Just kidding. Obama looks like he has locked up the Democratic nomination today. Wall Street may not like the prospect of an Obama Presidency.

It’s kind of amusing to watch CNBC as analysts try to explain why the market has taken a sudden turn for the worse. Lehman Brothers is down 8%. Uh oh. GM’s monthly sales were off by 30%. Uh oh.

Of course none of this should have too much of an affect on Australian stock prices. The Reserve Bank elected not to raise the cash rate from 7.25%. The RBA concluded that the last eight rate hikes have made borrowing sufficiently expensive that household and business credit will not contribute to overheating in the economy. Phew!

But if people can’t or won’t borrow more, that doesn’t meant they won’t have more money in their pockets. There’s always an increase in income to drive domestic spending. That income—in the aggregate—comes from Australia’s record terms of trade, as we mentioned earlier this week. As far as we know, there’s not a lot the Reserve Bank can do about that. Wage pressures have to be building.

The share market didn’t find the rate news much of a relief from the weakness in U.S. financial stocks. The Aussie financials were down and so were the miners. If the miners and the banks are down in Australia, the index is down. The only exception is energy, where Santos is making waves in the LNG market.

For the record, we still think banks stocks are dogs. Globally, banks continue to de-leverage and raise capital. You might make a spirited argument that the worst of the housing-related losses have been taken. But, even if that point were generously granted, you’d still have to ask where in the heavens bank earnings are going to come from?

The only possible answer is that the credit cycle is reversing and interest rates are headed lower. This may possibly be true in Australia. But it can’t possibly be true anywhere else in the developed world. The ECB remains hawkish. The Fed never got tight in the first place. And the Bank of Japan is in no position to raise rates with the Japanese economy in a fragile state of expansion.

So once again, Australia is the weird looking kid on the global block, with a cycle that seems to be at odds with everyone else’s. What will it mean for the Aussie dollar? Well, the RBA won’t cut rates until it sees signs that inflation is slowing down. And it’s going to be months before that happens (if it does happen, that is.)

In the meantime, you’d expect traders to sell the Aussie dollar if they don’t think interest rates are headed higher. Yet that did not happen en masse yesterday. On the economic front, building approvals were up 7.8% on a seasonally adjusted basis. This gave the Aussie a little nudge and countered the prospect that interest rates may have topped out.

Since we’re going on the record today, we can’t see the Aussie getting a lot weaker against the greenback this year. The rate differential between the two currencies favours the Aussie. And if rates aren’t driving the pair, then it would economic growth.

You can go ahead and forecast a bottom in housing, a top in oil prices, and a major rebound in the U.S. in the second half—all of which would drive the greenback higher and probably lead to a significant rally in U.S. stocks (and selling in BRIC and emerging markets, including Australia.) But it is easier to write out that scenario and actually believe it.

Still, there are some folks who believe that the U.S. is scraping along the bottom, albeit in prolonged fashion. We think these people fail to realise that the world is witnessing a structural reallocation of capital away from Western markets and toward developing markets. Granted, this theory allows for big rallies in U.S. shares.

However, for our money, it’s best to focus on the long term compound growth in earnings available in the emerging and developing world, than trying to trade rallies in the U.S. stock market, where a decade of managing corporations for short-term profit has put U.S. companies on the back foot in global competition. The game has changed.

There was more perplexing news on the economic front. Australia’s current account deficit was up 4% to $19.49 billion, according to the Australian Bureau of Statistics. The deficit on goods and services rose by $1.4 billion, or 22%.

It’s pretty strange that you have a country in the middle of arguably the greatest export boom of all time—and you’re running a current account deficit. The trouble is, despite its continental size, Australia is small in terms of population. It is hard for an economy of this size to produce the diversity of goods available in the world. There are not enough human resources for a truly diverse economy.

And with globalisation, why would you produce things locally you can buy on international markets? There are some things you want to do locally so you don’t have to rely on trading partners (energy, food, banking). But Australia’s trade and current account deficits seem to be structural in nature. The country will always import capital goods, textiles, and consumer electronics—things not likely to ever be made competitively in Australia.

Is it time to look at base metals again? Zinc, lead, nickel, and copper all came off the boil last year. Meanwhile, energy and bulk commodities (coal, iron ore, phosphate) all zoomed ahead. But now, maybe things are heating up in the base metals again.

Melbourne-based Jervois Mining announced that is has been approached by a Chinese consortium to develop the Young nickel deposit in NSW and produce 50,000 tonnes of nickel a year. When we get back to Melbourne next week, we’ll ask Gabriel and Al what they think of base metals prices and base metals stock and report back to you.

Dan Denning
The Daily Reckoning Australia

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Source: Australia’s Current Account Deficit Up 4%

Think about the American flag — 13 stripes and 50 stars, standing as it does as the nation’s essential patriotic symbol.

What Patriotism Really Means

The old saw is that “patriotism is the last refuge of scoundrels.” It’s true that far too many have used appeals to patriotism, (or nationalism), to cover their nefarious schemes for power.

But on this American Memorial Day we should consider that true patriotism denotes positive, supportive attitudes toward one’s country. Patriotism includes pride in one’s country and its achievements, in its culture and also identification with other people in the nation.

Patriotism implies that the country, however defined, offers moral standards and values — what it means to be “an American.” Patriotism also implies that individuals should place their nation’s interests above their personal or group interests. Indeed, in time of war, the ultimate sacrifice may extend to offering your own life on behalf of your country.

Remembering the Sacrifice Made in Blood

Memorial Day is a day when Americans should pause and focus on the ultimate price so many have paid over the centuries to win and preserve our freedom.

Each generation has taken up and continued the struggle to protect liberty. My father fought in France in 1918 and my older brother flew missions in a B-24 Liberator over Italy in 1944. Both have passed on now. Perhaps your family history is similar.
Young folks used to have a saying: “To die for.” It meant that some object or person is so enticing that you’re willing to make the ultimate sacrifice to obtain it.

But ask yourself this, how many Americans today would be willing to die for the freedoms and liberties we supposedly enjoy — as more than a million before us have done? And do we still enjoy the liberties for which they fought and died? Or have freedoms been slowly taken from us, devaluing the sacrifice of their deaths? Did they die in vain? In his eloquent Gettysburg Address, President Abraham Lincoln suggested that what we do as a people would determine the answer to that question.

Painting Politics by Numbers

Americans are overwhelmed by numbers. We’re surrounded by presidential preference polls, a bloated national debt, huge budget and trade deficits, highway fatalities, the number of forecasted hurricanes, crime statistics. But too many people seem more concerned about the latest American Idol winner than about how our freedoms are being systematically stolen away.

The cruelest numbers of all are those that seem so senseless.

Over 4,000 members of the American military have died in the Iraq war, as well as thousands more Iraqis and non-military American contractors. Whatever the merits of this war, each American and Iraqi casualty, many of them very young, were unique individuals. Each with his or her own life, loves and potential that now will go unrealized.

Was this really necessary? It’s worth considering in comparison that in all the wars America has fought, including our own Civil War; 1,290,200 have died. During Gen. Robert E. Lee’s first Confederate invasion of the North, at Antietam in my home state of Maryland, on Sept. 17, 1862 alone, more than 23,000 men were killed, wounded or missing.

What’s Worth Dying For?

Here in The A-Letter, we often speak of freedom and liberty, usually in terms of very real threats to both of these precious commodities.

To observe that so many have died in the American cause over so many centuries only accentuates the meaning and importance of the cause for which they gave their “last full measure of devotion” as Lincoln said.

They died before their time, with promises unrealized, in the service of their country. Their very real sacrifice for our liberties makes it all the more important that we guard against diminution of those liberties in our own time — whether the threat is from abroad, or from within our own government.

Today let’s remember the real meaning of Memorial Day and never forget those who made the ultimate sacrifice for our liberties.

God bless America,

BOB BAUMAN, Legal Counsel

Source: Did All Those Sacrifices Mean Anything?

That is, they were concerned Washington bureaucrats might restrict the free flow of the dollar and other currencies in and out of the United States.

I raised the issue during my Panama presentation last week because frankly, I’m also concerned about the decidedly anti-free market, anti-offshore statements and actions of both of the Democrat Party presidential candidates.

Failures at Economics 101

That dynamic novice economist and statesman, Sen. Barack Obama (D-Ill), has proposed inane legislation in the U.S. Senate that could disrupt American trade and business. His legislation would blacklist 30 or so foreign jurisdictions (Switzerland and Panama included) for the manufactured sin of imposing little or no taxes.

He would also require Americans to report offshore financial activity of every kind and give the U.S. Treasury unprecedented power to set new rules over such activity.

In 2004, Hillary Clinton, as New York senator, made offshore an issue claiming she wanted to close “loopholes” for “…people who create a mailbox, or a drop, or send one person to sit on the beach in some island paradise and claim that it is their offshore headquarters.” (She announced this while her husband was raking in millions from cozy offshore investments his rich, new cronies handed him.)

Indeed both wannabe presidents, Clinton and Obama have denounced offshore investments and financial activity. They’re trying to imply that the millions of Americans who freely do business offshore are engaged in tax evasion and hiding cash from the IRS.

That is simply untrue.

Thus the serious question: If, God forbid, either wins the White House, can currency controls be next? In fact, under emergency laws still in effect, a president can impose such controls by executive decree.

“Currency Controls” – What Are Those Again?

As you read this, keep in mind that we are not talking peanuts here – nearly US$4 trillion in foreign exchange moves in the global economy every 24 hours.

Free currency convertibility means residents and non-residents of a country are able to exchange domestic currency for foreign currency. That means you can trade the weak dollar for the strong euro, for example. But there are many degrees of convertibility, depending on how governments want to manipulate currency.

In the extreme case government regulations might limit or prevent currency or bank deposits from being moved out of the country. Other restrictions might include banning the use of foreign currency within the country or banning residents from possessing foreign currency, restricting currency exchange to government-approved exchangers, setting official fixed exchange rates, or restricting the amount of currency that may be imported or exported.

How Politicians Make Assets Worth Less

In the past, certain politicians have claimed the need to apply exchange controls to maintain “orderly capital flows” and preventing “runs” on a currency. That happens when businesses and individuals quickly sell the currency in exchange for another currency that is seen as more stable and valuable. Of course, such trades are the essence of the free market economy.

As the late Nobel Prize winner Friedrich von Hayek wrote in his 1944 classic, The Road to Serfdom, “The imposition of exchange controls leads to an instantaneous reduction in the wealth of the country, because all assets are worth less.”

Such controls have been especially appealing to unthinking politicians in countries with large balance of payments (imports vs. exports) problems. The U.S. trade deficit at the moment is US$272 billion so far for 2008 and amounts to many trillions over recent years.

Free market advocates disapprove of exchange controls because they restrict trade and business transactions, especially in a time of beneficial globalism. Free exchange of currencies allows instant capital flows. That expands integration of the international economy through trade, foreign direct investment, migration, and the spread of technology.

This recent world boom has been largely caused by developed economies integrating with less developed economies, using foreign direct investment, the reduction of trade barriers, and the “westernization” of these developing cultures. Free currency exchange is the life blood of this growth.

Controls Destroy Freedom

It is no accident that among the few countries now enforcing currency controls are some of the most tyrannical. These include China, Cuba, Libya, Myanmar (Burma) and Venezuela – and some whose economies would fare far better without controls – The Bahamas, South Africa, Argentina.

In Hugo Chavez’ anti-free market Venezuela, currency controls have produced shortages. They’re now lacking the basic foodstuffs such as milk, eggs and chicken, impeding imports and keeping out needed goods like capital machinery and spare parts out of reach for many businesses, which are now shutting down. In South Africa, a long-time system of dual currency controls has hampered growth and sustained a 25% unemployment rate, scaring away needed foreign capital.

Czar Nicholas II first pioneered limitations on convertibility in modern times. The Czar ordered the State Bank of Russia to introduce a limited form of exchange control in 1905-06. He wanted to discourage speculative purchases of foreign exchange.

Fortunately, the free market trend since the end of World War II has been to end exchange controls. Margaret Thatcher led the way in the 1970s. France abolished controls in 1990, after 44 years. The European Union’s adoption of the euro further did away with controls.

So could the U.S. buck the trend and start imposing these controls? Honestly, it is possible. History does not mean that statist politicians in America, hungry for more taxes to finance their radical spending, would shy away from imposing such controls – just as they repeatedly vow to “tax the rich.” All that it would require is the stroke of the new president’s pen.

What can you do about all this? If you are an American, know your candidates and cast your vote wisely this November. In the meantime, take advantage of your offshore financial freedoms while you still can.

BOB BAUMAN, Legal Counsel

Source: Attack of the Control Freaks!

Yesterday, we mentioned the oil market. Today, we slide in deeper.

You’ll recall, dear reader, some time ago we guessed that the feds’ efforts to keep consumers consuming were essentially inflationary…and that the inflation they caused would tend to go more into gold and oil than into economic growth or asset prices.

Since then, the price of oil has shot up over $100. Yesterday, it hit a new record at over $126, before falling back to $124. Gold, meanwhile, has traded above $1,000 – and now is correcting in the mid-800s.

This is already a major adjustment. It comes along with a major adjustment in the purchasing power of the dollar, generally. Americans’ global purchasing power has been cut in half. The value of their assets – on the world market – are only half what they were during the Clinton years. And the value of their most precious asset – their time – has also been greatly reduced.

This is why you see so many Europeans in the United States…America is a cheap place to visit. It’s also why U.S. export industries are reviving; the country has become a low-cost producer for many things; it is now a place where richer nations can consider outsource production.

All of this has gone almost ‘according to plan’ – that is, it is pretty much what we guessed would happen.

But now, we have to ask: are these adjustments enough?

You’re expecting us to say ‘no,’ aren’t you? Instead, our answer is ‘maybe.’

In the case of America’s 50% pay cut, (the U.S. dollar is only worth about half as much as it was compared to other major currencies) we think it should do the trick. Now comes a long period in which people come to realize it and begin living not quite as large as before. They lose their houses. They cut back on their spending. They relearn an old word – thrift – and find they like it. They downsize their lives – with smaller houses, smaller cars, and littler expectations. The economy goes into a long slump – as 70 million people, facing retirement, begin to save money.

In the case of gold, our guess is “probably not.” Gold has still not come near the inflation-adjusted peak it set 28 years ago. Considering all that has happened during those years, we bet that there is another peak to come – even higher than the last. In 1980, the United States still had the residual financial integrity to stand up to inflation. Paul Volcker could push the yield on the 10-year Treasury note up to 16%; he caused a recession, but not a revolution. Most importantly, he protected the dollar. We don’t see any Volcker around now…and we don’t see how anyone – even Paul Volcker himself – could “pull a Volcker” now.

The country has twice as much debt per person. It has a hugely negative current account. It has the biggest government deficit ever (think what would happen to it in a real recession…the deficit would go to $1 trillion). No, we don’t think gold is in danger of a sudden attack of monetary propriety. Instead, we think the gold bull market has much further to go – probably above $2,500 an ounce, before the dollar-based financial system collapses completely.

Agree or disagree, dear reader…but you’ll want to take advantage of this dip in the gold price. Pad your portfolio with the yellow metal – for just one penny per ounce. You can beat that. Find out how here.

But it is oil we set out to reckon with today. And what we reckon is that oil is getting close to its near term peak. If we were holding major positions in oil, we would sell them.

Here’s why. While gold is nowhere near its record high – oil is above it. In today’s money, the top price ever paid for a barrel of oil, until recently, was only about $79. Today, oil seems to be headed to twice that level. And a few experts think it will go much higher. Goldman’s oil expert predicts $200 oil.

But why should it go so high? For all the talk about China’s insatiable demand, it is still true that prices and demand must worth themselves out. When the price goes up, people grumble…but they use less. We filled our tank in France last weekend. The total price came to more than $150. We had been thinking about driving down to the South of France next weekend. Instead, maybe we’ll take the train…the trip would have cost us more than $300 in gasoline alone.

Everything happens at the margin, said a dead economist. Americans alone probably drive millions of marginal miles – to places they really don’t really need to go…when they don’t really have to be there. At over $3.50 – they’ll drive less. Already, the Financial Times reports that U.S. demand is falling more than expected.

There’s so much shifting sand in the oil market – usage, new discoveries, distilling capacity, storage facilities, OPEC policy, inflation, drilling technology, emerging market developments, the dollar, U.S. economic growth – its impossible to know how big the dunes will get. But oil demand – and prices – should generally stay in line with GDP. The more growth, the more oil. Plus, if you measure GDP and oil in dollars you eliminate both inflation and currency depreciation as variables. Well, at $100, reports Martin Wolf in the Financial Times, “the annual value of world oil output would be close to $3,000 bn. That is 5% of world gross product. The only previous years in which it was higher than that were 1979 to 1982.”

Those were not good years to enter the oil business. The price subsequently collapsed.

Yes, you could make a lot of money in oil…many people already have. But sure as fleas come with stray cats, success leads to excess. As the price rises, more and more people imagine that it will keep going up. Some take measures to avoid using it. Some find substitutes. Some increase production. Markets still work, in other words. Every bubble eventually finds its pin. The day can’t be too far off when the price of oil will fall back under $100.

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Source: Oil’s Adjustment

The same is not always true when we talk about trade deficits. Like the falling dollar itself, it’s worth asking the question: How does it affect you, the individual?

The trade deficit – the excess of imports over exports – has a direct and serious effect on the value of our dollars. As long as we continue having big trade deficits, it means we’re spending more money overseas than we’re making at home. Our manufacturing profits are lower than our consumption. If your family’s budget has a “trade deficit” of sorts, you’ll soon be in trouble. If your spouse spends $ 4,000 for every $2,000 you bring home, something eventually gives way. This is what is going on with the trade deficit.

In fact, the trade deficit is one of the most important trends in the economy, and the one most likely to affect the value of the dollar. Combined with our government’s big budget deficit, the trade deficit only accelerates the speed of decline in our dollar’s value.

Speaking in terms of spending power of the dollar, the trade deficit is the third rail of the economy. Here is what has been going on: The United States used to produce goods and sell them not only here at home, but throughout the world. We led the way, but not anymore. The shift away from dominance in the production of things people need has allowed other countries (most notably China and India, and with Colombia, Russia, Brazil, and Mexico not far behind) to pass us up, and now the U.S. consumer has become a buyer instead of a seller.

This international version of conspicuous consumption 1 is financed not from the profits of commerce, but from debt. Let’s think about this for a minute. If we were buying from domestic profits, the trade deficit wouldn’t be such a bad thing. It would mean we were spending money earned from domestic productivity. But this is not what is going on. We are going further and further into debt to buy goods from other countries. Our wealth is being transferred overseas and, at the same time, we are sinking deeper into debt. This is taking place individually as well as nationally. Consumer debt (you know: credit cards, mortgages, lines of credit) is growing to record levels, and the federal current account deficit is moving our multitrillion – dollar national debt into new high territory.

Sure, we should be concerned about retirement income from savings, investments, pension plans, and Social Security. But a bigger danger is that, even with a comfortable retirement nest egg by today’s standards, what if those dollars are worthless when we retire? What then?

The big question today is, how long can this debt-driven economy continue? If you quit your job and refinance your home, you could live for a while on the money. The higher your equity, the longer you would be able to spend, spend, spend. But then what?

This is precisely what is going on in the U.S. economy, and, at some point very soon, we are going to have to face up to it and change our ways. The trade deficit is the best way to track what’s going on. Returning to the analogy of quitting your job and living off of your home equity, you may stay home all day and order an endless array of electronics, furniture, toys, computers, and the like; in other words, you could consume goods in place of working. But remember, you didn’t win the lottery; you are financing this new plan with borrowed money. The lender will want that repaid. So this individual version of a trade deficit (the deficit between generating income and spending money) is what is happening on a national level in the United States.

This is the problem that is directly affecting the value of the dollar; and the situation is getting worse. We know that the dollar is in trouble because we see it depreciating against the floating currencies of other countries.

The United States has a lot of wealth, but that wealth is being consumed very quickly. History shows that no matter how rich you are, you can lose that wealth if you’re not productive. Meanwhile, the dollar’s value falls and – in spite of the Fed’s view that this is a good thing – it means our savings are worth less. Your spending power falls when the dollar falls, and as this continues, the consequences will be sobering.

The dollar’s plunge has taken many people, currency experts of banks included, by surprise. For many of them, it is still impossible to grasp. Some talking head on CNBC said that he was at a complete loss to understand how such weak economies as those seen in the European Union could have a strong currency. For American policy makers and most economists, the huge trade deficit is no problem.

They find it natural that fast-growing countries import money while slow-growing economies export money. At least, that is the recurring theme. So Americans traveling abroad may continue to complain that “it has become so expensive to travel in Europe” as though the problem were somehow the fault of the Europeans. But in fact, it is the declining spending power of the dollar that is to blame, and not just the French, the Italians, and the residents of the so-called chocolate-making countries.

This problem is pegged not to some speculative or fuzzy economic cause, even though the concept of currency exchange rates continues to mystify. A historically large trade deficit is at the core of the declining dollar. Somebody needs to get over the notion that our economy is strong and other economies are weak, merely because this is America. In the United States, the reason for the trade deficit is not a high rate of investment as we see in some other countries, but an abysmally low level of national savings. We are spending, not producing.

A second argument offered by some is that “capital flows from high-saving countries to low-saving countries, wanting to grow faster.” Under this reasoning, a deficit country, looking at both consumption and investment, is absorbing more than its own production. But whether this is good or bad for the economy depends on the source and use of foreign funds. Do those funds pay for the financing of consumption in excess of production (as in the United States) or for investment in excess of saving? That is the key question that ought to be asked in the first place about the huge U.S. capital imports.

To quote Joan Robinson, a well-known economist in the 1920s and 1930s close to John Maynard Keynes:

“If the capital inflows merely permit an excess of consumption over production, the economy is on the road to ruin. If they permit an excess of investment over home saving, the result depends on the nature of the investment.”

The huge U.S. capital inflows (economic jargon for money coming into the country), accounting now for more than 6 percent of gross domestic product (GDP), have not financed productive investment; in fact, they are financing more and more debt. Capital grew from 5 percent in 2005 to more than 6 percent in 2006, according to a report from the Bureau of Economic Analysis (BEA), “U.S. International Investment Position.” Our net investments are among the lowest in the world, meaning we prefer spending and borrowing over actual production and growth. The huge capital inflows have not helped finance a higher rate of investment. The United States has been selling its factories and financial assets to pay for consumption.

It’s helpful to use a real means for measuring economic strength. Money coming here from overseas finances higher personal consumption. The steep decline in personal saving is a symptom of our spending, and along with that habit we have lower capital investment and a growing federal budget deficit. In the third quarter of 2005, for the first time ever, the rate actually fell into negative territory – to – 1 percent.

The trade deficit came in at only $58 billion for March, which I have scheduled as Prosecution Exhibit # 7,327 in the upcoming Mogambo Court Of Awesome Revenge (MCOAR), wherein I will easily show that Americans have now eaten, drunk, breathed and injected so many pesticides, hormones, antibiotics, fertilizers, plastics, industrial by-products and toxic substances of one kind or another that the total volume of the mind-altering, poisonous, cancer-causing crap inside people is obviously producing stupidity and mental illness of Biblical proportions.

Unfortunately, as soon as I think about that, I realize that all that polluting garbage is but an insignificant jot of nothingness when compared to the eye-popping, Sheer Freaking Tonnage (SFT) of mind-altering prescription drugs and mind-altering alcoholic beverages being consumed, too, and especially when combined with the massive consumption of various illegal mind-and-mood-altering drugs, too.

Then again, now I that I think of the economic insanity of the corrupt Federal Reserve and the whole constellations of insanity as exhibited by Congress, the electorate, the school system, and the media, it sure answers a lot of questions!

To even suppose that a country under the influence of so many mind-altering substances could make a rational decision about anything makes me laugh and laugh, but not that good kind of laugh where somebody told you a funny joke, and since you and your barfly trash buddies are already pretty sloshed, you laugh too long and too loud, and then you repeat the punch line a few times and comically slur the words in doing so, laughing some more each time, and then somebody buys another round of drinks and life is good.

No, this was the other kind of laugh, the ugly kind where I demonstrate Mogambo Utter Contempt (MUC) at such imbecility, but without the optional message-enhancement of throwing stinky, dirty diapers at the crowd of rude, stupid people who are shouting for me to shut up and quit ruining their stupid outdoor wedding, or their stupid outdoor birthday party or disturbing their Sitting Around Looking Stupid party or something, I dunno.

But the reason for my vicious MUC is that this negative $58 billion trade deficit for March was interpreted as, unbelievably, GOOD news, since it was down from February’s deficit of a negative $61 billion! Hahahaha! Good news! Hahaha!

I plan to try this on my wife if I ever lose my mind and decide to go home to face her and the kids while sober; “Well, I came home roaring drunk every night last month, but last Thursday, I can home sober! That one time! Therefore, this is good news! Rejoice, ya nasty old bag! Rejoice, I tells ya, and then shut up!”

If you decide that you are an adult and you can withstand childish Mogambo Utter Contempt (MUC), listening to me make rude noises and watching me shaking my butt at you to indicate maximum disrespect and disdain, then let me slip into “adult mode”, too, and (after straightening up by combing my hair with my fingers and making sure that my zipper was up) I note in my most grown-up voice that at this exact time last year, in the merry, merry month of May, 2007, a mere twelve months ago, we had a freaking trade SURPLUS of $63 billion! Now it’s a negative $58 billion!

So the total swing from a monthly surplus of $63 to a deficit of $58 billion has been a staggering $121 billion! Wowser! You can probably tell by the way my eyes spin comically in my head that this is a Big Freaking Change (BFC), and it scares the hell out of me.

If you cannot hear alarms alerting you to the extreme danger of such a deteriorating economic condition, then you need an expensive Mogambo Economic Detection System (MEDS) right away, which admittedly does little more than make a big racket to drown out the sounds of wolves howling in the distance, which are coming to eat you and your family alive, mostly by consuming the thing that would keep you and your family alive; the buying power of your money.

Like for instance, in your retirement portfolio. As to that, I turn to the “Indexes’ P/Es & Yields” table in Barron’s, which showed that the Dow Jones Industrial Average lost another huge chunk of earnings last week, taking the total earning for the 30 stocks in the index down to $148.27, which was down from $185.64 last week, and which was down from a relatively astounding $756.27 in earnings a year ago! But the stock market did not go down!

This means that with the index closing at 12,745.88 last Friday, the price-to-earnings (P/E) ratio of the DJIA went to a staggering 85.97! Hahahaha! People are still buying those stocks at the most absurd price in stock market history! Hahahaha!

The fact that the DJIA did not drop by three-quarters into the gutter where it burned with an acrid flame is Prosecution Exhibit # 4,328 in a separate case in the Mogambo Court Of Awesome Revenge (MCOAR), the one where I sue the hell out of everybody connected with the Federal Reserve, the Congress (except for Ron Paul) and the Supreme Court for being stupid, stupid, stupid, and including as co-defendants the “investing professional” idiots who bought these stupid stocks and their sickly earnings to drove the price up so high that it produced a P/E ratio of 85.97! Hahahaha! This is actually beyond stupid! Buying an index of stocks with a P/E of 85? Hahahaha! This is, is, is…I am at a loss for words!

But I can still laugh the laugh of Mogambo Utter Contempt (MUC), and I do! Hahahahahaha!

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Source: A Shrinking Trade Deficit is Still a Deficit

At the time, our debt stood at $7 trillion, with interest payments in fiscal 2003 totaling $318 billion. But now the U.S. national debt stands above $ 9 trillion, with interest payments in fiscal 2007 adding $ 1.4 billion a day.

But the Fed and Treasury have engineered a strategy to pay off the debt with weaker and weaker dollars. And guess what? So far, so good. Since November 2002, the dollar has fallen against the euro more than 50 percent since its high in October 2000. Of course, this is not the first time we’ve gone through a managed devaluation of the currency. In the 34 – year period since Nixon slammed the gold window shut and subsequently ended the Bretton Woods exchange rate mechanism, we’ve had only five major currency trends:

1. Weak dollar 1972 – 1978 (7 years)
2. Strong dollar 1979 – 1985 (7 years)
3. Weak dollar 1986 – 1995 (10 years)
4. Strong dollar 1996 – 2001 (6 years)
5. Weak dollar 2002 – (? years)

The most notable period spanned the 10 years from 1986 through 1995. Then as now, the United States was fighting a historic current account deficit through managed debasement of its currency. But because the present bear market only began in February of 2002, the current cycle looks like it still has a number of years to run.

In the best-case scenario, if the current bear market follows the trajectory set by the 1986 – 1995 slump, we could see a weakening dollar for up to 10 years. This presents an opportunity for selling the dollar in one of four ways: direct and indirect speculations, using short- and long-term options for each. These plays will help you safely position your money outside the dollar bear market. And you stand to make a fair amount of money, too.

But there is great danger ahead. Since the trade deficit passed the $ 759 billion mark – 6.3 percent of GDP – foreigners now must shell out about $ 1.5 billion a day just to keep the dollar afloat. And even during the managed dollar decline of 2003, the trade imbalance continued to grow. In 2005, Stephen Roach, Morgan Stanley’s chief global strategist, predicted that the current account deficit at the time was on course to reach $ 710 billion – 6.5 percent of GDP. He was short by only a few billion.

Herein lies the drama. The Bank of Japan spent the equivalent of $187 billion in 2003 – and $67 billion in January 2004 alone – in a bid to prevent its strengthening currency from choking off the country’s export-led recovery. In dollar terms, the Bank of Japan is now spending more than $ 1.5 billion every day trying to keep the yen from strengthening against the greenback.

Over a four-week period in the fall of 2003, combined foreign central bank purchases of U.S. securities topped $ 40 billion, more than $ 2 billion every trading day. Yet these central bank billions managed merely to limit the greenback’s decline to just 2.3 percent over the same period. Can you imagine what would have happened if the banks hadn’t pumped that money into the Fed’s reserves? One former currency trader has asked, “If $40 billion cannot bring about even a minor rally, just how weak and despised is the once – almighty dollar?”

We have relied on the kindness of strangers for too long. “We’re like the untrustworthy brother – in – law who keeps borrowing money, promising to pay it back, but can never seem to get out of debt,” Jim Rogers writes. “Eventually, people cut that guy off.”

There is no way the United States can possibly pay off its creditors should they decide to cash in their IOUs. Right now, the United States holds only about $ 70 billion in reserves against its obligations – much less than 2005’s $ 87 billion. That would last about three minutes should creditors begin to sell the dollar, rather than trying to support it.

It’s hard to imagine, isn’t it? The world’s reserve currency spiraling downward, out of control. But then, that’s what the British must have thought in 1992 when they attempted to manage a devaluation of the pound. Despite the Bank of England’s best efforts, sterling got away from them; the currency collapsed and Britain was kicked out of the Exchange Rate Mechanism (ERM) established to pave the way for the euro. On that day, known as Black Wednesday in Britain, currency speculator George Soros is rumored to have made as much as $ 2 billion. Don’t be surprised if more fortunes emerge in the future as the dollar slips dangerously close to free fall.

By flooding the system with liquidity, the Fed cannot control the value of the U.S. dollar against foreign currencies; nor can they control its purchasing power – at least not indefinitely. The Fed’s current policies can “give the majority of investors the illusion of wealth as asset markets appreciate, ” wrote Marc Faber in November 2003, “while the loss of the currency’s purchasing power is hardly noticed. This is particularly true of a society that has a very large domestic market, where 90 percent of the people don’t have a passport and therefore know little about what is going on outside their own continent. And where the import prices of manufactured goods are in continuous decline because of the entry of China, as a huge new supplier of products with an extremely low cost structure, into the global market economy.” If that’s the case, you should look at any declines in the dollar as an opportunity to make some money.

The dollar is the single biggest element of risk in the world of finance today. Rearrange the current system of world finance ever so slightly, let confidence in the greenback falter, and the mighty dollar could go up in flames. There are many ways to hedge against this risk. Better still, there are many ways to profit from the likelihood the dollar will fall. Some methods are direct, some indirect. Some are leveraged, some unleveraged. There is a methodology for every taste, but before explaining the specifics, we ask: What ails the dollar?

The dollar is a victim of its own success. It is America’s most successful export ever – more successful than chewing gum, Levi’s, Coca – Cola, or even Elvis Presley, Britney Spears, and Madonna put together. Trillions of dollars flow through the global financial markets every week, and they are readily accepted at large and small – and clandestine – business establishments from Kiev to Karachi.

Today, there are simply too many dollars in circulation for the currency’s own good. Why? Americans have been living beyond their means for more than two decades. The U.S. dollar’s problems stem from a single cause. “If there’s a bubble,” wrote David Rosenberg, chief economist at Merrill Lynch, ” it’s in this four – letter word: debt. The U.S. economy is just awash in it. “

You’ve seen it firsthand: John Q. Public now holds more credit cards and outstanding loans – with a higher and higher total debt load – than ever before. Outstanding consumer credit, including mortgage and other debt, reached $ 9.3 trillion in April 2003 – a significant increase from its $ 7 trillion total in January 2000 – but by the third quarter of 2007, debt had nearly doubled since 2000, to $ 13.7 trillion. With consumer spending alone responsible for approximately 70 percent of U.S. GDP, that’s quite a hefty personal debt load.

The corporate debt picture is no better. American companies have never depended so much on sales of their corporate bonds. Between 2002-2007, investment – grade corporate bond sales increased nearly 60 percent, growing from $598 billion to $951 billion. But junk bond sales for that same period broke the bank, surging from $57 billion to $133 billion.

The third leg of the debt problem, following consumer and business debt, is Uncle Sam. Government debt as of November 7, 2007, officially passed $ 9,000,000,000,000. That’s about $ 30,000 for every man, woman, and child in the country. This total includes debt owned by many types of investors, from individuals to corporations to Federal Reserve banks and especially to foreign interests. (By 2004, foreign central banks had stockpiled more than $ 1.3 trillion worth of dollar – denominated Treasury bonds and agency bonds at the Federal Reserve. By 2007, foreign debt had nearly doubled, to $ 2.033 trillion.)

Good day… And a Terrific Tuesday to you! It sure has been the weirdest weather for April that I can recall… We had a frost warning last night! UGH! Oh well… Onward and upward, as the Big Boss, Frank Trotter likes to say!

As we draw closer to the Fed rate announcement tomorrow, (the meeting actually begins today) I’m seeing more and more talk/speculation of the Fed announcing an end to this rate cut cycle after cutting rates 25 BPS. Hmmm… Interesting, don’t you think? I mean, come on, when has the Fed ever been that transparent? I know that Big Ben Bernanke said he was going to have the Fed be transparent, but he’s been in the Big Chair for a couple of years now, and there’s been no transparency to my knowledge… And I’m a Fed watcher, I’m a Fed watcher, watching rates go down.

This thought has the dollar swinging the hammer again… And every currency has taken a hit from the hammer overnight… Except for Chinese renminbi (CNY)… But then the moves there are so darn minuscule that it’s difficult to determine if it went up or down! HA!

Anyway… That’s the skinny on the move in the currencies overnight to a stronger dollar. These knuckleheads are forgetting something very important… The dollar’s fundamentals are awful! Forget for a minute about the interest rates being at the second lowest level for any G-10 country. Think back to the financing of the deficit problem I keep talking about. The recession going on… The housing meltdown… The subprime meltdown for banks/lenders and bondholders… A war… And you get a different picture for the dollar don’t you? Alright, it’s OK to bring back interest rates into the picture now. What you’ve got is a currency with awful fundamentals, and interest rates at 2%.

But… The markets don’t see it that way this morning… And I learned something long ago about fighting the markets… You lose! We just have to hope that calmer heads get a hold of the markets before the dollar rallies too much and the trade deficit goes even higher!

We begin to empty out the data cupboard today as the Case Shiller Home Prices report for February (two months ago!), is expected to show more rot on the vine with a 12% decline in prices.

And for anyone thinking that the housing meltdown has bottomed… The number of U.S. homes standing vacant has reached a record of 18.6 million. This is due to rising foreclosures. The 2.9% vacancy rate (vacant and for sale) represents a record in data back to 1956. OUCH!

We’ll also see the consumer confidence report for April, and it’s expected to keep the recent trend of weak confidence reports going… The Confidence Index stood at 64.5 in March, and the “experts” believe it will fall to 61.1 in April, which would be the lowest reading since 1993.

OK… We had another European Central Bank (ECB) member out talking hawkish yesterday; only this time it was the Top Cat – ECB President, Trichet. Let’s listen in to a snippet of his talk…

“It’s crucial that the Governing Council sets the appropriate monetary policy stance on the basis of no other considerations than the delivery of price stability in the medium term. The bank’s current policy stance will contribute to achieving our objective.”

That’s Central Bank parlance for… Beating Inflation is the ECB’s sole aim.

I’ve had quite a few people send me the column that appeared in Forbes titled: The Demise of the Euro. I’ve said this before, but for anyone that missed it… Here’s my take… I believe that this article is much like all the others we’ve seen announcing the end of the euro… They are all regurgitated. They have the same stuff each time regarding how Spain and Italy don’t like the “one policy meets all”, and they will leave the euro, thus causing the collapse.

Listen to me now, and hear me later on this… Spain and Italy should be thanking their lucky stars that they were ever invited to join the euro (EUR)! For once, these two countries, which had been known to have shaky finances, have inflation that’s at least in this atmosphere. They have budgets that are somewhat in line with the attempt to balance, and they have 80% of their trade among the other members in the Eurozone. Tell me again why these two are going to leave the euro.

OK… Onto other things… My friend the Mogambo Guru is back in rare form, after suffering a heart attack earlier this month. Yesterday he posted some very interesting numbers regarding the stock market rally… Let’s listen in to the Mogambo…

“And another horror is that the stock market went up, which is Pretty Freaking Strange (PFS) since Barron’s reports that the earnings of the Dow Jones Industrials went down, dropping to $225.53 from $234.49. This has produced the unbelievable price-to-earnings ratio of 57! Earnings are going down, but the stocks are going up! To a P/E of 57!

Un-freaking-believable!

“And not only that, but DJ Transportation index saw its earning drop, too, to $218.60 from $230.91, taking this index’s P/E to 23!

“And while the venerable S&P 500 has not yet shown any more deterioration in its earnings, the fact that the market went up made the P/E of this index go to a lofty 21! All of this in the face of deteriorating conditions and economic collapse! This is beyond incredible!

“How can you NOT run to gold in such crazy times? Ponder this question well, as a lot depends on your answering it correctly, much like when the minister asked you, ‘Do you take this woman to be your lawfully wedded wife?’, and you know how well that turned out. So, like I said, ponder it well!”

Ahhh… The Mogambo on a Tuesday! Folks it doesn’t get much better than that! You can read the entire article here.

Currencies today 4/29/08: A$ .9340, kiwi .7775, C$ .9875, euro 1.5575, sterling 1.9750, Swiss .9640, ISK 74, rand 7.5760, krone 5.1225, SEK 6, forint 162.15, zloty 2.2150, koruna 16.20, yen 104.10, baht 31.62, sing 1.36, HKD 7.7915, INR 40.40, China 6.9845, pesos 10.48, BRL 1.6865, dollar index 72.89, Oil $115.12, Silver $16.83, and Gold… $886.47

That’s it for today… Well… I began my last four weeks of cancer meds in my second phase yesterday. I don’t look forward to these four weeks, but I can’t dwell on it, so I’ll take it one day at a time. I go in for a scan this Thursday; they are still trying to figure out what that was that they saw on my rib two months ago. I’ve seen enough hospitals and imaging places in the past year to fill a lifetime. But hey! I’m here! And still full of you-know-what and vinegar every morning! In case you’re wondering why I’m telling you all of this… I receive a ton of emails from readers asking me to keep them up to date with my progress in fighting this cancer… So there you have it! And… I hope you have a Terrific Tuesday!

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If you want to see how a gold standard would work in practice, look no further than the famous board game, Monopoly. I got the idea for this from Junior Mogambo Ranger (JMR) Rebecca H., who sent an un-attributed quote that ran, “Which paper money held up the longest? Don’t know. But the one paper money that held its value the BEST, I believe, is the monopoly money”, because “You can still buy Boardwalk and the railroads for the same amount. No inflation with monopoly money.”

And that is exactly the way it would work in real life, too, with gold money; under a fixed money supply there is never any inflation in the general level of prices! In fact, most prices would tend to drift down, down, down over time while quality would drift up, up, up, as that is what competition in the marketplace does when paid for by competition between producers to borrow scarce savings, mediated by the banks, which makes only the best projects get funding.

But, I regret to say, we have squandered it all in favor of another of history’s ludicrous experiments in Big Government Through Deficit Spending; in this case the federal government borrowed gobs and gobs of money by issuing more bonds for sale, and the Federal Reserve (like the obedient little traitor that it is), created the money so that investors and pension funds and insurance companies could borrow it to buy all the government debt! On margin! Hahahaha! We’re freaking doomed!

And it is not just us Americans that are being eaten alive with more and more, and evermore expensive, governments in the thrall of Marxist stupidities, as we learn when Joel Bowman “reporting from the Persian Gulf” here at The Daily Reckoning writes, “I found it interesting to note that the Saudis, perhaps the most expansive central planners in terms of intervening in individual’s lives, now spend $55 of every barrel of oil sold just to provide welfare for their citizens. This is a country with the largest reserves of the hottest export around and it requires a price seen less than two years ago just to balance the books! The only thing outpacing the rise in crude price, it would seem, is the over-reaching arm of the planners.”

I note from the Economist magazine that year-over-year inflation in consumer prices in Saudi Arabia is running at 7%. Oops!

This brings up Junior Mogambo Ranger (JMR) Patrick, who writes that inflation is hitting the people pretty hard. He writes, “I’m working on the edge of the Sahara desert on a gas processing plant in Tunisia. And whuddya know… People are selling their cars because they cannot afford the petrol, while food and fuel prices have risen dramatically even with government subsidies. The government is really stretching itself to pay for all its subsidies and will soon have to allow prices to rise at a faster rate. I don’t think it’ll be too long before food riots start breaking out.” Yikes!

And to show that it can get worse than that, Mr. Bowman adds that “Venezuela, according to a report someone forwarded me recently, needs an astonishing $97 per barrel of oil to meet Hugo’s financial obligations… Iran and Nigeria require something like $75.”

Currently, consumer prices in Venezuela are rising at 25% a year, Iran about 8% and Nigeria probably 15%. Oops!

In short, apparently these countries need the price of oil to stay high to pay for their welfare expenses as he notes that “the margin between profit and just covering their expanding welfare buttocks is getting rather thin”, which means that they will necessarily be raising oil prices again pretty soon, as inflation in prices is making these government welfare costs go up, which means that oil will be going up in price! This investing stuff is easy!

And if it is welfare that they are providing, then the news couldn’t be worse when the Economist magazine reports, “Soaring prices for products like rice and wheat are causing headaches for aid agencies and politicians.”

And it will soon get really bad for Mexicans, as if it wasn’t bad enough as it is, as Petroleos Mexicanos (PEMEX), Mexico’s state-owned oil conglomerate, has admitted to a 6.4% decline in oil production during just the first two months of 2008! Yikes!

You will understand the significance of the seemingly gratuitous use of the word “Yikes!” when you learn that this is the same oil field that reportedly provides the vast majority of Mexico’s revenue! And production has been going down and down for years already. But not – Yikes! – at this terrifying rate!

And lest you think that we Americans are going to escape the carnage, think again, as from the Independent.co.uk we get the headline “USA 2008: The Great Depression” with the subhead, “Food stamps are the symbol of poverty in the US. In the era of the credit crunch, a record 28 million Americans are now relying on them to survive – a sure sign the world’s richest country faces economic crisis.”

So one in 10 Americans is already on food stamps, one in eight residents of Michigan is on food stamps, “double the level in 2000″, and it is all getting worse, as “At least six states, including Florida, Arizona and Maryland, have had a 10 per cent increase in the past year.”

And with the monetary spigots wide open in response to the terrible consequences of the fatal failures of the Federal Reserve descending upon us, taking the concept of “deluge of money” to whole new realms, it will just keep on getting worse. And worse. And worse.

Which brings us to gold and silver. Ahhhh! I feel better!

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Editor’s Note: Richard Daughty is general partner and COO for Smith Consultant Group, serving the financial and medical communities, and the editor of The Mogambo Guru economic newsletter – an avocational exercise to heap disrespect on those who desperately deserve it.