“Not exactly,” we explained. “Yes, we saw the problem coming. And we expected the government would do all the wrong things – which it has. But we never imagined that they’d do so many stupid things all at once.”

There are only two examples from modern history of depressions such as this – the ’30s in America and the ’90s in Japan. Both times, the governments did stupid things. But this time, the U.S. government has outdone them all. They’ve committed $13 trillion to programs that make no sense theoretically…and have never worked when they’ve been tried.

If you’ll recall, the dog that bit the world economy was rabid with debt. The feds are trying the old ‘hair of the dog’ technique. But they’ve rounded up every mangy cur and stray bitch in the country. And now they’re adding debt to the world economy at a much faster rate than ever in history.

Of course, as feral economists, we love it. We never thought we’d see such a thing. Gone are the mealy-mouthed reservations of cautious economists. Gone are the hesitant…hedged…halfway measures. They’re pulling out on the stops. It’s the pedal to the metal…it’s hell for leather…

What a bold experiment! What a brave undertaking! What a crackpot thing to do!

They must think the planet is under attack from aliens. It’s as if the survival of the human race were at stake. Nearly the entire output of the largest economy on the planet for an entire year – debt, not savings – is being spent to…to…to…well…to do what?

To try to stop the speculators from getting what they deserve!

But wait…it gets even madder. Of course, if you put food out in the alley, it’s bound to attract rats.

Not surprising then, that the government’s bailout cash is giving rise to an astonishing number of new fraud and money laundering accusations.

The complex nature of the bailout program makes it “inherently vulnerable to fraud, waste and abuse, including significant issues relating to conflicts of interest facing fund managers, collusion between participants, and vulnerabilities to money laundering,” says an internal government report.

“You don’t need an entirely corrupt institution to pull one of these schemes off,” said an expert. “You only need a few corrupt managers whose compensation may be tied to the performance of these assets in order to effectively pull off a collusion or a kickback scheme.”

But don’t worry. The feds are on the case. They’re said to be investigating. Just the way they did with Bernie Madoff. And who knows? Maybe the crooks will tell their families…and maybe the sons and daughters will turn them in, just like they did with Bernie.

There are always a few rotten apples in every barrel. But from here at The Daily Reckoning’s South American headquarters in Buenos Aires they all look brown to us. Even Business Week magazine opines that the whole bailout program is nothing more than a scheme to pick the pockets of the nation’s retirees in order to give the money to rich bankers.

“Monday afternoon, Goldman Sachs (NYSE:GS) reported much larger than expected first-quarter profits on the heels of the strong earnings Wells Fargo (NYSE:WFC) reported last week.

“No one should be surprised.

“The Fed has permitted the banks and financial houses to park vast sums of unmarketable paper on its books – securities made nearly worthless by the misjudgment and avarice of bankers. In return, the Fed has provided these paragons of finance with fresh, cheap funds to lend at healthy rates on credit cards, auto loans, and even mortgages.

“While the Fed cuts the banks slack, the bankers are busy turning the screws on their debtors by raising credit card rates and fees, and harassing distressed borrowers with all the zeal the Roman army displayed sacking Palestine.

“It takes good banking skills to borrow at 3%, lend at 5%, and make a profit.

It takes much less business acumen to borrow at 2%, lend at 5%, and make a profit – which is exactly what has happened. The extra fees are just gravy.

“This all comes at a cost to someone – America’s elderly.

“Many retirees depend on interest from certificates of deposit. Those rates are down dramatically and as CDs expire, retirees are compelled to reinvest their savings at lower rates and live on less income. They can take comfort that their sacrifices are helping pay off Wall Street’s losses from the lavish bonuses that were paid bankers – for example, the $70.3 million Goldman doled out to CEO Lloyd Blankfein in 2007.”

We don’t envy the feds. So many pockets to pick…so little time. Make sure you aren’t among those who find themselves bled dry by the government’s bailouts.

Now, we turn to Addison with a look at China’s recent gold accumulation:

“As we’ve been suspecting, the Chinese have been accumulating gold, slowly but surely.” Writes Addison in today’s 5 Minute Forecast. “They made the announcement this morning. Really, what would you do if you were sitting on $1.9 trillion in foreign reserves – more than half of it minted in U.S. dollars?

“The State Administration of Foreign Exchange says China’s reserves now total 1054 metric tons – up from 600 in 2003. If you’re keeping score at home, that’s a 76% increase in 5 years.

“These new numbers place China fifth among nations that disclose their gold holdings – just ahead of Switzerland.

“Given pronouncements made by premier Wen leading up to the G20 meeting last month, you can count on them to pick up a fair share of the $12 billion the International Monetary Fund (IMF) plans to sell this year.”

Each weekday, Addison brings readers The 5 Min Forecast, an executive series e-letter that provides a quick and dirty analysis of daily economic and financial developments – in five minutes or less.

And back to Bill for more memories of his Argentine adventure:

“Macho…” Jorge shouted. “Alto!”

“Macho” was not the right thing to be during the roundup season. It was like being long banks in September of 2008; you were going to get killed.

“If ever you are in the sluices,” we warned Elizabeth, “and they say ‘Alto!’ you should make a run for it.”

“Macho” means male. And on a cattle ranch, male animals are few. The ratio is one bull per 20 cows. The finest of the young males are spared…and destined to a life of procreation. The rest get sent “alto” – to the upper field…and then to the slaughterhouse (usually after being fattened up a bit before they get there).

We brought about 400 cattle over the pass from Compuel. As far as we know, only three died. One calf made it all the way to the corral down at the ranch and then fell down. We left it alone on the ground…hoping it would get back on its feet. It never did.

“There was something wrong with it before we left,” Jorge warned. The vaqueros would normally cut up a fallen calf and have it for dinner. This one, they didn’t dare eat.

The other two dead cows died of wounds inflected by the vaqueros themselves. One – a fat young black steer – was singled out of early retirement…it was the quest of honor at a barbecue at the ranch house. The other was cut up by the vaqueros and portioned out between them. We saw it when we headed back up the hill to the house at lunchtime. It was on its back and on the ground… Three vaqueros were working on it. Its hide had already been cut off. Even from the head. Otherwise, the animal was still intact. Pedro was beginning to cut the head off with a saw as we passed. Later in the day, the skinned head, with horns, sat on the wall like a devil’s head. The vaqueros made the sign of the crucifix when they walked in front of it.

Every once in a while, the bulls would begin pushing against each other. Once they got into such a squabble they broke through the main gate. Another time, a huge bull charged where we were working. All of us jumped the fence or climbed the sluice to get away. Then, we got back to work…

“Macho…alto!” “Hembra…bajo.” (Female…to the lower paddock.)

Jorge judged every animal.

As each animal got stuck in the jaws of the sepa, a whole team got to work. One of the vaqueros injected it against brucellosis. Another gave it an anti-parasite medicine.

Cosimir, a young man wearing a red trucker’s cap, put a pair of tongs in its nose and gave a tug…forcing open its mouth so we could look at the teeth.

We watched Cosimir’s face…intent on his work; each time he pulled on the tongs, his own mouth opened…his tongue went out to the side.

“Sin dientes…alto.” (No teeth…upper paddock.)

“Llena boca…bajo.” (All her teeth…lower paddock.)

Each cow was also treated to an ear tag and an earmark. Each yellow plastic tag has a number, so the animal can be identified and recorded. The tags are punctured through the ears like rings. Then, a v-shaped cut is made in the ear too – further identifying the cow as one of ours.

The cows kicked and bawled. But your editor had already closed the gate behind them. And Pedro had closed the sepa on their necks. They were stuck until we were finished with them.

Young macho calves were singled out for special torture. Once the injections had been made, ears cut and pierced, a rawhide rope was put around their necks. They were dragged into a small paddock next to the sepa. Then, they were held down by two vaqueros while the third cut off their testicles.

The first day, Edward, 15, wearing boots and a cowboy hat, learned to lasso the young calves. He was soon put to work helping Omar castrate the machos:

“I just held them down. Omar asked if I wanted to cut off their…well…you-know- what…but I didn’t want to do it. He was using a Swiss Army knife. I thought they used rubber bands. That’s what they use in France. But Omar says the rubber bands are not always successful. Sometimes they fall off. This way, there’s no doubt about it.”

Over the three days, Edward helped castrate dozens of young calves.

We finished with the cows from Compuel on the first day. By late afternoon, we were checking the horizon for signs of the second group. For while we were working on the thin cows from the high country, other vaqueros were on out the range rounding up hundreds more of them.

Towards the north, we saw a cloud of dust.

“There they are. They’ll be here in about an hour,” Jorge calculated.

It was already nearly 6:30 pm. The sun was going down. Soon, it would be dark.

“We’ll get them into the big paddock…and work on them tomorrow,” said Jorge.

The roundup lasted three long days. From sun-up to sunset, the dust rose up from the corral, along with the yells of the cowhands – including your editor’s. Without a break…the cowboys drove the cows into the sluices…the bright sun beat down…the injections…the frightened cows…the fighting bulls… By the time the sun set behind the mountain in the West, your editor was worn out. He could barely drag himself back up the hill to the ‘sala’ – the main ranch house.

But as he was going up the hill, he noticed, and not for the first time, what a beautiful place it was. It’s autumn in the Southern Hemisphere; the alamo trees have turned golden. Water is running in the streams. The grass is green. The sky is blue.

“I think what makes this place so stunning are the vivid colors,” said Elizabeth. “That…and the majesty of the setting.”

One on side, in the distance, is the snow-covered Nevada de Cachi. At the other, snow tops the Lomo de Negra too. Between them is a broad valley with cattle, vineyards, pimento, llama, barren desert, stones, cactus, and dry moonscape rock formations as well as dense, bottomland vegetation.

Source: Rabid with Debt

This from The Sovereign Society:

It’s often the case that the most important news isn’t what’s happening in the world today, but what’s not happening in the world today. Case in point; President-elect Obama’s constantly growing stimulus is not driving the market upward.

Going back to the Fall of 2007, the Fed’s interest rate cuts served as an immediate boost that pushed the markets higher. As planned, these infusions of credit helped to boost market confidence and morale…even if only for a few days or weeks.

Their effect lessened and lessened as time went on…and the boost from December’s rate cut only lasted a few sessions before being gobbled up by market uncertainty. Now, President-elect Obama is pulling out literally all of the stops in declarations about his planned stimulus…

A few states looking for a few hundred billion quickly grew into a US$1 trillion stimulus package. And the US$1 trillion stimulus package quickly grew into multiple years of US$1 trillion budget deficits. 1.5 million new jobs balloons to 4 million new jobs…but the stock market doesn’t even flinch.

What gives? With what seems like a promise to write blank checks, infusing seemingly unlimited amounts of credit into the flagging economy, why isn’t Obama’s stimulus effort gaining any short-term traction in the marketplace?

It’s a (Liquidity) Trap!!

In monetary economics, a ‘liquidity trap’ happens when a Central Bank’s nominal interest rate reaches zero and investors stop expecting significant returns on their financial and real investments…and start sitting in cash.

Think about it; cash only ever yields zero. But when the Fed’s interest rate hits zero, the same is true of short-term credit. The two are comparable in terms of reward…both yield zero. So there’s no incentive to take a risk and lend when you can expect the same returns from hoarding cash. This is true for both consumers and businesses, and it’s especially true when you account for the increasing default risk and general uncertainty that have become commonplace in today’s markets.

So in its efforts to stimulate the economy, the Fed is actually doing the exact opposite…slowing the economy by adding even more incentive to hoard cash in these troubling times.

As a result, the marketplace becomes resistant – if not outright immune – to further infusions of credit. Be it through trillions in deficit-spending “stimulus,” or the witchcraft of quantitative easing, the job of stimulating the economy after implementing a zero interest-rate policy becomes much, much more difficult.

And in light of recent news covering the precipitous drop in consumer demand, you’d be hard-pressed to find Obama’s planned stimulus showing any traction in the marketplace. Combined with the rising savings rate, the current freefall in consumer demand means disaster for corporate earnings and – in turn – share prices. This gradual realization will likely continue to offset any boost offered by Obama’s continued pep talks.

In reality, Obama’s pledge to make a new “New Deal” with the American people should be significantly boosting the economy. After all, the prevailing wisdom is that these kinds of policies helped us through the great depression. Those who were crossing their fingers for an “Obama Stimulus Rally” were almost spot-on…except they forgot about one thing.
The onerous burden of Central Bank policy.

No…it appears as though we won’t see a stimulus rally in January after all. And with any rally’s momentum deadened by the liquidity trap, one could reasonably expect that the market has reached its short-term peak.

Source: Federal Reserve Torpedoes Obama’s Stimulus Rally

Too many investment myths have gone unchallenged lately. Today I plan to refute them – and explain why financial markets are likely to perform much better than most investors believe in the year ahead.

Let’s begin by examining the four biggest investment myths circulating right now…

Investment Myth #1: The Era of Free Markets is Over

It’s true that many of the apostles of free-market economics have begged Congress for government intervention during the current credit crisis. But nobody is seriously arguing that Uncle Sam should nationalize the economy, set wages and prices, or establish production quotas.

The free market still constitutes the best means of securing prosperity over the long term. (Just ask the Chinese. Three hundred million people there have been lifted out of poverty over the past three decades.) We will find ways to make free markets work better – not abolish them.

Investment Myth #2: The United States Has Lost its Competitive Edge

The reality is the United States continues to lead the world in innovation, technology, higher education, worker training and the ability of the labor force to move from one job to another.

Three months ago, the Swiss-based World Economic Forum released its global competitiveness report and, once again, the United States topped the list. The study further noted that our strong productivity will help us “ride out business-cycle shifts and economic shocks” better than most countries.

Investment Myth #3: The United States is No Longer an Attractive Market for Investment

Yes, the Fed’s move to take interest rates near zero has predictably knocked the dollar for a loop again. But that isn’t deterring foreign investors. Perhaps they know that the biggest bargain of all is inexpensive assets in a cheap currency.

According to the World Bank, the United States attracted more than $2 trillion worth of foreign direct investment last year. Britain, Hong Kong and France – the next three top finishers – each registered less than half as much. The United States remains the economic engine of the world – and smart capital will continue to seek a home here.

Investment Myth #4: U.S. Financial Markets Will Take Decades to Recover

In the more than 200-year history of equity investing in the United States, stocks have never taken decades to recover. Those who argue they have always omit dividends. Dr. Jeremy Siegel of the Wharton School points out that even if you invested a regular amount in the Dow every month beginning at the market peak in 1929, within four years you would still have outperformed someone who invested the same amount each month in T-bills. (The key is regular investment and reinvested stock dividends.)

The Nikkei 225 in Japan, of course, is still down more than 70% from its peak in 1989. Could the United States be headed for the same long, deflationary spiral? That’s extremely unlikely. The Japanese real estate and equity bubble was much bigger, government action there was clumsy and ineffective, and the banks were not cleaned up quickly or efficiently. Congress and the Federal Reserve are being much more proactive here.

It’s true that the economy is in for a few rough quarters. Understandably, the media is focused on the bad news. We all know that hundreds of thousands of jobs have been lost. Venerable names in banking and finance are no more. American automobile manufacturers are begging Congress for a lifeline. Residential real estate and the stock and corporate bond markets have all taken it on the chin.

But there are reasons for optimism, too. Oil has plunged from $147 a barrel to less than $40. Low interest rates will ultimately make it cheaper for businesses and consumers to borrow. A cheap greenback boosts exports and makes U.S. assets inexpensive to foreign buyers. And fundamental valuations on stocks are the cheapest they’ve been in 17 years.

Make no mistake, 2009 is going to be a tough year for the economy. But the financial markets – always looking forward – have already discounted this and could surprise you in the year ahead.

So don’t get waylaid by the gloom-and-doomers. There are always attractive investment opportunities out there and right now is no exception.

We’ll be highlighting dozens of new ideas – here and in our Oxford Club Communiqué – in the weeks just ahead.

Let’s buck the trend together – and look forward to a happy, healthy and prosperous New Year!

Source:The 4 Biggest Investment Myths of 2008

The dollar rose against the yen on Monday after the Bank of Japan followed last week’s interest rate cut with a warning that the health of Japan’s economy has deteriorated and is likely to get worse.

But investors’ equally dim view of the U.S. economy hurt the greenback against the euro, which rose broadly in holiday-thinned trade. Doubts about whether a U.S. automaker bailout would steer the economy out of recession also hit the dollar.

Traders said volumes were razor-thin in the lead-Up to the Christmas holidays, aggravating even the slightest moves in the currency markets. Still, many said demand for dollars remained low.

“The dollar view is so opaque at the moment, and the risk reward at this time of year is not worth it unless you really have to trade,” said Maurice Pomery, head of foreign exchange at IDEAglobal in London.

The dollar managed to rise above 90 yen for the first time in nearly a week after BoJ Governor Masaaki Shirakawa said yen strength and a global slowdown may force Japanese exports still lower even after a record plunge in November.

“All Asian exporters are at risk in this global economic slowdown, but Japan is at the top of the list,” said Dustin Reid, senior currency strategist at RBS Global Global Banking & Markets in Chicago. “The stronger yen has been playing havoc for Japanese exporters, and the auto companies in particular are likely to be significantly affected.”

So far this year, Japan’s currency is up nearly 20 percent against the dollar and more than 22 percent against the euro.

Early in New York, the dollar was changing hands at 89.85 yen , up 0.8 percent, after earlier rising to 90.23. The BoJ cut Japanese interest rates last week to near zero.

The euro also rose 1.3 percent to 125.79 yen after earlier hitting a session peak of $1.4123. Sterling fell 0.8 percent to $1.4814 , while the euro rose 1.1 percent to 94.35 pence , near a record high of 95.56 pence touched last week.

A move by China’s central bank to cut lending and deposit rates by 27 basis points — its fifth cut since September — shed more light on the scope of the global slump.

GRIM U.S. OUTLOOK

After coming under steady pressure in December, the dollar rallied on Friday after the Washington announced emergency loans for crippled General Motors and Chrysler.

But while the move averted a crisis for now, traders said uncertainty over the companies’ restructuring plans left many doubting the long-term effect it would have on the economy.

Last week, the Federal Reserve cut benchmark interest rates to near zero, underlining the severity of the economic crisis and undermining support for the dollar.

Investors are also looking for the European Central Bank to cut interest rates, currently at 2.5 percent, in January, though ECB executive board member Lorenzo Bini Smaghi warned about the risks of monetary policy being too lax, according to the Rome newspaper Il Messaggero.

Steven C. Johnson, Reuters 12/22/08

This from Investment U:

Investing requires tough decisions. What to buy? When to buy? How much?

But none more difficult than this: Admitting the fundamentals no longer support an investment you own. Or, as the French philosopher Geoffrey F. Abert summed it up over 900 years ago, “It often takes more courage to change one’s opinion than to stick to it.”

And today I’m living proof.

Just three weeks ago, to the day, I declared, “The dollar’s not done.” I laid out my case about Jim Roger’s being wrong.

But I’m officially changing my stance on the falling U.S. dollar.

To be clear, it’s not because I finally saw the light, recognized the error of my ways, or heeded the “sage” advice of so many of you that wrote in to chastise my “foolishness” or “ignorance.” And I didn’t get a personal phone call from Jim Rogers, either.

I don’t cave to bullying or criticism. Just fundamentals. And the bottom line is this – for most of the year, the fundamentals supported a stronger dollar. Enough so to allow my subscribers to lock in gains shorting the euro versus the dollar of 12%, 58%, 60%, even 267%.

But those fundamentals changed. Big time. So here’s what you need to know, and how this fundamental change could be as profitable as the last one.

U.S. Dollar Doubts Surface As Investors Give Up On Yield & Value

My first doubts about the U.S. dollar surfaced when investors gave up on yield and value. In return for, well, no return. Remember, last week I reported demand for four-week Treasury bills – offering ZERO percent interest – outstripped supply four times over.

If that wasn’t bad enough, I noticed investors on the long-end of the bond market weren’t investing any smarter. All they want is “safety-only,” too. Case in point – the yield on 10-year and 30-year Treasuries fell below 3%.

Forget below average. Such paltry yields represent the lowest levels in the last 50 years.

So what’s the big deal? Well, it’s the equivalent of Bank of America putting out a curbside sign during the real estate run-up advertising “no-documentation1% mortgages.” People can’t resist cheap money. And we shouldn’t expect our elected representatives to show any better restraint. They will borrow cheaply and spend freely, while they can.

And it’s the extent of this spending that troubles me, and threatens the dollar the most.

The Flood is Coming and There’s No Ark to Save The Dollar

Forget the $530 billion of government debt that flooded the market last quarter. Or the $550 billion estimated for this quarter. President-elect Obama is planning a tsunami.

If you have any doubt, just consider the trend in estimates for his soon to be released economic stimulus package.

• A few weeks ago, $500 billion was the consensus number.
• Then it crept up to $700 billion.
• Now, Republicans and Democrats alike believe the final plan will top $1 trillion.
• And that’s on top of the $4 trillion price tag for his proposed middle-class tax cut and universal health care.

The only way to absorb the impending and massive Treasury issuances will be for the Fed to flood the market with dollars. Or put more plainly, to run the printing presses 24/7 – which many of you already suspect they’re doing.

Arguably, these factors alone should be enough. But I’m stubborn. I wanted one more thing before I let go of my dollar bullishness. And yesterday I got it.

The U.S. Dollar Index Breaks An Uptrend

Recall, in July the U.S. dollar index bottomed out and entered a confirmed uptrend. But after rattling off about a 20% gain, everything just came unglued. And yesterday, the U.S. dollar index officially broke through the uptrend line. So look out below. Because there’s no telling where the next support level rests.

That being said, I don’t think it’s time to do the opposite of my previous recommendation, and get long the euro. Not hardly. The recent hawkish comments out of the European Central Bank scare me. They won’t be able to escape this financial crisis either, no matter how defiant the rhetoric. Plus, euro-zone banks still need to unwind as much as $800 billion of dollar-denominated leverage.

In short, the upside in the euro versus the dollar will be subdued. Not to mention, a far better opportunity exists shorting long-dated Treasuries.

As The Bond Market See-Saws…

The bond market is remarkably simple – it’s a seesaw, with interest rates on one end & bond prices on the other. When one goes up, the other goes down.

If you have any doubt, consider recent history. As the Fed aggressively cut interest rates, bond prices went vertical. Up 20% in some cases. That’s unheard of for bonds. And it represents our newest bubble (first real estate, then oil, now treasuries).

Make no mistake, this bubble will end just the same.

• First, because the government can’t get away with near zero yields forever. Investors will eventually demand a respectable return on their money. Especially foreign governments. In the last quarter alone they increased their U.S. debt holdings by 12%, according to Bloomberg. To load up even more will require additional compensation.
• Second, because inflation is around the corner. Never has a world government spent (or planned to spend) so much and avoided it. The only way to curb the resulting inflation will be for the Fed to abruptly reverse course, and begin raising rates at the first signs of an economic recovery.
• Bottom line, the only way for rates to go from here is up, which means bond prices will head the opposite direction.

Again, I aim to be transparent in my analysis. Always. And that includes defying Lillian Hellman’s observation that “people change and forget to tell each other.”

Consider this your notice. My outlook for the falling U.S. dollar has changed, albeit quickly.

This isn’t an apology. It’s simply a head’s up that more compelling opportunities exist. One a fellow colleague summed up perfectly, “If you don’t short Treasuries right now, you’re dumber than investors buying them for a zero percent return.”

A bit harsh. But hard to refute.

Source: The Falling U.S. Dollar: Taking An About-Face

The news of the day was of course the results of the Federal Open Market Committee’s meeting, at which they took the big scalpel to interest rates.

The Fed wrote that, “Since the Committee’s last meeting, labor market conditions have deteriorated, and the available data indicate that consumer spending, business investment, and industrial production have declined. Financial markets remain quite strained and credit conditions tight.”

Thus it effectively announced a comprehensive quantitative easing policy, saying that it would establish a target range for the federal funds rate of zero to a quarter of a percentage point. Rates will need to be kept low “for some time,” the central bank said.

The accompanying policy statement said that, “The Federal Reserve will employ all available tools to promote the resumption of sustainable economic growth,” and it will support financial markets and stimulate the economy “through open market operations and other measures that sustain the size of the Fed’s balance sheet at a high level.”

The day’s hard data were none too cheery. The Commerce Department said that housing starts in November plunged 18.9%, to the lowest level since the beginning of record keeping in 1959. According to similar records kept elsewhere, it’s the slowest pace of construction in the entire post-World War II period.

At the same time, the Labor Department confirmed the deflationary environment by reporting that the consumer price index plummeted by a seasonally adjusted 1.7%, the biggest drop since the government began adjusting the CPI for seasonal factors in 1947.

The non-seasonally adjusted number, minus 1.9%, marks the steepest decline since January 1932, in the depth of the Great Depression. Small wonder that the Fed pulled out all the stops.

Source: Dollar Tanks After Fed Decision

“After largely being confined to range trading against the major European currencies in recent weeks, the dollar has broken down,” said Marc Chandler, of Brown Brothers Harriman.

The British pound also gained 2.1% vs. the greenback, while the Swiss franc was up 1.7%.

However, “We suspect that U.S. fundamentals have not deteriorated as much as the price action is prompting the dollar bears to suggest,” Chandler said.

“Instead, we would regard the greenback’s decline as largely technical in nature, relating to profit-taking by momentum traders on the second-half dollar rally ahead of the end of the year,” he concluded.

Analysts awaited today’s interest rate decision from the Fed, with most expecting a cut of the benchmark by half a point to 0.5%, although some are going so far as to forecast a cut of three-quarters of a percentage point, to 0.25%.

“The U.S. dollar is selling off aggressively going into the rate decision as traders realize that after [today], the dollar will either be the lowest or second lowest yielding G10 currency,” said Kathy Lien, director of currency research at GFT. “No matter how you look at it, an interest rate of 0.50% is just as bad as an interest rate of 0.25%.”

Source: Dollar Craters Against Euro

This from The Daily Reckoning:

Global financial markets are acting as though the world is about to implode. Over the past four months, the investment community has dumped all assets; regardless of their underlying economic fundamentals. We have seen unbelievable wealth destruction on a global scale and trillions of dollars have evaporated and returned to monetary heaven.

The rate of decline has been astonishing and in the past twelve months, the Dow Jones Industrial Average (Dow) has seen its worst one-year performance – ever! It is interesting to observe that the Dow’s recent plunge has been even worse than the 1929 decline which preceded the Great Depression of the 1930’s (Figure 1). So, are we really witnessing the end of the world as we know it?

Regardless of the Armageddon fears prevalent today, I would argue that this slump may turn out to be a fantastic buying opportunity for the patient, long-term investor.

Now, the mainstream media seems to be convinced that our planet is headed into a permanent global depression and investor-sentiment certainly reflects this thought process. The same cheerleaders who, only a few months ago, were gleefully shouting about the emergence of a new global economy are now forecasting eternal disaster. Furthermore, investors are liquidating all assets as images of their children living in shanty towns fill their fearful minds. ‘Demand destruction’ and ‘de-leveraging’ have replaced ‘liquidity’ and ‘global growth’ as the new buzz-words. Stocks are down significantly from the highs, corporate bonds have taken a beating and even commodities (including precious metals) have joined the bear parade. And those who naively bought structured products from private banks have seen total losses. So, where do we go from here?

The best way to begin is by reiterating that global markets are now extremely oversold and undervalued, hence attractive. This may sound counter-intuitive but it is vital to understand that a decline of 40% in US stocks (and even more in some countries) has set the stage for fantastic long-term gains. If my assessment proves to be correct, investors who buy the unimpaired sectors today should make a fortune over the coming decade.

Remember, the best time to buy is when everyone is despondently selling. As John Templeton (founder of Templeton Funds) often said, “bull-markets are born on pessimism, grow on scepticism, mature on optimism and due on euphoria”. And you can be sure that the investment community is feeling extremely pessimistic and fearful today.

At present, a lot of ‘gloom and doom’ and ‘deflation’ chatter is doing the rounds in the mainstream media. The recent selling panic is frequently being described at the worst crisis since the Great Depression. However, this hype does not imply that the economic outlook is similar to the 1930’s. One of the biggest reasons why the Great Depression occurred was due to the failure or inability of the money-supply to expand in line with the need for this money.

Furthermore, the failure of roughly 5,000 banks did not help the situation either as millions of Americans lost their savings! In the current situation, however, various central banks and governments are throwing trillions of dollars into the monetary system and all bank deposits have been guaranteed. And if need be, the authorities will print money until the world runs out of trees. So, in my view, a prolonged deflationary phase or a global depression is not likely to happen.

The recent sharp declines in the markets can be attributed to the fact that two separate negative events caught the public’s attention at roughly the same time – depth of the financial crisis and fears of a US recession. Now, as far as the first issue is concerned, it is my belief that the worst is behind us. For sure, we may hear of sporadic bank busts in the months ahead, but the recent government guarantees prevented a total collapse of the banking system. For the record, I do not agree with the recent bail-outs because they are immoral and are going to cause huge inflation in the future. However, we all have to deal with reality and for now, it seems that the credit markets are starting to function again.

Our research reveals that currently US$3.5 trillion is sitting on the sidelines, waiting to be invested. And when investors deploy this cash into the markets, it will flow towards sectors which have been unharmed in this financial crisis. Now, I do not know about you, but apart from natural resources (where supply and demand imbalances persist) and industrials (which may benefit from massive government-sponsored infrastructure projects), I cannot find any other sector which has strong fundamentals. Housing faces severe over-supply, autos are struggling, banks will suffer due to over-regulation and consumer discretionary stocks will also fare poorly as the over-stretched public in the West tightens its belts.

The one sector of the economy which remains in excellent condition is commodities. Demand is holding firm, supplies of key resources are still tight and the ongoing credit crisis will only delay many projects which were previously meant to come online. This will create additional supply shortages in the future, thereby leading to much higher prices.

As far as precious metals are concerned, it is worth remembering that our world’s financial system has been hijacked by money-printers. Whether it is the Federal Reserve, Bank of England or the European Central Bank – they are all creating money ‘out of thin air’ and inflating the supply of paper currencies.

As this rampant inflation continues, what is astonishing though is that so many investors are being hoodwinked into believing that our world faces a genuine deflationary bust. These days, opinion is divided as to whether we will witness continuing inflation or gut-wrenching deflation. In my view, this discussion is absurd and deflation (or a contraction in the supply of money) is out of the question.

Banks are in the business of lending money and debt creation is essential for their very survival and prosperity. So, you can be sure that the modern-day money lenders will find a new way to further expand the supply of money and debt.

Whilst paper currencies (cash) regained some purchasing power in the past few months due to forced liquidation in the asset markets, there is no chance that they will maintain their value over the medium to long-term. History is littered with numerous paper currencies which became totally worthless and I suspect many of the current ones will also disappear. In fact, a remarkable study confirms that only 23% of paper currencies ever issued have survived the test of time! The vast majority were destroyed due to hyperinflation and are no longer in circulation.

Accordingly, I would urge investors to sit tight with their positions in hard assets (precious metals, energy and agriculture) and add more capital at such depressed levels. Under the best-case scenario, global markets bottomed out over the past two months and even if they did not, at the very least, we should get a multi-month rally in commodities and related stocks.

Source: The End of the World…Or the Right Time to Buy?

This from Sovereign Society:

The time to start building fresh positions in oil, gold, silver and TIPs has arrived. Even distressed real estate should be accumulated if credit can be secured.

Over the next 6-12 months the United States, Europeans, Japanese and Chinese will eventually arrest deflation. And long before that materializes, hard assets will begin a major reversal following months of crippling losses.

Since peaking in July, the entire gamut of inflation assets has collapsed amid a growing threat of deflation or an environment of accelerated price declines. The last deflation in the United States occurred in the 1930s, purging household balance sheets, corporations, states, municipalities and even the government following two New Deals.

Thus far, U.S. CPI or the consumer price index has not turned negative year-over-year. Yet as oil prices continue to lose altitude and other commodities have been crushed, input costs and price pressures continue to decline dramatically since October. The only major component of CPI that continues to post modest year-over-year gains is wages. And with unemployment now rising aggressively this quarter it’s highly likely wage demands will also come to a screeching halt.

Plunging Bond Yields Discount Danger

In the span of just six months, foreign currencies (except the yen), commodities, stocks, non-Treasury debt, real estate and art have all declined sharply in value in the worst panic-related sell-off in decades. More than $10 trillion dollars’ worth of asset value has been lost worldwide in 2008.

What’s working since July? U.S. Treasury bonds and the U.S. dollar as investors scramble for safety and liquidity.

On December 5, 30-day and 60-day T-bills yielded just 0.01% – the lowest since the 1930s while the benchmark 10-year T-bond traded below 2.55% – its lowest yield since Eisenhower was president in 1955. Even 30-year bonds have surged as the yield recently dropped below 3% for the first time in more than four decades.

The market is now pricing a severe recession and – possibly – another Great Depression. Despite a series of formidable regular market interventions by central banks since August 2007, the credit crisis is still alive and kicking. The authorities have not won the battle …at least not yet.

Heightened inter-bank lending rates, soaring credit default swaps for sovereign government debt and plunging Treasury yields all confirm that the primary trend is still deflation.

To be sure, credit markets worldwide have improved markedly since the dark days of early October. Investment-grade corporate debt is rallying, commercial-paper is flowing again and companies are starting to issue debt once more – but only the highest and most liquid of companies. For the most part, banks are still hoarding cash and borrowers can’t obtain credit.

The real economy is now feeling the bite as consumption falls off a cliff, foreclosures soar and the unemployment rate surges higher. These primary trends are deflationary as broad consumption is severely curtailed, with consumers preparing for the worst economy since 1981 and rebuilding devastated household balance sheets.

But at some point over the next 12 months, the market might transition from outright deflation or negative consumer prices to some sort of disinflation or at least an environment of stable prices. That’s when inflation assets should start rallying again.

Inflate or Die: The Name of the Game in 2009

The battle now being waged by global central banks, including the Federal Reserve is an outright attack on deflation. Through the massive expansion of credit, the Fed and her overseas colleagues are on course to print money like there’s no tomorrow to finance bulging fiscal spending plans, bailouts, tax cuts and anything else that helps to alleviate economic stress.

Earlier in November, the Fed announced it would target “quantitative easing” and “monetization,” unorthodox monetary policy tools rarely or never used in the post-WW II era.

Without getting too technical, the term “quantitative easing” means the Fed will act as the buyer of last resort to monetize Treasury debt and other government agency paper in an attempt to bring interest rates down. Quantitative easing aims to flood the financial system with liquidity and absorb excess cash through monetization or purchasing of government securities.

Through monetary policy, the Fed controls short-term lending rates but cannot influence long-term rates that are largely set by the markets; the Fed now hopes it can influence long-term rates through quantitative easing. And since its announcement two weeks ago, long-term fixed mortgage rates have declined sharply.

These and other open market operations directed by the Fed and Treasury will eventually arrest the broad-based deflation engulfing asset prices. It will take time. Inflation is the desired goal and is the preferred evil to deflation, a monetary phenomenon that threatens to destroy or seriously compromise the financial system. Policy-makers have studied the Great Depression, including Fed Chairman Bernanke, and the consequences of failed central bank and government intervention in times of severe economic duress are unthinkable.

Ravenous Monetary Expansion

According to Federal Reserve Board data, the Fed is now embarking on a spectacular expansion of credit unseen in the history of modern financial markets.

The total amount of Federal Reserve bank credit has increased from $800 billion dollars to $2.2 trillion dollars (or from 6% to 15% of gross domestic product) as the central bank expands its various liquidity facilities in an attempt to preserve normal functioning of the financial system.

The Fed’s ongoing operations to arrest falling prices are targeted namely at housing – the epicenter of this financial crisis. It is highly unlikely that the United States economy will bottom until housing prices find a floor. Quantitative easing hopes to stabilize this market.

Buy Gold Now

Relative to other assets in 2008, gold prices have declined far less. The ongoing liquidity squeeze has forced investors to dump assets, including gold to raise dollars. I suspect this short-term phenomenon will end in 2009 once the ongoing panic subsides and credit markets become largely functional again.

Gold should be accumulated now ahead of market stabilization. As the financial system gradually comes back to life over the next several months or sooner, the dollar should commence another period of weakness; there will be little incentive to hold dollars with short-term rates at or close to zero percent. The Fed will be in no hurry to raise lending rates.

Still, the Japanese experience in the 1990s warns investors of the travails of long-term deflation.

The Japanese, unlike the United States, only started to seriously attack falling prices in the economy in 1998 through massive fiscal spending. In contrast, the U.S. is already throwing everything at the crisis after just 17 months.

I expect the United States to print its way out of misery and, over time, and conquer deflation. But the cost will be humungous and at the expense of the dollar, U.S. financial hegemony and calls for a new monetary system anchored by gold.

It’s literally “inflate or die” for global central banks. Inflation will win.

Source:  Inflation on “Sale” as Deflation Dominates Global Markets

This from The Sovereign Society:

Your bank is a counterfeiter, as facilitated by the Federal Reserve System and permitted by the government that allegedly represents you.

The lie of fractional reserve banking is at the heart of our ‘banking’ system. And its acceptance as fact or necessity by the world’s populace is the basis on which most other economic lies and myths gain so much credibility.

To understand why we’re in so much trouble right now, and why the privately owned Federal Reserve Banks are to blame, one must understand fractional reserve banking, and why it amounts to little more than counterfeiting.

King Edward II, Goldsmiths and “Legal” Counterfeiting

For all of history through to the 1800s, goldsmiths were the world’s primary bankers. It made sense in those hard money days to keep your gold with the fellow who molded it into coins and acted as the community’s central cash register.

So here we have the goldsmiths…guardians of bullion and protectors of everyone’s wealth. I’ve personally always seen this as the primary function of a bank.

But just guarding money and issuing certificates for it…I suppose it just didn’t pay as well as it could. That and you always end up with a huge pile of cash (gold) that’s just sitting around and not really doing anything other than backing promissory notes. So the goldsmiths got crafty, and at this point they became the bankers we know today.

They started issuing more certificates than they could back in gold, allowing them to collect interest on the physical gold collecting dust in their shop… gold that already belonged to someone else. But weren’t there already certificates attached to that gold? Of course. But the bankers believed those certificates wouldn’t all be cashed in at the exact same time, so they could get by and no one would ever be the wiser.

This is the critical point in our story, and at few points in history has the difference between right and wrong been so very clear.

The value of goldsmith’s notes was in the gold behind them. So when they issue a new note backed by…well backed by nothing other than the supposition that they’d have enough inventory to pay it off if it fell through…they were engaging in wishful thinking, at best. Ladies and gentlemen, I give you irrational exuberance. At the very core of our banking system.

But how could the goldsmiths get away with such blatant counterfeiting? Didn’t anyone realize that they were pulling wealth from thin air, that they were trading worthless notes for valuable goods? Well, the governments knew. Why didn’t they do anything to stop the goldsmiths?

Put clearly; it wasn’t in the interest of the world’s ruling monarchs to stop them. King Charles II of England had his own con game going with the bankers…one where they traded him physical gold for sticks of wood (I’m not kidding at all…we’ll be covering government debt next week.)

So by complying with the government’s con games and ponzi schemes, the goldsmiths earned themselves a back-scratching from the world’s monarchs, received in the form of Fractional Reserve Banking.

The Whole World Falling for the Same Tricks…500 years later

And so we arrive at the modern-day. The Dollar is the world’s reserve currency, making us in some sense the world’s goldsmith. And we have a Federal Reserve System – composed of privately owned member banks – that represents how cloudy and convoluted the relationship between governments and banks has become in the last half-millennium.

But somehow, the world economy keeps falling for the same scam.

You see, the Federal Reserve controls not only the interest rate at which banks are allowed to lend, but the fractional reserve ratios they’re required to keep (as a percentage of their reserves).

Let’s backpedal for a second here… make it even simpler. An institution composed of banks and their representatives is in control of not only our money supply, but the amount of new money (in the form of loans issued) that banks are allowed to ‘counterfeit’ and the interest they’re required to charge on those conjured-from-nowhere dollars.

Interest rates – when the decision is left to the borrower and the lender – represent the time preferences and assumed risk of borrower and lender. Like the price of any other good, the interest rate of a loan ideally represents a compromise for both parties in terms of time and risk.

But when the government intervenes with a mandated interest rate (like Greenspan’s sub-zero “liquidity experiment”) those decisions to lend and borrow are often made with little or no consideration to time and risk. Since the money is cheap, free, or the government might even be paying you to take it, incentives are changed across the board.

And then fractional reserve banking comes in. Since the banks only have to keep a percentage of their reserves – a ratio set by an institution they own…making them essentially self-governing – these ridiculously low interest rates spur the banks into a lending frenzy.

Lending to and from each other, commercial interests and private parties, the banks go hog-wild. Without the restraint of reasonable lending costs, they lend as much credit against your money as humanly possible, flooding the economy with fresh dollars that never existed before.

Euphoria takes over. Of course housing prices will continue to go up when the pool of dollars chasing those houses is growing so rapidly…that’s just common sense. But many of us bought into it, in some way or another. And that’s what makes the coming correction so painful.

The M3 Chart:
Ever wonder why the government dropped it a few years ago?

Because of the one-two punch of mandated interest rates and fractional reserve banking, an epic amount of bad business decisions are inevitably made. That’s a simple truth of economics… no matter who tries to ignore it.

But what can I do?

Well, it’s pretty easy actually. Just don’t believe all the hype, take everything with a grain of salt, and make your own decisions. I’m not telling you to protest at your local federal reserve bank, I’m just saying you should use reason and that you shouldn’t take most things at face value.

Like when the keepers of our national pocketbook – and thereby our national sovereignty – are run by the very banks they’re supposed to govern, and those banks (whose original purpose was to guard the money of the people) have a balance sheet that looks like this:

You should be asking questions.

When our government gives a US$25 Billion bailout to Citigroup (NYSE:C), and then the company’s market capitalization is listed at around US$20 Billion shortly before the company is taken over… you should certainly be asking questions.

When Detroit’s CEOs fly to Washington in separate luxury jets, and they beg for US$75 Billion in bailout money for companies with a combined market capitalization of less than US$10 Billion…you should be asking questions.

There’s a heist going on out there… and plans are afoot. Through the careful control of information sources, those in power can control the actions of the masses. But you don’t have to be a part of the masses.

To make the difference and speak out on the part of personal sovereignty, The Sovereign Society’s Chairman John Pugsley has assembled this comprehensive report to tell you about a few of their most dangerous and pervasive of lies. I urge you to have a look.

Regardless of whether you voted for the current President. Regardless of whether or not you like or even trust our country’s political and economic systems. You need to give this special information enough of your time to understand the grim situation you could be facing. Not just for your sake, but for the sake of the Sons & Daughters of America, now being laden with years and years of debt.

Source: Fractional Reserve Banking a.k.a. Counterfeiting