crime. At best, they can simply record the victims’ stories for the next begging trip to Washington.

Defend Yourself

However, there are private companies that are quite willing to provide citizens with the means of protecting themselves, their families and their property. For example, TASER International Inc. (Nasdaq:TASR) is well known for its easy-to-operate electrical stun devices.

TASER offers two distinct product lines: one for law enforcement, military, corrections and professional security agents, as well as a convenient series of personal protection devices roughly the size of a cell phone that can drop a mugger twitching and writhing to the curb in the most satisfying manner.

These units are the darling of most every police department in the country, as they can be used in circumstances where the safety of officers is at stake without risking the inevitable lawsuits and lost hours that result from firearm discharge.

Shocking Gains

Even better (for TASER anyway), while their professional models can be used over and over again, the personal systems require that you abandon the deployed unit after each use. Who would not replace a tool that just saved your life?

Talk about your permanent market!

But the best part is yet to come: much like virtually every other small tech stock, TASR has been punished mightily in recent days. Since the market collapse began a year ago, shares have been slashed from $19.10 to under $6 today.

Now normally I use stock options to leverage megacap stocks’ relatively small moves into triple-digit gains. However, this time around, I believe that this technique is both unnecessary and limiting.

As crime rises, I am forecasting TASR shares to return to their $20 range. For this opportunity, why risk time decay on a call option contract when simply buying shares of TASR offers one the same sort of triple-digit gains – many times over – during the next 18-24 months?

Source: Shocking Gains From Shocking Times

One of Obama’s prime campaign planks has been his promise to mercilessly raise taxes on the “rich,” a group initially defined as those making more than $250,000 per year. This was later dropped to $200,000 per year, and more recently has been defined as those Americans making more than $150,000 annually.

Setting aside the precipitous downward slide in the definition of “rich,” there is ample reason to suspect that Obama’s tax changes portend much higher, if not confiscatory, taxes on the most productive Americans. Obama has strongly argued for higher taxes as a way of employing government to alter the pre-tax distribution of income, which he believes has concentrated too much of the gains from productivity in recent years in the hands of the very rich.

He seems to think that the “very rich” are a closed caste of more or less fixed membership, which changes little from year-to-year. This figures in his concept of “fairness,” which supposes that it is perfectly just to burden a small fraction of the population with a majority of the costs of running the Federal government. This was detailed in a New York Times article on “spreading the wealth” by David Leonhardt. He wrote of Obama:

“He would then pay for the cuts, at least in part, by raising taxes on the affluent to a point where they would eventually be slightly higher than they were under Clinton. For these upper-income families, the Tax Policy Center’s comparisons with McCain are even starker. McCain, by continuing the basic thrust of Bush’s tax policies and adding a few new wrinkles, would cut taxes for the top 0.1 percent of earners – those making an average of $9.1 million – by another $190,000 a year, on top of the Bush reductions. Obama would raise taxes on this top 0.1 percent by an average of $800,000 a year. ‘It’s hard not to look at that figure and be a little stunned. It would represent a huge tax increase on the wealthy families. But it’s also worth putting the number in some context. The bulk of Obama’s tax increases on the wealthy – about $500,000 of that $800,000 – would simply take away Bush’s tax cuts. The remaining $300,000 wouldn’t nearly reverse their pretax income gains in recent years. Since the mid-1990s, their inflation-adjusted pretax income has roughly doubled.’

“To put it another way, the wealthy have done so well over the past few decades, with their incomes soaring and tax rates plummeting, that Obama’s plan would not come close to erasing their gains. The same would be true of households making a few hundred thousand dollars a year (who have gotten smaller raises than the very rich but would also face smaller tax increases). As ambitious as Obama’s proposals might be, they would still leave the gap between the rich and everyone else far wider than it burdensome on the young entrepreneur who was making his first millions as it would on the aging plutocrat who actually had enjoyed the prosperity of the past-quarter century since Reagan cut marginal tax rates.”

An October 13 editorial in The Wall Street Journal clarifies the mysterious arithmetic of Obama’s sweeping claims to cut income taxes for millions who currently have no income tax liability and pay no taxes:

“For the Obama Democrats, a tax cut is no longer letting you keep more of what you earn. In their lexicon, a tax cut includes tens of billions of dollars in government handouts that are disguised by the phrase ‘tax credit.’ Mr. Obama is proposing to create or expand no fewer than seven such credits for individuals:

“- A $500 tax credit ($1,000 a couple) to ‘make work pay’ that phases out at income of $75,000 for individuals and $150,000 per couple.

“- A $4,000 tax credit for college tuition.

“- A 10% mortgage interest tax credit (on top of the existing mortgage interest deduction and other housing subsidies).

“- A ’savings’ tax credit of 50% up to $1,000.

“- An expansion of the earned-income tax credit that would allow single workers to receive as much as $555 a year, up from $175 now, and give these workers up to $1,110 if they are paying child support.

“- A child care credit of 50% up to $6,000 of expenses a year.

“- A ‘clean car’ tax credit of up to $7,000 on the purchase of certain vehicles.

“Here’s the political catch. All but the clean car credit would be ‘refundable,’ which is Washington-speak for the fact that you can receive these checks even if you have no income-tax liability. In other words, they are an income transfer – a federal check – from taxpayers to nontaxpayers. Once upon a time we called this ‘welfare,’ or in George McGovern’s 1972 campaign a ‘Demogrant.’ Mr. Obama’s genius is to call it a tax cut.

“The Tax Foundation estimates that under the Obama plan 63 million Americans, or 44% of all tax filers, would have no income tax liability and most of those would get a check from the IRS each year. The Heritage Foundation’s Center for Data Analysis estimates that by 2011, under the Obama plan, an additional 10 million filers would pay zero taxes while cashing checks from the IRS.

“The total annual expenditures on refundable ‘tax credits’ would rise over the next 10 years by $647 billion to $1.054 trillion, according to the Tax Policy Center. This means that the tax-credit welfare state would soon cost four times actual cash welfare. By redefining such income payments as ‘tax credits,’ the Obama campaign also redefines them away as a tax share of GDP. Presto, the federal tax burden looks much smaller than it really is.”

After all the sloppy definitions are parsed, one point remains clear. The top 5% of U.S. income earners, who presently pay 60.14% (2006 figures) of all income tax, are destined for a huge federal tax increase under Obama.

One of Obama’s specific proposals is to raise the capital gains and dividend taxes to 25%, which will sharply increase capital confiscation as increasing percentages of “gains” will reflect inflationary depreciation of the currency. In the U.S., an investor must pay tax on the difference between the sales price of an asset and it purchase price, with no adjustment for inflation. Consequently, when the tax rate and inflation are high, a large portion of the “capital gain” is illusory. Any asset that appreciates by less than the rate of inflation will result in its owner losing purchasing power and having to pay taxes on the illusory gains. At Obama’s higher tax rates, (he has suggested that capital gains and dividend taxes should be hiked to as much as 25%,) capital confiscation would result from modest levels of inflation.

And the Great Credit Crunch implies that inflation will be far higher than in recent experience.

Setting aside whether it is moral or equitable to force a small fraction of the population to essentially pay for the whole cost of government, much of which entails the shuffling of checks to purchase votes of various aggrieved groups, there is a bigger question. Can it be wise for the whole fiscal regime to stand on the shoulders of a small group, like a pyramid tottering on its point, so that any tribulation which undermines the prosperity of those who pay would promise to bankrupt the state?

It is a worthwhile question to ask if you have considerable assets. In light of the worldwide credit crunch, which has deflated assets of all kinds, the prospect of burgeoning prosperity at the magnitude required to enable one-in-20 Americans to become “Super Rich” benefactors of Big Government is vanishingly small. There won’t be enough rich people to fill the role assigned to them in Obama’s scheme. The result to be expected, in addition to confiscatory taxation, is a dramatic shortfall of revenues. This, in turn, implies surging deficits and deficit financing requirements that will rapidly swamp the capacity of the Treasury to borrow.

Source: Playing the Tax Credit Card