David Stevenson (MoneyWeek, UK):

It’s not been a great week for British bankers.

There’s the ongoing spat between RBS and HM Government over how much the former’s heavy hitters can pay themselves in bonuses. Then there’s the embarrassing yet somehow inevitable revelation that our banks are the ones most exposed to Dubai – with RBS top of the pile, naturally.

Meanwhile, French President Nicolas Sarkozy has been unable to disguise his glee that Europe’s new finance minister is a Frenchman, who he clearly believes will take the City down a peg or two.

But these are just niggles compared to the real dangers the banking system faces.

The cheap money that the UK’s lenders have been enjoying is about to dry up, for one thing. But worse still, while central banks have been flooding the world with money, a dangerous imbalance has been building up in the banking sector…

Click here for the rest of Mr. Stevenson’s insightful article at MoneyWeek, UK.

Baltimore – (TFN): All eyes and ears are on the Fed this week. With Bernanke in New York discussing potential new bubbles and the New York Fed getting heat for overpaying AIG’s many creditors, investors are having a tough time knowing exactly who to follow.

For those of you who hold up the “Fire the Fed” signs, move over. I am thinking about joining your camp.

First, the real bad stuff. According to Neil Barofsky, TARP’s special inspector general, New York’s Fed (under the leadership of Tim Geithner) failed to use its leverage as the top-banking regulator to tell AIG’s lenders to take less than they were owed.

Instead of taking an across-the-board “haircut” as Obama and Pelosi told us we all should, finance giants like Goldman Sachs, Merrill Lynch and Societe Generale said they want 100% of what they were owed.

The only holdout, UBS, said it would be willing to take 98%. But after tough looks from the guys from across the table, that offer was quickly rescinded.

According to Barofsky, the move cost the country billions of dollars and much, much more in confidence for the nation’s banking cops.

Thanks, Tim!

With that bit of news in today’s headlines, it is tough to find the confidence in some of the Fed’s latest plans to help pull the country from financial failure.

As the nation slowly recovers from last fall’s economic collapse, Bernanke and his troops at the Fed are now facing the difficult task of unwinding massive expansionary policies.

One trick discussed today is shortening the length of emergency loans from 90 days to just 24 days starting in January. It’s a pretty mundane move that will have little tangible effect on the markets.

But what could have a much larger impact, with much less transparency, is Bernanke’s recent discussion of paying interest on the reserves banks place with the Fed.

A popular move with many overseas central banks, the interest rates paid on reserves helps to establish a rate floor that regulators can gradually increase without raising overall interest rates.

Essentially, the move is a way of mopping up excessive liquidity without draining or lowering the water in a much larger pool of lending capital.

Like many things, the idea sounds great on paper, but so did letting the Fed negotiate with AIG’s trading partners and we now know how much that cost us.

Let’s face it. The markets like transparency and predictability. Anything less gives us what Friedrich Hayek called “malinvestment.”

As the Fed gets more and more creative in its efforts to boost the economy without creating deadly bubbles, transparency will go out the window.

Toss in growing political pressure from the folks from Washington and one thing is certain.

Anything the Fed does will cost you and I more money.

So gold is now publicly loved by armchair investors, famous hedge fund managers and central banks… even as we write, Erin Burnett is “squawking” about it on CNBC. Are your contrarian senses tingling yet?

“So many hedge fund managers and pundits are singing the same tune: long gold and short U.S. Treasuries,” our friend Dan Denning wrote in today’s Daily Reckoning. “The bond bubble could go on much longer than anyone expects. And when so many people agree on something, none of them are usually right. As a contrarian, you’d be worried about becoming a victim right about now.”

Finish reading this article on DailyReckoning.com.

There are a lot of uncertainties permeating the market right now, not the least of which is healthcare reform. Will that reform entail a public option that could add $1 trillion to the deficit?  How is reform going to be financed?  And is it going to mean higher costs for employers across the board, or just the healthcare insurers?

Investing is made infinitely more difficult when 18% of U.S. gross domestic product (GDP) is hanging in the balance.

And you still have to consider:

• That unemployment is likely to keep rising, perhaps over 10%.
• That the U.S. Federal Reserve’s policy of quantitative easing is slowing down.
• That there is almost certainly a second wave of home foreclosures on top of the current commercial real estate epidemic.
• And that retail sales are still a long way from recovery.

There is also reason to believe that the U.S. dollar will continue to be weak, though it probably won’t sell off precipitously.

The U.S. dollar has weekend against the Euro lately, having fallen 0.8% Friday.  Technically speaking the chart shows a traditional “cup and handle” formation that could lead to an acceleration of the dollar’s downward trend.  Gold prices, up about 13% Friday, confirm this trend and could soon break through the $1000/oz resistance.

Fundamentally, if the economy – encumbered by high unemployment and a relapse of the housing market – does not pick up the dollar could be further imperiled.

Weakness in the dollar will also be affected by the Fed’s withdrawal of liquidity, which is likely to proceed at a gradual pace.

Finally, diversification away from the dollar among the world’s central banks is taking place, albeit at a slower pace than many analysts have suggested, and that too, is weakening the dollar.

Let’s concede that there is no currency that could supplant the dollar as the world’s major reserve currency. So, it’s unlikely that the world’s central banks will simply abandon the dollar anytime soon. However, we must also acknowledge that a reduction in the weightings of the U.S. dollar within central bank reserves is already underway.

An Aug. 14 article by BNP Paribas currency strategist Ian Stannard in Euromoney recently described this gradual shift in currency reserves.  The article noted that only 62.5% of global currency reserves are in U.S. dollars, down from about 66% in 2005.

So I do not anticipate a sudden shift in central bank reserves, but rather a continuation of the measured restructuring we’ve seen so far. Thus, the slow weakening trend in the U.S. dollar is likely to continue.

So, in this very uncertain investment scenario, I prefer to go for more secure returns in bonds.  And we can achieve great diversification at a cheap cost with the iShares iBoxx $ Investment Grade Corporate Bond Fund (NYSE: LQD).

For starters, its weighted average coupon of 6.26% offers a current yield slightly north of 6% at today’s prices.  Investors are assuming interest rate risk, which means that if interest rates climb, the value of the bond has to come down.  But in the short term, there is no immediate threat of inflation.

Looking at the major holdings of the fund – which has no single position that accounts for more than 1.26% of its total holdings – I see some names that have demonstrated continued stability and others that have shown recent signs of improvement, such as American Express Co. (NYSE: AXP).  So I do not expect any major credit spread hiccup here.  I certainly do not see any hiccup that a 6.26% coupon would not compensate for.

For an additional hedge against dollar weakness, I suggest you revisit my June 8 recommendation of the iShares SPDR Gold Trust ETF (NYSE: GLD). You may also consider buying a bit of the PowerShares DB US Dollar Index Bearish (NYSE: UDN) fund.  Do not go overboard. Err on being light, rather than heavy on hedging, since timing currency moves is very difficult.

Recommendation: buy iShares iBoxx $ Investment Grade Corporate Bond Fund (NYSE: LQD) at market.  Consider hedging part of the US dollar risk by buying the iShares SPDR Gold Trust ETF (NYSE: GLD) and PowerShares DB US Dollar Index Bearish (NYSE: UDN). Both funds should account for a fraction of your position.  Have a 5% stop loss on UDN (**).

Source: Buy, Sell or Hold: The iShares iBoxx $ Investment Grade Corporate Bond Fund

• World Bank President Robert Zoellick warned in a letter to the Group of Eight nations that the global economy is not out of the woods yet and they should be cautious about pulling back on stimulus programs.  Dated July 1, the letter was addressed to G8 host Italian Prime Minister Silvio Berlusconi and said interventions by central banks and governments appeared to have “broken the fall in the global economy” by stabilizing financial markets and boosting demand. “Yet 2009 remains a dangerous year. Recent gains could be reversed easily, and the pace of recovery in 2010 is far from certain,” Zoellick wrote in the letter obtained byReuters on Monday.  The G8 heads of government are expected to issue a statement on the situation of the world economy during their meeting in the central Italian city of L’Aquila.

• The Institute for Supply Management’s index of U.S. service industries contracted last month at the slowest pace in nine months, as measures of new orders and employment improved.  The survey of non-manufacturing firms, which make up almost 90% of the economy, rose to 47 — higher than forecast — from 44 in May, according to data from the Tempe, Ariz.-based group. Readings of less than 50 signal contraction.  The index’s third straight monthly improvement reflects signs of stabilization in housing and consumer spending. That combined with leaner inventories means companies may start expanding output again in coming months, Bloomberg News reported.

• Anglo-Australian mining company Rio Tinto PLC (ADR NYSE: RTP) has agreed to sell its U.S. packaging business to Wisconsin-basedBemis Co. Inc. (NYSE: BMS) for $1.2 billion in cash and stock.   Bemis, a food-and-beverage packager, will acquire 23 operations spread across the U.S., Canada, Mexico, South America and New Zealand that package and wrap such things as meats, cheese, bagged lettuce and snack foods, the Wall Street Journalreported.  The deal should push its sales from $3.8 billion to $5.3 billion annually and significantly boosts Bemis’s role in many foods and beverages purchased in U.S. grocery stores.

• Economic worries pushed crude oil prices below $65 a barrel Monday for the first time since May 27 as investor doubts over a potential rebound in the global economy increased, Reutersreported.  Prices fell more than 3% to $64 a barrel, after touching a five-week low of $63.40 in overnight trading.  London Brent crude fell $1.29 from Friday’s close to trade at $64.32 a barrel.  Crude has fallen more than 13% after reaching nearly $74 a barrel on June 11 on optimism that an economic recovery could bolster demand.  But recent weak economic data — including a poor U.S. jobs report last week — has weighed on markets.

• Writeoffs for Bank of America Corp. (NYSE: BAC) may rise as much as 10% to $7.6 billion when it reports its second quarter results on July 17, according to a Credit Suisse Group AG (NYSE ADR: CS) report obtained by Bloomberg News. Among the bad debts was $1.9 billion related to home equities, and 10.4% of credit card loans. Stress tests conducted by the U.S. government in May estimated the lender may face $136 billion in loan losses through next year.

• Moody’s Investors Service put Brazil’s credit ratings on review for an increase to investment grade, citing the country’s “demonstrated resilience to shocks” in the global economy, Bloomberg News reported. “Confronted with a wide array of adverse conditions, the Brazilian authorities’ policy response has been effective in containing the impact of the global crisis, thus providing evidence of increased resilience to shocks, a characteristic integral to an investment-grade credit profile,” Moody’s said.

• Justice Department officials have begun an initial review of the largest telecom companies such as Verizon Communications Inc. (NYSE: VZ) and AT&T Inc. (NYSE: T) are anti-competitive,The Wall Street Journal reports. While no company is being singled out at this point, the investigation could explore whether wireless carriers hurt smaller competitors by signing exclusivity deals with phone handset makers, such as AT&T’s deal with Apple Inc. (Nasdaq: AAPL) that makes it the sole carrier of Apple’s popular iPhone. Together, Verizon and AT&T control 60% of the 270 million wireless subscribers.

• Marc Andreessen, co-author of the first web browser, has started a venture capital fund with longtime business associate Ben Horowitz for new companies with new technology ideas, The New York Times reported. The duo’s company, called Andreessen Horowitz, has raised $300 million for tech-related investments, and will risk as little as $50,000 on new ideas. Any successful ideas will get up to $50 million for the companies to grow globally. Five-year returns in the venture capital industry were just 6% last year, a far cry from 2000’s 48% at the dot-com bubble’s peak. Andreessen is a director at Facebook Inc., which started with just $500,000 but has since raised $600 million.

Investment News Briefs Tuesday, July 7, 2009

The Fed wants you to believe hyperinflation is looming. Or at least, it shouldwant that, if doubling its balance-sheet – purchasing and lending against investment junk – is going to work the wonders that modern central-bank theory says it can. And the Fed certainly wants you to believe it will stop at nothing to avoid deflation (”whatever means necessary” as the chairman put it back in 2002).

So anyone touting the hyperinflation risk in public is playing the shill, a decoy – seemingly unconnected – proclaiming the miracle powers of Dr.Ben Bernanke’s snake oil to CNBC anchors at every chance.

In fact, they’re doing the Fed’s work better than the Federal Reserve itself. Really.

“The major danger with a zero lower bound for the interest rate,” said Swedish policy-wonk Lars Svensson(also a Princeton colleague of the Fed chief and his credit-bubble associate Paul Krugman) in a speech earlier this year, “is that inflation expectations will be too low and even negative, and that the real interest rate will thus become too high.”

With it so far? Slashing interest rates to the very minimum of 0% suggests inflation has vanished, at least in the central bank’s eyes. But that, in turn, reduces the rate of inflation expected by consumers, investors and business. Central banks are credible forecasters, you see. At least in central-bank eyes. So in Svensson’s philosophy, the zero-rate solution to falling inflation proves self-fulfilling as people hoard cash and sit tight in bonds.

“It is thus necessary to…to counteract expectations of falling inflation, and preferably to create expectations of higher inflation,” Svensson went on. But “as Paul Krugman put it” says the Riksbank’s deputy governor, “How will the central bank ‘credibly promise to be irresponsible’…?

Heaven knows the Fed’s trying. (So’s Krugman, to no one’s surprise.) But while it’s embraced credible recklessness, the Fed’s stop short of French kissing it.

Why so coy…?

“We have a very serious recession, we have a 9.4% unemployment rate,” said San Fran Fed governor Janet Yellen in a speech in California on Tuesday. “If we were not at zero, we would be lowering the funds rate…We should want to do more.”

Just how much further would the Fed go – all the way to hyperinflation perhaps? Racing to first base, “The vigorous policy actions of the Fed and other central banks, combined with sizable fiscal stimulus here and abroad, have sent a clear message that deflation won’t be tolerated,” Yellen said.

“Based on measures of inflation expectations,” she went on, an apparently reading straight from Svensson, “the public appears confident that the Fed will adopt policies that will maintain a low, positive rate of inflation. Evidently, the credibility that the Fed and other central banks have built over the past few decades in bringing inflation down has spilled over into a belief that we won’t allow inflation to get too low either.”

Steady on, cheeky! Second base next, and “A glance at history shows that many countries with massive structural deficits and without an independent central bank turned to the printing press to pay off their debts,” Yellen continued.

Straight to third then, and “That’s a recipe for high inflation and, in some cases, hyperinflation.”

Gulp, almost home! But then, somewhere between third and fourth base, the Fed’s gone shy and rebuttoned its blouse. Because “I don’t believe the United States faces that threat,” Yellen said, showing the come-on to be just one big tease.

“Looking back in history, runaway fiscal deficits have often been accompanied by high inflation,” she explained in Tuesday’s speech in the bankrupt state of California. “But, since World War II, such a relationship has only held in developing countries. In countries with advanced financial systems and histories of low inflation, no such connection is found.”

Oh man, what a let down! Who’s gonna put out hyperinflation if not the Fed…?

“In order to make up for the collapse of credit, we are effectively creating money,” said George Soros, the legendary if only occasionally accurate hedge funder, at a Washington forum in March. “If and when credit is restarted, you would then have an incredibly swollen monetary base, which, if it were leveraged, you would have an explosion of inflation.”

The trouble comes, as Lars Svensson guessed back in January, with that “if and when”. Because it opens the door to the idea that a central bank might opt instead to withdraw all this new money after the deflation panic has ended. And that in itself is enough to make creating it useless. Pointing to Japan’s five-year experiment with ‘Quantitative Easing’ between March 2001 and March 2006, said Svensson, boosting the monetary base by some 70% failed to “noticeably affect expectations of inflation and the future price level.

“For example, the Yen did not depreciate as it should otherwise have done. Firms and households clearly believed that the expansion of the monetary base was temporary and not permanent, which subsequently proved to be true. The monetary base fell back to normal levels when the interest rate was later raised to above zero.”

Sure, the Bank of Japan’s trillions did triple Japanese Gold Prices. But even with gold refusing to drop back against the Dollar right now, eagle-eyed readers will note that, quite apart from the urgent debate in Europe, the US authorities are at pains to deny they need an ‘exit plan’ any time soon. White House advisor Christina Romer made that much plain in last week’s Economist magazine, blaming the double-dip depression of 1937 on “an unfortunate, and largely inadvertent, switch to contractionary fiscal and monetary policy.” Yellen said it again Tuesday.

So Team Bernanke have got the right idea – at least on Planet Svensson – if not the right level of irresponsibility just yet. Slip a little vodka into their juice though, and they might start talking up inflation like Alan Greenspan, Bernanke’s predecessor and the Maestro himself, writing last week in the Financial Times. He tried to spook everyone out of cash and into the stores by warning of a decade of inflation ahead!

“A pending avalanche of government debt is about to be unloaded on world financial markets,” Sir Alan of Greenspan warned sagely, almost visibly winking from behind those enormous spectacles. “The need to finance very large fiscal deficits during the coming years could lead to political pressure on central banks to print money to buy much of the newly issued debt.”

Or given enough sauce to get really loose, the Fed might even get crazy like Asia-based doomster Dr.Marc Faber. (He’s been known to enjoy the odd cocktail or two.) Stop warning on hyperinflation. Just come out and say it instead.

“I am 100% sure that the US will go into hyperinflation,” as Faber told Bloomberg in late May, and again onJune 29th. “The US central bank has structured and introduced policies without considering exponential credit growth and its consequences,” added the Gloom, Boom & Doom author in an interview with the Korea Timeson Wednesday.

See what I mean about being a shill? It’s like he’s on the payroll…

“The United States will not raise interest rates for many years to come because it needs to pay off its huge debts,” he went on, recommending inflation-friendly assets such as equities and Gold Bullion. “In turn, too much money in the economy will raise costs of everything, including healthcare and education, giving rise to hyperinflation.”

There, now that’s the way to do it! Greenspan and Faber on song, while the Bernanke Fed tip-toes around stating its aim:

Spark inflation and leave it to burn. Because putting it out worsened both the Great Depression and Japan’s “lost decade” – the one that started two decades ago and hasn’t yet ended. Everyone who’s anyone in monetary theory knows that.

And if they claim otherwise, maybe they’re the ones kidding.

Source:  Faber and Greenspan: Shills for Fed Snake Oil

Spot gold was bid at $925.20 by 1520 GMT after hitting an intra-day low of $922.60, the lowest since June 24. Earlier it hit a high of $944.70.

The precious metal reversed earlier gains when the dollar, which has been under pressure, gained against a basket of currencies after U.S. consumer confidence data.

“Obviously, in these days where everything is linked together, from crude prices to the price of gold, any change to people’s view of the economy and inflation expectations will cause a reaction,” said Ole Hansen, an analyst at Standard Bank.

Adding to the bearish signals for gold prices, crude oil dropped nearly 3 percent.

While investing in gold is usually seen as a hedge against risk, a strengthening dollar makes it relatively more expensive for holders of foreign currencies, weakening its appeal.

“Gold is following the dollar,” said senior trader Michael Kempinski at Commerzbank. “Euro/dollar falling below $1.41 triggered some profit-taking in gold,” he said.

Earlier in the London session, gold slipped after the European Central Bank said gold and gold receivables held by euro zone central banks fell by 96 million euros ($136 million) in the week ending June 26.

INFLATION IN FOCUS?

Matthew Turner, an analyst at VM Group, said gold investors seemed to be focusing more intently on long-term inflation expectations than recession fears, which would strengthen the link between crude and bullion prices.

“But there are no immediate signs of inflation anywhere for now, so investors are looking to the long term, and of course when inflation does start to go up, the price of gold will be rising well ahead of it,” he said.

U.S. gold futures for August delivery dropped by 1.5 percent to $926.90 per ounce on the day.

On the investment front, the world’s largest gold-backed exchange-traded fund, the SPDR Gold Trust, said its holdings remained at 1,125.74 tonnes as of June 29, unchanged since June 25.

In other precious metals, spot silver was lower at $13.52 against $13.84 on Monday, platinum was unchanged at $247.00.

LONDON, June 30 (Reuters)

After predicting a 0.1% economic contraction for its 30 member nations in March, the OECD said growth would reach 0.7% in 2010. The OECD also said this year’s economic contraction would be 4.1% compared to its earlier forecast of a 4.3% decline.

“The good news is that economic activity in OECD countries is reaching bottom, following the deepest decline since the Second World War. In fact, this is the first Economic Outlook in two years to revise up previous projections for OECD economic growth compared with the previous Outlook.” said OECD Secretary General Angel Gurria. “But we should not get carried away. The upward revision is fairly modest and we foresee a recovery that will be rather slow and fragile for some time.”

The recovery in the United States is expected to outpace that of both Europe and Japan, according to OECD estimates. Gross domestic product (GDP) in the United States will contract 2.8% this year before rebounding to 0.9% growth in 2010. In March, the OECD predicted the U.S. economy would contract by 4% this year and stagnate in 2010.

Euro area GDP is expected to contract 4.8% this year and to be flat in 2010, the OECD said. That’s actually worse than the organization predicted in March when it said the euro area economy would decline 4.1% this year and increase 0.3% in 2010.

“Signs of impending recovery in the euro area are not yet as clearly visible, reflecting country-specific combinations of bursting housing bubbles, export set-backs and damage to financial sectors,” the OECD said. “The eventual recovery may also be slow in this region, including because rising unemployment makes consumers more reluctant to spend.”

Analysts have said that the European Central Bank (ECB) erred by not cutting its lending rates as quickly and dramatically as the U.S. Federal Reserve, which could explain the difference between the rates of recovery for each region.

Other central banks “have their own responsibility and decisions and I have already said that as far as we are concerned, we would be very, very keen to avoid to be put in a situation which for us would not be appropriate, namely a liquidity trap,” ECB President Jean-Claude Trichet said following the Fed’s decision to cut its benchmark rate to a range of 0%-0.25%.

But it is precisely the aggressive monetary actions taken by the Fed and other central banks that the OECD credits with stifling the global recession.

“Signs have multiplied that U.S. activity could bottom out in the course of the second half of this year,” said the OECD. “Such a recovery would reflect tremendous policy effort.”

However, the group also warned that as fiscal stimulus fades and the need for balance-sheet repairs escalates, any U.S. recovery could be “uncharacteristically weak and insufficient to bear down on unemployment at around 10% of the labor force.“

For that reason, the OECD recommends the U.S. Federal Reserve not raise rates until 2011. With regard as to whether or not keeping rates so low for such a long period of time will lead to inflation, the OECD doesn’t see that as being the case.

“The projection that we have is one where the U.S. is emerging from the recession a little earlier than the euro area, which does not really support that argument,” OECD chief economiest Jorgen Elmeskov toldReuters.

As far as Europe is concerned, the ECB – which has cut its benchmark rate to 1% –should exhaust “the remaining scope for cutting the rate on the main refinancing operations sooner rather than later.”

“The bleak growth outlook argues for using additional room, where it still exists, for interest rates cuts and warrants keeping exceptionally low policy rates for a substantial period of time,” the group said.

While policymakers at the ECB have recently expressed a willingness to push the key rate down below the 1% floor, there is still a measure of hesitancy on the continent.

The ECB yesterday (Tuesday) pumped a record 442.2 billion euros into the Eurozone banking system in its first-ever offer of unlimited one-year funds. The demand for the funds highlighted expectations in Europe that liquidity will not be available again on such favorable terms.

The ECB itself reserved the right in future one-year operations to charge an interest rate above its main policy rate.

“Let’s wait and see how the latest measures work,” Jose Manuel Gonzalez-Paramo, an ECB executive board member told the Financial Times. “We did not decide that 1% was the lowest level imaginable in any scenario, but we do think that it is the appropriate level given the information that we have currently available.”

The preliminary Markit purchasing managers index (PMI), a closely watched survey released Tuesday, showed that Eurozone output fell for the thirteenth consecutive month in June.

The PMI rose to 44.4 in June, up from 44.0 in May. A reading of less than 50 indicates a contraction in activity, while a figure of more than 50 signals expansion. Economists had forecast a rise to 45.5, according to MarketWatch.com.

Dominic Bryant at BNP Paribas told The FT that Europe’s economy won’t be gaining traction “anytime soon,” and he expects the economy to be “more or less flat for the next four quarters.”

Europe’s underperformance when compared with the United States and United Kingdom will reflect “the less aggressive action of policy makers in the Eurozone in the areas of monetary policy, fiscal policy and banking sector support,” Bryant said.

OECD Boosts Outlook but Urges Developed Countries to Keep Lending Costs Low

As currencies expert Alex Merk of Merk Mutual Funds wrote recently, “Russian President Medvedev suggests the dollar is on its way out; Russian Finance minister Kudrin says there is no substitute for the dollar. The Chinese see a need to diversify out of the dollar; the Japanese say their trust in the dollar is unshakable.” What’s a poor investor to think?

Merk says Russia’s and China’s – along with fellow BRIC nations India and Brazil – concern over the stability of the dollar and their need to diversify out of dollar-denominated assets is a strategic perspective. As he rightly points out, “There is simply no substitute for the U.S. dollar today; no other market is as deep and liquid, or able to absorb the cash that needs to be deployed by central banks around the world.”

Does this mean the dollar is safe and sound? Not by a long shot. This, again, from Merk:

[We] believe countries around the world are racing to put the “tools” in place to be less dependent on the US dollar. In Asia, for example, after the 1997/1998 financial crisis, Asian countries realized they needed to bolster their countries’ reserves. In the latest crisis, they realized that holding almost exclusively U.S. dollar reserves was a risky strategy. The solution is all too obvious, namely to develop domestic markets. This isn’t just about developing domestic consumption to create a more “balanced” world economy, this is about creating domestic infrastructures, fixed income markets in particular. Currently, many global investors invest in Asian markets by buying US dollar denominated securities plus derivatives. This makes Asian issuers – governments, supranational and corporate issuers alike highly dependent on the US dollar. This will only change if global investors have confidence in the stability and maturity of the local markets. The message to “CEOs” of countries around the world is to show that they are open and ready for business. Such trust is not earned overnight. In Asia, Singapore is a leader; not surprisingly, Singapore has a healthy domestic fixed income market. China is on its way, but needs to do more to provide access to its domestic markets.

It other words, global diversification away from the dollar may not happen today or tomorrow. But the risk to the dollar – and to long-term US economic growth – is real.

Notes readers may want to do something about diversifying their portfolio allocation to hedge against this outcome. As usual we recommend considering beefing up the hard assets side of your portfolio and adding TIPS into the mix, too.

If you’re serious about investing in hard assets, we highly recommend you read this special investor report from Crisis Trader editor Christian DeHaemer on what he calls the “Great Red Oil War.”

Of course, you could also choose to trade currencies directly. For information on how to follow master forex trader Bill Jenkins to currency trading profits, click here.

The global population is peaking and is consuming more food than it’s producing. This will make food scarcer and cause it to rise in price.

But there are more subtle reasons for investing in commodities right now. Rogers says that although stocks may touch crazy valuations in the near term, they may be in worthless currencies – a vista Notes readers will be familiar with. This from a recent interview with Rogers in the Economic Times:

Central banks all over the world have printed huge amounts of money, and the real economy is not strong enough for all this money to be absorbed… so, it’s going into stocks and real assets such as commodities. It’s a mistake what they are doing. It’s giving short-term pleasure, but there’s long-term pain as we are going to have much higher inflation, much higher interest rates and a worse economy down the road.

The American bond market is already beginning to go down dramatically as people realize that the American government has to sell huge amount of bonds, and secondly, there is going to be inflation, serious inflation, as it was always in the past when you had governments printing huge amounts of money.

The fiscal deluge is lifting stocks. But they’re getting frothy. And Rogers reckons the current upward trend won’t last.

It’s going to snap. Later this year, next year, we are going to have currency problems, maybe even a currency crisis. I don’t know with which currency — maybe with the pound sterling, maybe with the US dollar, who knows. It maybe with something none of us have at the moment. When you have a currency crisis, stocks will be affected, many things will be affected. It is not sound, what’s happening out there in the world.

In the 1930s, we had a huge stock market bubble which popped. And then politicians started making many mistakes. They became protectionist. They made solvent banks take over insolvent banks and then both banks failed in the end.

They are doing many of the same mistakes now. What’s different this time is that we are printing huge amounts of money which they did not print at that time. So, we are going to have inflation this time.

There are a number of ways to play this scenario with hard assets. But to keep things simple, you may want to focus on the following three market-beating commodities ETFs (hat tip ETF Trends).

1) The iShares S&P GSCI Commodity-Indexed ETF (NYSE:GSG), up 8.1% for the year

2) Notes’ old favorite, the PowerShares DB Agricultural Fund (NYSE:DBA), up 7.5% for the year

3) The Market Vectors-RVE Hard Asset Producers ETF (NYSE:HAP), up 25.9% for the year