As far as currencies and metals are concerned, seemed to be in place yesterday…

That’s right… The rout on the dollar was on (recall yesterday, Wayne and Garth playing street hockey… Game On!) and this time… Not only did the currencies rally VS the dollar, Gold and Silver took part in the proceedings too! It’s been a long time since we’ve seen this happen… For the most part, whenever the currencies (minus yen) rallied, Gold would back off, and vice versa… Not yesterday! For the first time in a long time, the negativity toward the dollar was front and center BIG TIME!

The currency rally began early in the morning, and really gained steam as the day went on, and especially after the minutes of the FOMC meeting printed. You see, the Fed Heads had discussed that the economy is in a weakened condition and the economic projections for 2009 and 2010 were actually revised lower. The thing I took out of the minutes was this statement by the Fed Heads… the housing market “remained depressed but seemed to have leveled off”…

Memo to Fed Heads… Better be careful with those kind of statements… Did you all make a similar statement late in 2007? Look how well that prognostication worked out!

So… This news from the Fed about downgrading the growth outlooks for 2009 and 2010, is the key folks… You see, during the July 2008 – Feb. 2009 timeline, we traded under a different Trading Theme, that was well documented in this letter. But for new readers, the Trading Theme threw fundamentals out of the window, and rewarded the dollar every time data indicated the economy to be deeper, darker, and more dangerous in the recession / depression. This was against all fundamentals…

But yesterday, with the Fed downgrading growth forecasts, the dollar got sold like funnel cakes at a state fair! Finally! A return to fundamentals! Well, at least for one day that is. We certainly need to see more than one day of this to make any kind of final change in the Trading Theme trend… But it sure was nice to see for one day!

The Big Dog, euro, led the way for the other currencies (little dogs) yesterday. The euro finally, traded above its key resistance of 1.3740. A level that had stopped the euro “cold” three previous times. You may recall about a week ago, I told you that this is what happens with currencies, in the time (since 1992) that I’ve followed currencies. They make a run at a resistance level, and get knocked down. They make another, only to get knocked down, and then another with the same result. Sooner or later, love is gonna get ya’, no wait! Sooner or later, traders and market participants either 1. take this as a challenge and push the currency through the resistance level, or 2. they give up, take the ball and go home… And the currency then falls back through previous gained ground.

In this case, the euro finally moved higher and through the 1.3740 level, and traded all the way up to 1.38 on the day… The good news for euro holders is that there has been little to no profit taking overnight, and the Big Dog is still trading with a 1.38 handle this morning!

Long time currency followers would have to admit that this all looks very similar to previous periods where the negativity toward the dollar was very strong, and seemed take on a life of its own. Even your run of the mill dollar bull, begins to see things they way his counterpart the dollar bear sees them…

I think that the markets have come to the realization that the U.S. has taken the road that leads to easy monetary policy… And everyone knows what’s at the end of that rainbow! Inflation!

A couple of weeks ago, I participated in an editorial roundtable with my publishers for my “other” newsletter, The Currency Capitalist, (shameless plug!) and in the meeting I was trying to get everyone to agree with me that China was up to something. This was right after the announcement of their currency swap line with Argentina… Someone raised the question, a very astute question I might add, about why would China want to see the dollar lose value, when they own so many Treasuries…

I then pointed out something I had researched… That China had been stealth-like in doing so, but had shortened their maturities to less then 3 years… Which would mean that they could allow these to mature and not sell them pre-maturely… Could this be a “time-line” toward the lines of thought that China wants to replace the dollar as the world’s reserve currency?

OK… That was a couple of weeks ago, in a meeting… But yesterday, Chris Gaffney sent me a story that appeared on Reuters… Here’s a snippet… “China has engineered a subtle yet significant shift in the investment of its foreign exchange reserves, a sign of how it is willing to act on concerns about financing an explosion of U.S. debt.”

And then this… “China’s move to the shorter end of the U.S. debt spectrum is a defensive tactic adopted by the wider market as well on the view that the United States will have to raise interest rates down the road to control inflationary pressures when the economy recovers from the financial crisis.”

So… Now there are “others” that are sniffing around this trail of tears I think I’ve discovered, for if there is no “long-term” plan by the Chinese to replace the dollar as the world’s reserve currency, then I’ll have egg all over my face! Well… The good thing for me, is that this is a very long tailed story… And I’ll get to point to it over and over again in the coming years!

Doesn’t that just make you get chills of excitement? HA!

A currency that “I like” but had fallen badly last summer, the Brazilian real, has really pushed higher in recent months (since March 1st). Yesterday it looked as though it would trade below the 2 handle for the first time in 8 months! (BRL is a European Style currency, where as the price goes down, it returns more value VS the dollar) For those of you keeping score at home, the real has gained 17% since March 1st… With Brazil being a “high yield” currency, the return grows even more… But, that’s in the past… And past performance does not indicate that future performance will duplicate… (that’s for the legal beagles!)

Well… Recall earlier this week I talked about pound sterling nearing its 200-day moving average? Well… Forget about it! Yesterday, Standard & Poors (S&P) decided to place the U.K. on negative outlook… And the pound sterling quickly became the G-10’s worst performing currency on the day… For those of you wanting to know what’s what with these ratings from S&P… When S&P imposes negative outlook they foresee a greater than 50% chance of downgrade within the next two years, this is compared to negative watch which implies a greater than 50% chance of downgrade within the next few months.

I said earlier that the euro (Big Dog) had seen little to no profit taking overnight, and was trading with a 1.38 handle this morning… It has just slipped below that level, as I prepare to go to the Big Finish… Data wise for the Big Dog, Eurozone PMI’s (manufacturing indexes) surprised to the upside for this month. Now… It’s true that this manufacturing data is still in negative territory, but this data supports the thought that the worst is behind the Eurozone… That remains to be seen… But for now, that’s good news!

In Japan overnight… In yet another sign that the Fundamentals may have re-emerged, if for only one night, the yen rallied with the other currencies. Yes, this has not been the case for several months now. When the dollar rallied, yen rallied along with it… But not yesterday and last night… Yen pushed to a 94 handle for the first time in 2 months!

The data cupboard comes back with a plethora of data this morning… The Weekly Initial Jobless Claims prints first, followed by Leading Indicators and the Philly Fed Index (manufacturing for the region)…

And then there was Gold… And Silver! Year-to-date, Silver is outperforming Gold! Silver is up almost 25% this year, while Gold is up 6.6%. Our newest member to the currency and metals desk, Aaron Stevenson, pointed something out to me the other day regarding Silver… “the Gold/Silver ratio has increase to about 64 from 51 this time last year.” Hmmm… Very interesting…

Speaking of Gold… I had a long discussion with a long time customer last week in Las Vegas at the Money Show. We were discussing Gold confiscation… Again, I said it before and I’ll say it again, I don’t believe the Gov’t would do this again… But… The customer gave me something to think about. In “his scenario” the Gov’t devalues the dollar, and pushes Gold to $10,000 an ounce… Well… Now that’s “out there”… But as a Gold holder, I certainly would love to see $10,000 an ounce… My problem is that I don’t want to see what the U.S. economy looks like with $10,000 Gold! It may not be worth it folks…

OK… Before I go to the Big Finish, I need to make certain everyone understands that the previous paragraph was just a “discussion” of scenarios… I’m not saying, and neither is my customer saying that we believe Gold is going to $10,000 an ounce! It was just a figure to use to see if I would “bite” at confiscation at that level!

Currencies today 5/21/09: A$ .7715, kiwi .6050, C$ .8765, euro 1.3795, sterling 1.5660, Swiss .9080, rand 8.3950, krone 6.4075, SEK 7.5990, forint 201.20, zloty 3.1850, koruna 19.35, yen 94.97, sing 1.4570, HKD 7.7525, INR 47.33, China 6.8247, pesos 13.03, BRL 2.0330, dollar index 81.18, Oil $60.73, Silver $14.25, and Gold… $940.67

That’s it for today… $7 Billion more being injected to GM by the Gov’t… The sound of that just doesn’t give me a warm and fuzzy!

Source: Fundamentals Return

I give them out to my friends and family, and explain that they need to protect themselves against inflation. They get a real kick out of it and this opens their eyes to the fact that paper money is not backed by anything.

Zimbabwe’s annual inflation rate peaked at 489 billion percent in September 2008 and the Zimbabwe dollar became literally worthless.

Will America ever experience this type of inflation? I don’t think so… Our government has maintained steady price controls for over 30 years.

However, the U.S. could see inflation levels like we saw in the 1970s and we could easily experience 10% to 20% inflation rates or more…

Recently, America’s Federal Reserve has been easing, or decreasing interest rates, in an attempt to restart economic growth and get out of this recession. But, it’s the Fed’s main job to keep inflation in check. If inflation goes too high they will tighten, or increase interest rates in an attempt to head off future inflation.

We know inflation is coming due to massive federal spending—and next will come higher interest rates. Keep in mind that interest rates hit 18% in the 1970s, under similar circumstances.

High inflation and high interest rates both have negative consequences for the economy. The bad thing about high inflation is that it takes away your purchasing power. Then you have inflation’s evil side kick-higher interest rates, which slows down economic growth.

We are entering a tricky period and you need to be prepared. Invest in commodities and make sure to lock in that 30-year fixed rate mortgage at today’s low 5% rate.

Source: Pick Your Poison: Inflation or Higher Interest Rates

So… here’s something interesting. The two biggest countries to have been left out of the “stimulus” spending due to the “Buy American” provision have come out in support of an IMF-controlled reserve currency in the last week.

Hmmnn…
“What kind of international reserve currency,” asked Zhou Xiaochaun, head of the People’s Bank of China “do we need to secure global financial stability and facilitate world economic growth?”

With those words, Zhou added Beijing’s voice to the chorus begun by the Kremlin last week . “Beijing to Pitch New Global Currency; Dump Dollar” wrote Matt Drudge, for better or worse a master headline craftsman. While China made no such announcement, the governor of its central bank did author this rather poignant thought:

“An international reserve currency should first be anchored to a stable benchmark and issued according to a clear set of rules, therefore to ensure orderly supply; second, its supply should be flexible enough to allow timely adjustment according to the changing demand; third, such adjustments should be disconnected from economic conditions and sovereign interests of any single country.”

Hmmmn… really.
“Along come the Chinese,” notes our Byron King with a bit of a nationalist’s admiration of China’s stance, “who have morphed out of Communism, except where it suits their leadership cadre to maintain power and further the supreme geostrategic goals of the state. Even THEY understand the value of a stable unit of currency. They understand the need to preserve wealth over time, over generations. Very Chinese, no?

“I understand the Chinese argument that maintaining a stable currency should be a matter of national honor. It’s a very appealing point. It reflects the Asian concept of maintaining face, versus losing face.

“Of course, the U.S. lack of concern over the stability of its currency IS an issue of national honor, of which the current crowd of leadership has no concept. The roots of the Blame-America-First gang go back to the prep school progressivism, schoolboy socialism, college-kid communism and master’s degree Marxism of the 1960s and 1970s.

“Decades later, cultural Marxism has infected the entire society.” (And at least a few readers believe there’s more where that came from, below.)
In a small act of defiance, the dollar index rose a skosh, to 84. That’s about 5 points below its recent high, and still 13 points above the inflation-addled low it reached in April 2008.
In the stock market, the buying fervor of this bear trap has reached historic proportions:

You’re looking at the best 10 days for the Dow since 1938.

After yesterday’s 6.8% shot, the index is up 18.8% in the last two weeks of trading. If history does in fact rhyme, the Dow might be sitting pretty for a while:

In fact, the Dow at 110 in 1938 ended up being a long-term level of resistance. The market traded flatly for the next four years, briefly dipped below during the worst of WWII, and then staged a sure and steady rally for the next 30 years.

So all we have to do is fight and win another global war, pay down our debts and ignite another phase of industrial production… and then we’ll be fervently buying too.
Oil rose to a four-month high of $54 a barrel yesterday. The oil trade is a phantom of its former self. Last’s year’s counterdollar scarcity trade has given way to short bursts on glimmers of hope for the global economy — the “reflation” trade, if you insist on a buzzword.

Gold sat idly on its hands during yesterday’s stock spree. The spot price stayed flat around $950 and is under some pressure as we write. An ounce now goes for $920.
“Immigrants can help fix the housing bubble,” wrote Daily Reckoning contributors Gary Shilling and Richard LeFrak in a WSJ editorial over the weekend. What a radical idea… revive housing by enticing other people to spend money, instead of just printing it ourselves

“The Obama administration should seriously consider granting resident status to foreigners who buy surplus houses in this country. This makes more sense than the president’s $275 billion housing bailout plan, which Americans greeted with a Bronx cheer…

“A better idea is to offer permanent residence status to the many foreigners who are clamoring to get into the U.S. — if they buy houses of minimal values (not shacks). They wouldn’t need to live in those houses, but in order to remove the unit from the total housing market, they couldn’t rent them. Their temporary resident status granted upon purchase would become permanent after, perhaps, five years, if they still owned the houses and maintained clean records. The mere announcement of this program might well stop the ongoing collapse in house prices, especially in cities such as Las Vegas, Miami, Phoenix and San Francisco, where prices are down 40% — but where many foreigners like to live.

“Each year, 85,000 H-1B visas are granted for foreigners with advanced skills and education, and last year, 163,000 petitions were filed in the first five days after applications were accepted. The Ewing Marion Kauffman Foundation estimates that as of Sept. 30, 2006, 500,040 residents of the U.S. and 59,915 individuals living abroad were waiting for employment-based visas. Many would buy homes if their immigration conditions were settled.”

Somehow, we suspect this suggestion has and will run headlong into the nation’s renewed flirtation with xenophobia.
Another sign of the times: A public fund in Abu Dhabi just picked up a 9% share of Daimler AG, owners of Mercedes-Benz. Heh, its fitting, giving that there’s practically a Benz for every man, woman and child in the UAE. Aabar Investments spent $2.6 billion to pick up the largest single stake in Daimler. Ironically, the previous largest shareholders was Kuwait’s SWF, with a 7% chunk.

The WSJ asked the fund’s chairman, Khadem Al Qubaisi, if he was considering a similar purchase in a U.S. automaker: “I’m not interested,” he said.
This ought to assuage the populist rancor against executive bonuses:

One year ago, pretty good.

Yesterday, much better.

AIG, the lightning rod for the public’s anxiety over the economy, dropped its logo and nameplate from its New York headquarters yesterday. The corporation announced it would undergo a massive campaign of global rebranding. Its property casualty branch, one of the company’s solvent branches, has already changed its name to… drumroll, please: AIU Holdings.

That ought to fool ’em.
“Hey guys, give Judd Gregg a break,” writes a reader in response to yesterday’s issue. “Gentle Ben and Paulson came to Congress with their ‘the sky is falling’ scenario and said this is all we need to fix it. They operated on that premise and approved the money. What Gregg is referring to now is what ADDITIONAL funds have been approved by the bozos in power. This administration is brilliant at steamrolling through the legislation it wants at warp speed before the general population even begins to realize what has happened. Its goal is obvious — all must rely on the state. Seems a guy named Marx talked about that some time ago.”

The 5: Of course, the last administration encouraged debate and sought many different perspectives before steamrolling its own legislation through. Why you continue to see a difference between these parties is beyond us. These will all be moot points if the Russian, Chinese and U.N. proposals for an international reserve currency gain traction.
“I know you are trolling with your story of debris in the alley,” another reader writes. “There’s something beyond incongruous in ridiculing government while at the same time relying on government assistance to clean up the mess some evildoer did to public property. Don’t you see any contradiction here?

“Government can’t do anything right, but when there’s an act that impacts the common good, you call government tout de suite. And then insult the poor sod that comes to check out the complaint. Kudos to you for loading the taxpayer-supplied truck. It seems like you did receive some benefit from those taxes after all, even if your own labor was needed as well.”

The 5: Incongruous? Or entertaining. We thought the episode was illustrative of how government actually works… rather than the theory of it. We did anything but insult the guy, by the way. It was more like we were dirt on the bottom of his shoe that he couldn’t be bothered with.
“The irony of all this,” adds another, “is that you are forever telling people NOT to rely on the government, yet that’s exactly what you’re doing and are pissed that they aren’t bailing you out with your poor little garbage pile left by someone else. Get a pickup and shovel and do it yourself just, as you’re always preaching!”

The 5: You really think we were pissed? There are a group of Mexican laborers being housed down the street by our contractor. Before the city “supervisor” showed up on Sunday, we were considering asking them to help clean up the mess.

“BTW, I love you guys,” the reader continues, “I’m saying this with a big ol’ 5 Min. Forecast smirk on my face. Keep up the good work, guys, and God bless.”

The 5: Cheers.
“In the past 10 years,” writes the last reader, ”there has been a significant increase in the productivity of the American worker… yet wages remain stagnant. Meanwhile, there has been an unprecedented rise in executive compensation. Now under the auspices of those selfsame overcompensated executives, the whole thing comes crashing down, hurting the working people in terms of jobs and savings the most.

“I know you probably have little or no contact with the working men and women of this country, but it doesn’t take a rocket scientist to understand that they are really, really pissed off, as they have a right to be, and that they are finally demanding their elected officials do something about it. If you live in proximity to the bloated plutocrats, I suggest that bags of construction waste in your driveway may soon be the least of your problems.

“The working people of America want their money back.”

The 5: Funny you should point that out. We were in Red Emma’s coffeehouse on Friday. An elderly gentleman who could have easily played the part of the academic Byron describes above asked when Red Emma’s radical book fair was being held. Apparently, he was visiting from New York City and wanted to come back to attend and lend support.

“It’s in mid-September,” the barista replied.

“Oh, well, we’ll be in revolution by then,” the aged man shrugged to his bereted friend and walked out.

We’re not convinced American workers have gotten more productive. That’s a claim Greenspan has been making for years, too. We are convinced they’re feeling a lot more entitled, though.

P.S. The city sent a different supervisor out yesterday. We found him poking through some bushes in our backyard. He said he was investigating a sewage leak reported by someone at our address. Heh.

Source:China’s Threat, Stocks Soar, A Housing Solution and More!

Spot prices are way down for iron ore and nickel (which goes into iron ore production).

China has increased its iron ore imports over the past few weeks. And, as you can see from the chart below, nickel prices began rebounding at the end of last year.

The $586 billion construction stimulus program in China could be behind these recent trends.

But my Chinese sources say there’s a more mundane (and less hopeful) explanation. They say that China is buying more iron ore to take advantage of current low prices and build up inventories.

China’s economic growth is around 6.5-6.6 percent. It was 11-12 percent before it got caught up in the global economic slowdown. China has a long way to go to get economic growth anywhere near normal.

But I still think the first countries to rebound will come from the east and not from the west. It just won’t be soon.

Source: Basic Metals Not Ready for Primetime

In addition, the wealth effect is a brand of self-fulfilling prophecy, which makes it even more powerful…

By investing in stocks that go up, we have more wealth.  Having more wealth causes us to go out and spend.  That spending, in turn, causes the economy to grow.  Economic growth then leads to better times for companies which, in turn, lead to higher stock prices.

Unfortunately, the power of the wealth effect works in reverse as well…

When we see our stock portfolios getting hammered, we feel a lot less wealthy.  That loss of wealth causes us to pull back on spending.  Less spending means slower economic growth, which is lousy for companies.  Poor outlooks for companies mean lower stock prices.

And declining wealth isn’t limited to stocks.  Take a look at this chart of real estate prices…

As you can see from this graph, the year-over-year change in home values — indicated by the dark solid line — began to slow around the beginning of 2006.  But economic growth — indicated by the red dashed line — didn’t begin to slow until the middle of 2008.

In other words, the wealth effect in real estate wore off long before the economy began to sputter.  In this case, the declining value in real estate was a huge leading indicator of poor economic activity to come.

In fact, changes in just about any asset — from stocks to houses to commodities — can cause their owners to adjust their spending habits.  And those spending adjustments are going to happen after the owners’ assets take a hit.  And that makes them a great predictor of where things are headed.

I’ve told my readers time and time again that a recovery in real estate prices — and stability in the real estate market — is likely going to be one of the biggest pluses for a stabilized economy and higher stock market values.  Real estate got us into this mess and it’s going to get us out.

Using These Leading Indicators for Profit

So, how can you make money off the predictive abilities of the stock market and other asset classes?

Simple.  While others are waiting for the big economic indicators — such as solid growth, the labor market, and the credit crisis — to get back on their feet, you can slip into key investments long before anybody else gets wind. The markets are telling us loud and clear patience will be rewarded.

Source: Profiting from the Wealth Effect

Good day…The dollar continued its assault on the world’s currencies yesterday as the dollar index moved above the 74 handle. I pulled a chart off the Bloomberg on my way out the door last night, and it showed the only major currency which was up vs. the US$ yesterday was the Swedish krona, which managed a .07% increase. This dollar rally has legs, but I still question the fundamentals behind the dollars surge. Today may be the day we see the dollar finally make a turn, as the ECB will be announcing their rate decision.

It is not that I expect Trichet to raise rates, but I do expect him to sound hawkish and refocus the markets attention on Eurozone inflation and away from worries about growth. Two reports out of Germany this morning will bolster Trichet’s hawkish stance. German exports rose more than economists expected in June, defying a stronger euro and pushing the trade surplus to a record. Exports increased 4.2% from may, the most since September 2006. German industrial production also increased for the first time in four months with output rising 1.7% from a year earlier. The IMF last month rose its forecast for German economic growth this year and said the global slowdown linked to the US financial crisis was less severe than it expected.

The entire global economy has been dealing with commodity price inflation, but so far this raw material price spiral hasn’t spilled over to wage pressures. While the severe slowdown in the US economy won’t allow increases in wages, the European economy isn’t in as bad of shape. Lufthansa, Germany’s largest airline, just announced a 5.1 percent raise to settle a strike. And Lufthansa employees aren’t alone in securing inflationary pay deals in Germany. Negotiated wages jumped 3.5% in the year through April, the biggest gain in 12 years. This wage spiral will keep the ECB focused on inflation, with another interest rate increase possible. ECB council member Klaus Liebscher signaled there may be need for still higher borrowing costs in Europe, saying in a July 24 interview that “we haven’t exhausted our room for maneuver”.

The euro rallied against the dollar in early European trading on speculation European policy makers will continue to hold their tightening bias. One of the reasons for the spike in the value of the US$ has been a shift in interest rate expectations. During the past month, several currency traders have begun to speculate that the next move by the ECB would be a drop in interest rates, while they gambled that the next move by FOMC would be up. Recent data would suggest these speculations could be completely wrong. The economic downturn looks like it will continue in the US, keeping the Fed from lowering rates, while the ECB is dealing with a stronger than expected European economy, and spiraling wage pressures. A change in these interest rate expectations could put the dollar back on its long term trend down, and send the Euro back to $1.60 or above.

The Bank of England kept the main interest rate unchanged for a fourth month as they find themselves in the exact same position as our Federal Reserve. Inflation has been accelerating, and the economy is teetering on the brink of a recession. UK housing prices dropped the most in a quarter-century and UK services, manufacturing, and construction all shrank in July. So the economy is dramatically slowing while inflation is predicted to more than double the 2% target. BOE policy makers split three ways on which direction interest rates should move, so their only choice was to just leave them where they are. England’s economic situation has left the BOE as impotent as the FOMC!

As I mentioned above, the UK reported that house prices fell at a rate of 8.8% in July. This morning we will get a better picture of the current status of the US housing market. A report from the National Association of Realtors will probably show its index of home sales fell for another month. The inventory of unsold homes in the US stands at the highest level ever recorded. And according to economists, the inventory of existing homes and condos must fall by almost 50 percent for prices to stabilize. Theres is an 11.1 month supply of existing unsold homes at the current sales pace, up from 4.6 months in September 2005. Almost one of every 10 US mortgages was in trouble during the first quarter according to the Mortgage Bankers Association.

Those that want you to believe the ‘worst is over’ in the US economic downturn only need to look at the pending home sales numbers, which is usually seen as a leading indicator. The index of pending home resales is expected to have fallen 1% after a decline of 4.7% in May. As we have been reporting for some time now, the falling housing market has far reaching effects on the US economy. While the folks at CNBC have been telling everyone that the worst is over after Paulson and Bernanke came to the rescue of Fannie and Freddie, some very smart people (whom I agree with) are warning that losses will continue to mount.

Nouriel Roubini, the New York University professor who predicted more than two years ago that the US would fall into a recession because of the bursting of the housing bubble and rising energy prices is one who disagrees with CNBC. Ty Keough pointed out an interview with Roubini which appears in this week’s Barron’s. I would encourage any of you who are starting to ‘drink the Kool-aid’ being pushed by Paulson and Bernanke to read it. In the interview, Roubini predicts that we are in the second inning of a severe, protracted recession, which started in the first quarter of this year and is going to last at least 18 months, through the middle of next year. He goes on to say we can expect a total of $2 Trillion of debt related losses in our financial institutions. Roubini states that banks have only started to feel the effects of the housing downturn, and that consumer-credit losses and home-equity loan write offs will substantially add to their pain.

He ends the interview with this: “Leaving aside the fact that we are going to have a pretty nasty recession and international crisis, the global economy is going to grow at a sustained rate once this downturn is over. There are significant financial and economic problems in the US and that’s why I’m bearish about the US. But the emergence of China and India and other powers is going to shift global economics and politics radically, and the world is going to be more balanced in the future, rather than relying on one engine, which has been the US. ..I’m quite bullish about the state of the global economy..”

I agree with Roubini’s take on things, and the best way to protect your portfolio? International diversification. Keep a portion of your assets outside of the US$ in currencies and precious metals. Investors should view this dollar spike as an excellent opportunity to purchase currencies and metals at cheaper prices, dollar cost averaging to get your overall costs down.

Japan’s government said the economy is “deteriorating,” acknowledging for the first time that the country’s longest postwar expansion has probably ended. “There is a high possibility the economy has entered a recession,” the head of business statistics at the Cabinet office said in Tokyo today. The Japanese yen continues to come under pressure due to the weakening economy and the recent move back into carry trades. In these carry trades, investors borrow currencies at low interest rates, sell them and invest the proceeds into higher yielding investments, earning the ‘carry’. With market volatility easing over the past month, many investors have moved back into these carry trades, pushing the value of the funding currencies of Japan and Switzerland down. As in the past, these carry trades can be reversed as quickly as they are put on.

Just in, the ECB left rates unchanged. Now we just have to wait Trichet’s press conference, which will occur in about 45 minutes. Better get to the currency roundup:

Currencies today 8/7/08… A$ .9106, kiwi .7178, C$.9546, euro 1.5468, sterling 1.9517, Swiss .9474, ISK 79.83, rand 7.4390, krone 5.1734, SEK 6.0846, forint 151.84, zloty 2.0966, koruna 15.54, yen 109.45, baht 33.58, sing 1.3837, HKD 7.8054, INR 42.06, China 6.8643, pesos 9.9398, BRL 1.5775, dollar index 74.08, Oil $120.17, Silver $16.60, and Gold… $882.40

That’s it for today… Chuck traveled out to San Francisco to speak at the money show. This is the first time in several years that I won’t be there, but things are just too busy on the desk as of late. I got to see Chuck at the Cardinal game the other night, and he was excited about getting back out to San Fran and addressing the crowds. I guess Brett Favre is headed to New York. I used to really like him, but this latest move dropped him a few notches in my book. Albert Pujols hit a Grand Slam last night to propel the Cards to another win. Maybe we will have post-season baseball in St. Louis! Hope everyone has a Tub-Thumping Thursday!!

Chris Gaffney, CFA
Vice President
EverBank World Markets
1-800-926-4922
1-314-647-3837
www.everbank.com

Source: ECB to Change Dollar’s Direction?…

The buck’s performance was tempered by an announcement that German retail sales fell 1.7% in April, vs. consensus expectations for 1.4% growth. That curbed talk that the European Central Bank might raise interest rates, making it even more competitive with the dollar.

It also provided evidence that the slowdown already being felt in the southern European economies is beginning to make itself known in core countries.

Meanwhile, the dollar actually strengthened against the Canadian loonie after Canada reported the first quarterly decline in economic growth since the second quarter of 2003. March growth declined 0.2% from the previous month.

“The renewed deterioration in GDP suggests that the Canadian economy is being more greatly impacted by the U.S. slowdown than earlier thought,” wrote Michael Woolfolk, of the Bank of New York Mellon.

And the U.S. Commerce Department reported that nominal personal incomes, nominal consumer spending and consumer prices all increased 0.2% in April, suggesting the economy weakened further in the second quarter of the year, even as the first tax-rebate checks began arriving.

Source: Dollar Slides – But Retreat is Capped by Weak German Sales Data 

Back in the 1980s, when mobile phones first arrived, they looked like bricks with giant antennas. Now they are sleek and compact, and even good enough to let you surf the Web or watch TV.

In emerging markets, mobile phones are a potent sign of “leapfrogging,” the means by countries are embracing the new and bypassing the old.

Thanks to falling technology costs, hundreds of millions of 21st-century subscribers will have no concept of a telephone pole. They’ll go from no phone at all to the latest gizmo, with no baby steps in between.

Many will get a new phone and a new bank account at the same time, with one hooking up to the other. In this manner, at least, farmers in rural South Africa are sprinting ahead of New Yorkers into the new digital age.

Needless to say, there’s a lot of money to be made. As communications networks thrive and grow, the potential for economic growth explodes. This is one reason why Chinese and Indian telecom companies are already battling it out over who gets to partner up with the large African telecoms. (Some of the fastest-growing mobile phone markets include South Africa and Nigeria.)

The mobile market in India is red-hot, too. It’s hard to even grasp how fast India’s economy is being transformed. Not just in telecom, but in countless other ways. We in the West have been prosperous for so long, we’ve almost forgotten what it’s like to experience life-changing growth… to see regions and industries and cities changed overnight.

Chris DeHaemer of Material Profits has been paying close attention to all this. He thinks the “flood of foreign cash” pouring into India is still growing — and he wants you to profit from this trend. Read on to find out more.

Foreign Cash Is Flooding Into India by Christian DeHaemer, Editor, Material Profits

India’s second largest cellphone company, Reliance Communications, just blew the doors off of its earnings. Net profits were up 46% to $374 million, and the company brought on 4.8 million new mobile users, boosting its total to 45.8 million. As you’d expect, the stock jumped 300% in the last two years before pulling back with the market in January.

It’s no wonder that Reliance is on fire… India’s mobile market is growing at a faster rate than any other country. Indians are buying phone plans at the rate of 10 million a month!

And it’s just getting started. The total number of phones, both fixed and cellular, was 300.51 million at the end of March. India only just subscribed its 100 millionth user in May 2006, and cleared the 200-million mark in September 2007. There are 1.148 billion people in India, and cellphone penetration in Europe is 80-90%.

This is the type of growth that happens when poor people join the middle class. And it’s happening across all industries.

Indian GDP has averaged 8.7% over the past four years. Indians are confident that the good times are here and will stay here. This is proven by the fact that loans and deposits at State Bank have increased 23% last year, and loans increased 25%.

Indians are spending money at a torrid pace, albeit a less torrid pace than last year. Credit growth in India slowed to 21% in the last 12 months, down from a rocket-fueled 28% last year.

India has hit a virtuous cycle in its assent to modernity. The Nobel Prize-wining economist Simon Kuznets theorized that once an emerging market crosses a certain level above subsistence, its market and economy expand rapidly. Roads are built lowering the cost of transporting goods. Stable electricity allows people to buy and stock refrigerators. People buy more stuff. This leads to greater resources to build more infrastructure, hospitals and schools. This creates more jobs and education while lowering costs, increasing profits, and so on.

I call this a “prosperity bubble,” and we are seeing its rapid expansion going on right now in India. The country has plans to spend at least $500 billion on infrastructure over the next four years. This spending will go into things like railroads, highways and power grids. This will create a massive wave of new jobs. People will buy things like TVs, cellphones, houses and cars.

Companies that make and sell these things will see rapid increases in revenue. Share prices will go up. I’ve found at least one such company that will directly benefit from this wave of prosperity… it’s all in the free report you can access here.