OK… Well, yesterday we saw the currencies stop the bleeding from the overnight sell off, and although they range traded on the day, the bias was to sell dollars once again. That bias has played through on our Turn Around Tuesday theme, and the currencies are higher today than yesterday, but lower than they were 3-weeks ago week ago. Yes, the month of June has not been kind to the currencies, as some of the euphoria that was going on from March thru May, regarding the global economic recovery is being thought about again, and this time, not with the same rose colored glasses…

Yesterday, I told you about the story in the Australian Morning Herald that shook the A$’s confidence, when the Economics Editor said the markets were wrong to believe the Reserve Bank of Australia (RBA) were finished with their rate cuts. Well, that story was followed up by one that shook the confidence of the Commodity Currencies… This one was about China, and how analysts had gotten the stimulus all wrong in China, and that the Chinese had NOT put the money toward infrastructure and Capital improvements but instead into investments, thus making the Chinese disguising the stimulus in China as a recovery… Hmmm… I don’t live in China, so I can’t really pass judgment here, but I will say that most people that comment on China in the past 6 years have been mostly wrong…. And more wrong than right for sure!

But… As they say on the farm, it’s too late, the cow’s out of the barn! That Chinese stimulus story, hit a nerve with the Commodity Currencies, and before you knew it, the high flying currencies of Aussie, kiwi, Brazil, and South Africa were all looking at figures that thought for sure were in their rear view mirror! The sell off was damaging for sure…

This looks like a classic case of “getting cold feet”… Traders were all lathered up to take these currencies higher last week, but read a story and “got cold feet”… They would say they are being prudent… I would say that they are being wimps! Because in the end, folks… This has nothing to do with whether or not the RBA cuts rates again or not! In the end, this is all about what the U.S. is going to do about all their debt! I’ve harped on this for years, and the thing that really gets me is that IT HAS GOTTEN WORSE! The National Debt, is now over $11 Trillion, and will probably reach $14 Trillion this year, after all the deficit spending by the administration… This is just awful folks, just awful… Because… And here I go again getting up on my soapbox, but come on, this is important! And Yes, I know, you’ve heard this at least 100 times if not more before!

But, the only way the U.S. is going to be able to pay down their debts, and the $11 Trillion is just the tip of the iceberg with the baby boomers starting to retire, is to pay it back with cheaper dollars… But… Hey! Don’t take my word alone for this… Let’s listen in to the IMF’s Chief Economist, Olivier Blanchflower, who was speaking at a conference in Paris yesterday…

“A U.S. economic recovery will only be sustainable if there is a “large increase” in net exports, which may require a dollar adjustment. It may not be very easy, It may require “an adjustment in the dollar, but it is needed.”

Did you hear that? The IMF Chief Economist is saying out loud, and not under his breath, like most economists that see this but don’t want to go out on a limb, that the U.S. needs to devalue the dollar!

Now… That might be a shock to you, folks… But it’s not to me! And if you’ve read the Pfennig for a long time, and heard me harp and harp about the deficits and not being able to pay them back unless we do so with a cheaper dollar, then now it might just all come back to you… Like what the blind man said when he spit into the wind, Ahhhh, it’s all coming back to me now!

But again… It’s not just me that thinks these things, although I will say that sometimes it sure feels like I’m the only one saying them out loud every day of the work week!

Today, I have a special treat… And once again, I’m as proud as a peacock this morning, because, I have a quote to share with you, from the one and only Richard Russell… This comment plays well with what I’ve just been talking about… Check this out!

Richard Russell – “It’s clear (at least to me) that Obama is following the path Roosevelt took during the Great Depression.

In 1933, the government devalued the dollar by 41% by raising the official price of gold from $20.67 to $35 an ounce. Devaluation makes debt easier to handle. In a devaluation, the dollar value of debt remains the same, but all other assets would be worth more (in nominal terms) whether it was a house, a stock, a car or an ounce of gold.

How our creditors who own trillions of dollar in their reserves will react to a dollar devaluation I really don’t know, but a devalued dollar is a lot better than nothing. The Bernanke Fed is trying desperately to bring back inflation, and devaluing the dollar is the surest and quickest way to inflate.”

WOW! It’s not every day that I get to use a quote by Richard Russell! But now… Think about this stuff that’s in the Pfennig this morning… And then think about what I told you last week, about how all this going back and forth in the currencies and precious metals, is just “noise”… Ahhh, now I want to hear you say… “I get it, I get it!”

Oh… And to follow up the Blanchflower, Butler, and Russell comments… Ty sent me a quote my Mark Twain that sums it all up… Mark Twain – “History doesn’t repeat itself, but it does rhyme.”

U.S. stocks sold off 200 points yesterday, making it a tough row to hoe for the Commodities, and Commodity Currencies… The Brazilian real posted the worst performance on the day, with the real moving back above the “2″ level for the first time in about a month… Recall, that the Central Bank Gov. said in the middle of May that he would everything he could to keep the currency above “2″, only to watch it move below and then well below “2″ in the next weeks. The Central Bank Gov. did try, by cutting interest rates about 10 days ago, but in reality, he has little at his control if the markets / traders / investors decide to buy the currency… He does not have a treasure chest of reserves like the Bank of Japan and Bank of China… No, in reality, the only way the real was going to move back above “2″, was to have the sentiment toward Commodity Currencies change…

And again, I can’t believe that the one story in the Australian newspaper, has caused a sea-change of sentiment like this! Maybe, the story’s writer will be proven to have been bang on… That’s not what I’m saying… I’m saying, his opinion, caused a sea-change of sentiment, and that surprises me!

I had someone write me yesterday and say, I might add, once again, that Europe is in worse shape than the U.S. that they didn’t even have stress tests there because they fear what they might show… Hmmm… I wonder what they’ll think when they read this… ECB member, and President of the Bank of France, wrote in his annual letter to French President Sarkozy, that the “worst has passed for the economy and that he was favorable to releasing the results of the banks’ stress tests.” Hmmm… Guess we’re back to the “ugly car” comparison, eh?

Recall last week when I told you about the Chinese announcing a “buy China” protectionist program? I said then that these things usually spread and other countries announce their own versions of protectionism measures… Of course, we all know who started this round of protectionist talking… The current administration and their “buy American” plan… The Chinese measures were placed to offset the U.S. measures… But now, Germany is feeling pinched… Germany’s economy minister, Guttenberg, is voicing concerns about the Chinese announcement last week, and that he would bring this up at the next G-8 meeting in July…

Well… The problem with that is that China isn’t a member of G-8, so this could just be a “you-know-what session” of finance ministers, getting them all wound up to write protectionist measures of their own! Watch for these protectionist policies to spread like Bermuda grass! And, if that happens, the global recession will get even worse, folks! Thanks to the “buy American” move… Geez Louise, when will they ever learn? When, will, they, ever… Learn?

Looks like more and more people are jumping on my bandwagon, that the stimulus would not work… Two months ago, 59% of Americans thought the $787 billion stimulus would restore the economy, but since then, the number has slid to 52%. And… As unemployment heads to 10%, even with the adjustments and ghost jobs the BLS adds each month, that number of those that thought the stimulus would restore the economy, will continue to slide…

And finally a not so serious story… Say it ain’t so Paul Simon! Kodak will retire Kodachrome! Eastman Kodak has announced it will discontinue the legendary 74-year-old film that revolutionized color photography because of slow sales and dwindling demand in the film, due to digital cameras…

Kodachrome
You give us those nice bright colors
You give us the greens of summers
Makes you think all the world’s a sunny day, oh yeah!
I got a Nikon camera
I love to take a photograph
So Mama, don’t take my Kodachrome away

On a sidebar… I saw Paul Simon in concert this past spring… A great concert!

Currencies today 6/23/09: A$ .7870, kiwi .6330, C$ .8670, euro 1.3960, sterling 1.63, Swiss .9295, rand 8.24, krone 6.5375, SEK 7.9650, forint 202, zloty 3.2535, koruna 18.71, yen 95.50, sing 1.4565, HKD 7.75, INR 48.54, China 6.8345, pesos 13.33, BRL 2.0325, dollar index 80.44, Oil $67.08, 10-year 3.68%, Silver $13.81, and Gold… $922.73

That’s it for today… OK… Are you as fearful of what could happen in this on-going N. Korean ship following by the U.S.? That kind of stuff is scary… Somebody gets a nervous trigger finger, and… Oh well, I had better think of more peaceful things this morning, eh? For those that send me notes asking me about my left eye… I don’t have anything new to report. My lack of vision with the eye is the same, the good news is that it hasn’t gotten any worse! I told a good friend of mine the other day, when he expressed his concern that I’ve taken more than one hit with this cancer… “So far, the Good Lord has only allowed me to be attacked by cancer in places where I have two of”… Kidney, hip, leg, and eye! And… That’s the way I see it! I love those east coast starting times, I can actually watch the whole game! Of course I didn’t like it last night when the Metropolitans took it out on my Cardinals… Time to go… I hope you have a Terrific Tuesday!

Source: So Far… It’s A Turn Around Tuesday!

If you’ve been watching currency exchange rates and yields, you can’t help but notice that world currencies seem locked in a a race to the bottom.

Central banks are slashing interest rates as if they were kudzu. The yen has yielded almost nothing since the 1990s. Then the Feds determined to punish savers for their foresight, thrift and prudence by making dollars yield absolutely nothing. The Brits have followed suit, and even the stodgy folks at the European Central Bank are slashing and burning their interest rates.

Looks like their concerns about inflation have been wrong all along.

Today, the Swiss central bank cut its interest rate close to zero and started buying up foreign currencies to keep the Franken from appreciating too much as deflation looms.

They bought euros and dollars. The Swiss currency dropped as much as 3.2% after the decision. That may sound like nothing to stock investors inured to 5%, 6%, 10% drops by now. But in view of currencies, such rapid devaluation is HUGE.

What does this mean?

The players of the global economy compete mainly on two levels: Cheap labor and cheap currencies. Just as a $8-a-week worker tightening bolts on an assembly line in China is more attractive to manufacturers than a $14-an-hour laborer doing the same job in Jersey, export goods priced in a currency of relatively lesser value are more attractive to international buyers than those that include an exchange-rate premium.

The major players in the global economy understand that… China, Europe, Japan. In times of crisis, they’re letting their currencies become cheaper, slash taxes on exports, and ease labor restrictions.

Unfortunately, the U.S. government still thinks the mechanics of the global economy don’t apply to the new order. Timothy Geithnert opined in January that “a strong dollar is in the interest of the United States” when he won the Senate Finance Committee’s backing to head the U.S. Treasury.

With the competitors out of the gate, we sure hope that the Obama Administration will finish re-arranging the patio furniture before the lights go out…

Source: Currencies: Race to the bottom

This from Sovereign Society:

“Lenin said the day would come when gold would serve to coat the walls and floors of public toilets.” -Premier Nikita S. Khrushchev

Ancient, mysterious gold is being pushed to the forefront of investors’ minds these days, as the inflationary policies of the worlds’ central banks meet uneasily with the deflationary pressures of the housing industry’s collapse. Most expected this year’s air of uncertainty to push gold prices into the stratosphere, and all seem to be relatively shocked by the yellow metal’s lackluster performance thus far.

But for me it’s all just déjà vu…perhaps for you too. We’ve been here before. Not just during the great gold bull market of the 1970s, but way back in the 1920s, and the 1860s, and the…well, let’s not go back to Ancient Rome.

Since gold and freedom have had a long, torrid, and often clandestine affair, the market’s current attraction to the yellow metal makes it apropos that gold looms large in our discussions here at The Sovereign Society.

We hear predictions of US$1,000 or even US$2,000 an ounce. Well…before you or I are swept along in the excitement, let us analyze this euphoria through the lens of economic principles, and ponder the lessons of history.

You may have profited, as I did, in the tumultuous gold bull market of the 1970s. It was heralded in advance by my late friend Harry Browne, who saw it coming and showed investors how to get rich in his prophetic best-seller, How to Profit From the Coming Devaluation. I, too, joined the ranks of “gold-bugs,” writing enthusiastically about the metal’s glory…along with Jim Dines, Doug Casey, Howard Ruff, and many others.

With hindsight, and with gold prices currently stagnating, can we learn anything from history? Tracking the ‘real’ price of gold offers some clues.

In 1915, the dollar was defined as one-twentieth of an ounce of gold. Paper currency consisted of gold certificates that could be exchanged for gold on demand. The ‘double eagle,’ the US$20 gold piece, was one ounce of gold.

In 1915, US$20 would buy a lot. Wages were 35 to 75 cents an hour, or US$500 to US$1,000 per year. A man’s tailor-made suit cost US$25-$30 (with two pairs of trousers), while a Sears & Roebuck ready-made, but stylish pure-wool worsted suit sold for US$16.50. A movie ticket cost 15 cents (10 cents for kids).

Adjusted by the CPI, what cost US$20 in 1915 would hypothetically cost over US$450 today. Meanwhile, an ounce of gold that equaled US$20 in 1915 would cost US$726 as of this writing.

What happened? It’s known as fiat money creation.

What Happens When Paper IOUs Replace Solid Metal Currency

The prices of goods and gold diverged because the newly created Federal Reserve gave banks free reign to expand loans, massively inflating the quantities of gold certificates in circulation, with no increase in the banks’ gold reserves. As the gold IOUs flowed into the economy, boom times arrived. Prices rose and stocks and real estate soared.

Sadly, as the masses discovered, the “roaring twenties” were fueled by paper promises. In 1929, the stock market crashed, unemployment rose, people became fearful of banks, and the public began turning in their bank notes for the gold they had deposited. Of course, most banks didn’t have enough gold to cover the outstanding notes, one by one they failed, and the economy plunged into the Great Depression.

The bankers and politicians were quick to blame the free market, greed, and gold itself. Roosevelt, elected in 1933, closed the banks to stem a rising wave of bank failures, abruptly revalued gold to US$35 ounce (depreciating everyone’s dollars by 75%), and outlawed ownership of gold by U.S. citizens.

It was easy to rob American citizens at gunpoint by confiscating their gold, but what about foreigners? They could still choose between U.S. dollars and gold. The answer was to play the same game the Fed had played 30 years earlier: promise to redeem dollars in gold. In 1944, at the historic United Nations Monetary and Financial Conference at Bretton Woods, New Hampshire, every participating country pledged to keep its currency within a percentage point or two of an agreed dollar value providing the U.S. indemnified foreign central banks against a depreciating U.S. dollar by backing the dollar with Treasury gold. The dollar became the world’s reserve currency.

Credit Swells and Gold Freezes

The credit expansion began again, and the price of gold remained frozen at US$35 an ounce for another 27 years. Again, as happened in the 1920s, consumer prices began to rise. But just as worried Americans had begun to run to the banks in the 1930s, the rest of the world began a run on U.S. Treasury gold. In 1971, with Treasury holdings perilously low, Nixon abrogated the Bretton Woods agreement and gold, free of government chains at last, soared to US$800 an ounce in 1980.

At that price, it was wildly above its historic exchange value with other goods, so it was inevitable that the lines would converge again, and they did.

Politicians depend on fiat currency to fund wars and giveaway programs, and therefore always disparage gold. In 1924, in the euphoria of the Federal Reserve money bubble, John Maynard Keyes denigrated sound-money advocates by calling the gold standard a “barbaric relic.” Even after a half century of turmoil caused by fiat money, in 1975, Secretary of the Treasury William Simon continued to argue against gold due to its “destabilizing effects” on the world monetary system. The IMF formally sought ways to “insure that the role of gold in the international monetary system is gradually reduced.” Gold sales by both the IMF and the Treasury were undertaken to suppress the price and discourage investors.

Gold is a commodity…a tangible, useful mineral extracted from ore and refined for use. The very fact of its unique properties (divisibility, durability, scarcity, and its recognizable luster) make it an unmatched medium of exchange, and also a safe haven for citizens. Thus, it will always be a threat to the creators of fiat money.

What’s Next for Gold?

History teaches that gold will hold its value relative to other goods. In terms of inflating currencies, all goods, including gold, will hold their relative value to each other, and rise relative to currency. Right now, for the last 6 years the price of gold has risen more rapidly than other prices, and is now higher than the norm.

Since 1980, consumer prices have risen by almost 150%. Many analysts today assume that gold will repeat the price pattern that occurred in the decade of the 1970s, and argue that gold could go as high as US$2,000…or higher.

Warren Buffett once said that what we learn from history is that people don’t learn from history. Thus, it’s probable that the current bull market in gold is not over in spite of the fact that gold’s dollar price relative to goods is higher than the historical norm. The public has yet to discover just how much world currencies, and particularly the U.S. dollar, have been inflated in recent months and years. As this becomes apparent, dollar holders will, as they did in the 1930s, and again in the 1970s, try to redeem those dollars for tangible goods. Price inflation will return with a vengeance, and probably soon.

What are the best ways to own gold?

For myself, owning physical gold in the form of coins and bullion for conservation of purchasing power, and seeking out the shares of undervalued and overlooked gold mining companies for investment and speculative growth are the best choices.

In addition, to promote a return to sound money and to enjoy its benefits to every extent possible in the meanwhile, you should begin using “electronic” gold. The most reliable and safest purveyor of this new technology is Goldmoney. Check them out at www.goldmoney.com/?gmrefcode=sovsoc.

I opened this essay with a quote by Lenin, who argued that gold should be assigned to the toilet. Not only was Lenin an economic ignoramus, he was the ultimate enemy of individual sovereignty. Ancient, mysterious gold is the ultimate antidote to fiat money, and we can be certain that mankind’s love affair with this lustrous commodity will never end.

Source: Gold and The Lessons of History

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 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.

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Using the “Off Switch” to Shut Down Alzheimer’s and Huntington’s Diseases, Too

It turns out the “off switch” discovery could have lots of uses beyond radically improving a patient’s chances of beating cancer.

For instance, take Alzheimer’s. Right now, there’s no cure.

But imagine the implications — for both victims and medical investors — if this same breakthrough could be used to reverse Alzheimer’s symptoms in just weeks.

Check it out here…

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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.)

What the $7.8 trillion figure does not account for are items like the gap between the government’s Social Security and Medicare commitments and the money put aside to pay for them. If these items are factored in, the government debt burden for every American rises to well over $175,000. In 2005, the Methuselah of investment mavens, Sir John Templeton, then 93, said you should get out of U.S. stocks, the U.S. dollar, and excess residential real estate. Templeton believed the dollar would fall 40 percent against other major currencies, and that this would lead the nation’s major creditors — notably Japan and China — to dump their U.S. bonds, which would cause interest rates to run up, thus beginning a long period of stagflation. He was right.

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The Slow-Motion “Black Monday” Ahead

Here’s a picture for you: If the market today falls as fast and as far as it did in 1987, you’ll see more than 3,000 points erased from the Dow alone. In a single day.

Could it happen?

Banks hold the same blue chip shares you’ll find parked in your retirement fund. When the “level three” losses get declared, those same banks might have to start dumping those shares to raise cash. And that could send these blue chips…along with most of the rest of the stock market…into full-scale collapse.

I urge you to take the seven steps outlined for you in your free Strategic Financial Survival Library. Click here to reserve yours…

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Don’t let his age fool you — Templeton was still sharp in 1999 when the financial industry hacks in Florida were urging their customers to buy more tech stocks. Templeton warned that the bubble would soon burst. He was right; they were wrong. Of course, he was only 87 back then. He is almost certainly right again. Other great investors, too, are getting out of the dollar. For the first time in his life, Warren Buffett is investing in foreign currencies.

George Soros, who made a fortune selling sterling in the 1992 ERM crisis, warns that the U.S. system could “blow up” at any time. Richard Russell, the influential editor of the Dow Theory letters, speaking at the New Orleans Investment Conference, warned: “If ever there was a crisis that could shake the global economy — this is it.” Jim Rogers is teaching his daughter to speak Chinese. When old-timers nod their heads in agreement — especially when they happen to be the most successful investors in the world — their advice may be worth listening to.

American consumers, companies, the U.S. government, and the country as a whole owe more dollars to more people than ever before. But perhaps the greatest threat to the U.S. economy is its foreign creditors. There is — or should be — a limit to the number of dollars foreigners are willing to buy and hold and thus a limit to their willingness to service our credit habit. Why? Because the United States, while still the world’s number — one economic power, is showing itself to be an unreliable steward of its own currency.

Regards,
Addison Wiggin

Source: How to Sell the Dollar

The book sold more than 100,000 copies in hardback. Some three decades later, a dear reader sent me a copy of the 1971 paperback when I ran The Daily Reckoning’s desk here in London.

“You guys…you’re just saying the same as Harry Browne did 30 years ago! What’s new?” he wrote in an e-mail. And on first reading, Harry Browne’s book confirmed the jibe.

On rereading it on the train between Waterloo and Hammersmith this week, the cold fact stands out colder still.

~~~~~~~~~~~~~Special~~~~~~~~~~~~~

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The oil refineries in the United States can simply not handle the amount of oil we need. But luckily there is a new breakthrough that could be putting every U.S. oil refinery out of business.

And that’s the good news. Click here to learn more about how this new breakthrough could change the oil business forever…

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“In the short run,” wrote Browne — variously an investment adviser, newsletter tipster, and U.S. presidential candidate for the Libertarian Party — “inflation seems to be producing a ‘boom.’ Prosperity appears to hit the economy when the government pumps new inflationary money into circulation…

“The so-called gains from inflation are always spectacular, while the losses are generally hidden from view… But the truth was that nothing had actually changed. We still had the same amount of resources to work with; we still had the same general level of technical competence. Inflation deceived us into redistributing our resources temporarily toward more glamorous industries.”

What’s wrong with that? Demand for granite countertops grew some 15% per year — worldwide — between 2000-2006, according to Dimension Stone Advocate News. More glamorous still, demand for marble rose by 12% annually.

Come September 2007, research from the Freedonia Group (costing $4,500 for the full report) said sales of kitchen and bathroom countertops in the United States alone would rise to 540 million square feet by 2011. That would fetch some $14 billion for “natural and engineered stone” manufacturers in Italy, Spain, China, and Brazil.

OK, so nobody’s food got any tastier simply because they chopped onions on new marble plinths. And we all ate fewer meals at home anyway. By August ‘06, consumers in Britain were spending more on dining out than they spent on eating at home; across the Atlantic, the restaurant and fast-food business employs 13 million staff — one in 12 of the work force!

But what’s not to love about a little glamour each day?

“Let’s take a hypothetical engineer,” wrote Harry Browne back in 1970, “working in an aerospace company… One day, his boss calls him into his office to tell him some good news. ‘Bumstead,’ he says, ‘the company has just received a new government contract. That means we can now give you a raise. Your take-home pay is going up by $100 per month.’

“[Bumstead] rushes home, tells his wife, and they spend all of four minutes deciding what to do with the raise. They rush out and buy a swimming pool, probably by obligating themselves for the $100 per month the new raise is bringing him.”

Here in the 21st century — where $100 hardly buys a tankful of gas in the U.S., let alone here in the U.K. — the total number of swimming pools for U.S. homeowners now stands around 8.6 million, by one industry estimate. The pool maintenance and equipment market, having grown by 8% per year since 2002, approached annual sales of $3 billion in 2006.

“There’s only one problem,” as Browne noted. “Prices are rushing upward to meet the increased paper money supply caused by inflation — the same inflation that deceived Bumstead into thinking he’d received a raise.”

~~~~~~~~~~~~~Special~~~~~~~~~~~~~

Make 10 Times Your Money as the Dollar Falls

There are two classic hedges to play that move up every time the dollar falls. The dollar has been losing value rapidly this decade, and Washington seems bent on taking it further down.

That means that we can expect even more inflation in the coming months and years. But these two plays could be the key to financial survival. Click here to find out what plays to make…

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That’s why, just as in 1970, Reuters reported, “April Personal Spending up as Expected.” The Commerce Department said U.S. consumers spent 0.2% more last month than they did in March. But after adjusting for higher prices, real consumer spending was unchanged — despite the impending arrival of economic stimulus checks, set to total $106.7 billion for 2008.

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.)

In my career as an investment analyst, I’ve seen at least a half dozen bona fide bear markets. The first three occurred during the emerging-markets meltdown of 1997-1998, which began in Asia with the Thai baht devaluation.

I took a research trip to Argentina and Brazil in the summer of 1998. I spent a week in Buenos Aires and a week in Sao Paulo. Young investment bankers showed me around both cities. Three things shocked me: the motorcycle drivers, the prevalence of prostitution (I was young and naïve), and how you could buy every single stock in Brazil for less than four times earnings.

If I’d only had the capital and the conviction I have now, I would have bought every single blue-chip stock in Brazil. If only I’d put $10,000 in a dozen companies back then!

To give you an idea of how lucrative that might have been, since 2002, the iShares Brazil index fund (EWZ) has gone from $5 to $88. This fund didn’t exist in 1998, but if it had, it would have traded for less than $2. I believe you would have made about 50 times your money over the years if you’d bought Brazil in 1998. That’s how you turn $100,000 into $5 million.

I was there. And I could have done it – except I didn’t have the capital or the confidence to believe what my brain was telling me. I won’t make that mistake again, believe me…

That bear market and others taught me stock prices can fall farther than anyone can imagine and, if you’re patient, it’s possible to make stupendous profits in stocks, especially if you’re willing to buy when no one else will. These lessons helped me begin buying stocks heavily near the exact bottom in 2002…

Stock prices had simply reached the point where we could safely buy the highest-quality stocks in America – like Exelon, which we’ve owned in my advisory since October 2002 issue. We bought the most efficient producer of electricity in America and the largest nuclear energy operator for 10 times earnings. You had to be dumb not to buy Exelon at that price.

But after a dozen years studying markets around the world, the one thing I know for certain is: Most people will only buy stocks when they shouldn’t and will absolutely not buy stocks when they should.

If I can convince just one reader of this essay to ignore his emotions, forget his fears, and buy high-quality stocks when they’re cheap – and ignore everything else – I will have accomplished something. This lesson is very important given the state of today’s stock market.

With the S&P 500 down 24% from its peak to its recent trough, we are in the midst of a real bear market. My belief today is stock prices – on average – are going to go lower.

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While most of your financial advisors will undoubtedly tell you to trim your exposure to stocks and “batten down the hatches” financially – you will get the opposite advice from me. Do you think Warren Buffett, Sam Zell, Marty Whitman, Bill Gross, Jim Rogers, Jeremy Grantham, Steve Leuthold, Mark Mobius, or any other extraordinarily successful long-term investor trims his portfolio during bear markets? Absolutely not. That’s when they put their cash reserves to work.

Great investments are made during bear markets. Great investors earn their reputations during bear markets. The fortune you hope to gain from the markets will be made by what you do during bear markets. It’s easy to buy and hold during good times. It is much, much more difficult to put money to work in critical situations when you have to go against the crowd and your own fears.

To my knowledge, there’s only one way to do the right thing during these critical times: You must know how to evaluate equity values. And you must understand the margin of safety you have in your investments. Without this knowledge, it is nearly impossible to sit on your hands and hold on. If you don’t have firm knowledge of the value of your stocks and confidence in their intrinsic value, you will eventually cave in to your fears. You’ll join the panic – at exactly the wrong moment.

But… if you know the value of what you own and if you’re confident in the “margin of safety” in your investments, you should have absolutely nothing to fear.

If you’ll do this simple thing – buy value, and know that you own extremely high-quality business – you can prosper during the bear market, while you wait for the perfect moment of panic to arrive. For instance, right now, we own (and recommend buying more at current prices) Intel (INTC), one of the all-time elite global businesses.

Intel is one of only a handful of companies that has been able to grow its earnings 20% annually, for more than 20 years. Around 60% of Intel’s sales come from Asia. If you believe in the growth of China and the rest of Asia, Intel might be the best way to play it. Intel plays such a critical role in the supply of silicon tools, any argument you make about Asian growth is a bullish argument for Intel. Intel’s huge investments each year into research & development ensures it improves its products at a pace none of its rivals are able to match.

Do you think you’ll get hurt buying Intel right now at just over 10 times cash flow? Absolutely not. This kind of certainty gives you the ability to sleep soundly during bear markets.

Right now, you’re being given a fantastic opportunity to build a super-high-quality portfolio at prices that almost guarantee you’ll see high average returns over the next several years. All you have to do is be selective and patient – the things most investors can’t do.

Now, if you can understand why fear and bear markets are truly good for us, you’ll take dire financial situations in stride… You’ll know they present outstanding opportunities to build wealth for the long term.

Good investing,

Porter Stansberry

P.S. In the most recent issue of my advisory, I list seven stocks that carry my highest possible rating for safety and large capital gains. Since the market started falling in August, these stocks on average have actually increased in value. I think these companies should be the core of your portfolio for years to come. You can learn more about a subscription here.

There they will accept the risks as well as the rewards, to their very considerable long-term benefit.

You simply cannot enjoy being the financial center of the world but start bleating for government bailout whenever asset prices dip a few percent. As Paulson is demonstrating, the regulatory price for being bailed out is far too high. We must all grow up and take a full measure of punishment. The banks must take theirs.

Let the shareholders and depositors take theirs too. Just like natural organisms the financial system must have death to evolve into a better form.

Paulson’s plan is a dressed-up confiscation of the profits of the cautious, and a transfer of those profits straight back to unreconstructed gamblers in the worst offending banks. This is very unwise.

In these difficult times, profit (or more accurately the avoidance of loss) should be benefiting those who troubled to understand the risks in the system, and avoided them. But Paulson’s plan is currency creation, and a devaluation of the good quality assets owned by the cautious. He fails to understand that unless the system occasionally rewards caution there is no reason ever to be cautious again.

The market works better without these rescues. Only by appropriate economic reward to the cautious, when they are right and everyone else is wrong, will caution sit well beside risk-taking in the financial system. The real threat to New York’s and London’s continued dominance of the world’s future financial system is government regulation itself.

Mr. Paulson should read Hayek’s classic The Road to Serfdom, and he would understand the inevitable failure of his rescue plans. He would see how these top down rules remove society’s flexibility until one day we all wake up in a paralyzed “command” economy, where nothing can be done without official sanction.

Instead, he has forgotten what a command economy means. He should study the history of communism’s economic successes. It won’t take him long.

Paul Tustain
The Daily Reckoning Australia

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