Bill Bonner (The Daily Reckoning, UK):

The ‘recession’ did more damage than they think

Claptrap! Nonsense! Balderdash!

Everywhere we look, someone is saying something ridiculous.

Which is good news to us. This Daily Reckoning was getting to be serious work…what with the world facing a total financial meltdown and all.

So, we’re pleased to be able to lighten up by, once again, telling you what an idiot Tom Friedman is. You already knew that? Well, it doesn’t hurt to repeat it…

We hadn’t seen much of the old Tom recently. His recent editorials in the New York Times were no smarter than before, but a bit subdued…as if some chemical trace of good sense had slipped into his system, perhaps from a paper cut. But now, he’s back, big as life and twice as stupid.

We’ll come back to Tom in a moment, but since this is a financial service, we should probably begin with the financial news.

The Financial Times is looking over its shoulder. The recession is over, it says; time to take stock of the damage.

“Beyond the Crisis… With most of the world’s economies officially out of recession, the FT launches a series examining the legacy of worst global economic crisis since the 1930s,” says the FT. But according to the figures below the headline, the crisis wasn’t so bad. The US economy walked backward only 3.5%. Now, it’s making progress again.

The FT editors should keep their eyes on the road. The ‘recession’ did more damage than they think. And it isn’t over… There’s more trouble ahead.

The ‘recession’ in the US has wiped out…

…ten years of stock market progress. Actually, stock prices are no higher than they were in 1998…

…ten years of employment progress. You have to go back to the ’90s to find a time when so few people were working in America…

…ten years of income gains. The typical household had less real, disposable income than it had 10 years ago.

In other words, a whole decade has been lost. Baby boomers are now ten years older, and less prepared for retirement than any previous generation in US history.

In Florida, joblessness has reached 11.2%. The jobless picture gets even grimmer when you consider the effect of long-term unemployment on the unemployed.

“It’s a killer disease,” says Thomas Cottle of Boston University. “People are going to be damaged and may not recover in their lifetimes.”

The FT elaborates: “The longer people are out of work the more their skills decline and the less appealing they become to employers.”

That puts the boomers in a bad spot. If they lose their jobs now they may never work again. Which means, they will face retirement with very little money…and a keen interest in making sure the feds keep the money flowing their way. They may not recover in their lifetimes…

Housing starts are at a 10-month low. Mortgage applications are at a 12-year low. As far as we can tell, both housing and employment figures are getting worse.

In short, the ‘recession’ is far from over, even if the feds are able to jive up the GDP figures from time to time.

Click here for the rest of Mr. Bonner’s insightful analysis at The Daily Reckoning, UK edition.

Don Miller (Money Morning):
The U.S. Federal Reserve may take an unorthodox approach to raising interest rates by paying interest on bank reserves rather than relying on traditional open market remedies, as it exits from its long-term fiscal stimulus programs, Reuters reported today (Tuesday).

Paying interest on reserves is mostly untested and would represent an unexpected twist in the Fed’s response to the financial meltdown.

“In the old days … the Fed controlled the federal funds rate with open market operations,” Antulio Bomfim, a former Fed economist now with Macroeconomic Advisors LLC in Washington told Reuters. “Now, at least in this period when reserves are over-abundant, the way the Fed hopes to raise the federal funds rate will be primarily by raising the interest rate it pays on reserves.”

Usually, when the central bank wants to set a target for the federal funds rate it buys or sells Treasury securities on the open market, influencing interest rates by deploying or withdrawing capital.

By paying interest on reserves, the Fed makes it attractive for banks to keep their money at the central bank as long as interest rates in private markets are lower.

By doing that, the Fed can put a floor under the lending rate that banks charge each other for overnight loans, which is the central bank’s traditional choice for influencing the economy. Open market operations to raise interest rates would be relegated to a supporting role in the initial stages of tightening.

In order to spark an economy mired in deep recession . . . Click here to read the rest of Mr. Miller’s article.

Yesterday, we had a couple of Fed Heads talking, but the Big Kahuna stood out and moved the markets with his statements… Here’s the skinny…

Big Ben was giving a speech, and said, “The Fed will monitor closely the currencies, and the Fed’s policies will ensure that the dollar is strong.” Now, when he first uttered those words, the dollar got bought and the non-dollar currencies were sold… But then, a few of us had this feeling… It was a feeling that we had heard all this before… And there – in the archives, circa June 2008 – Bernanke said, “In collaboration with our colleagues at the Treasury, we continue to carefully monitor developments in foreign exchange markets.” Wait! We won’t get fooled again!

In June 2008, his statements spooked the markets into believing the Fed was really going to do something to bolster the dollar… But when nothing came along, the dollar REALLY got sold until the financial meltdown of August 2008… I mean… What has the Fed done in the past 1 1/2 years to “bolster the dollar”? Near zero interest rates that will remain in place for longer than they should… Quantitative easing… A bloated balance sheet of toxic bonds.

You could see the V-8 moments on traders’ faces when they realized, yesterday, that all this had been said before, and nothing came of it, so… We won’t get fooled again!

So, then traders reversed their buying of the dollar and sent the dollar to the woodshed. You should have seen the reversal… It was amazing…

Click here to read the rest of Mr. Butler’s article.

Good day… And a Happy Friday to one and all! Let’s make it a Fantastico Friday, eh? Why not! It’s the Friday to kick off Mother’s Day weekend! More on that later, but first, let’s talk about the Stress Tests.

Personally I could just as easily forget about them, because as I’ve said over and over again, The Gov’t wasn’t going to “spook” the markets with “true results”… This whole “exercise” is a just another effort to make us all “feel good”…

OK, the rumor mill has finally been shut down, and the facts, as the Gov’t would let us know them to be, are out… Let’s take a gander at the results!

The Wall Street Journal (WSJ) reported it like this: 10 of the 19 largest U.S. Financial Institutions will be required to raise a combined $75 Billion in new capital.

The Washington Post (WP) reported it like this: Nine of the 19 banks do not need any new capital at all.

It’s all in the way you word it… Both of them are correct… The WSJ tells it like I think most people would want to hear it, while the WP, is for the Polly Annas of the world!

When it’s all said and done… This feel good circus is now over, and we can get back to dealing with the financial meltdown, deficit spending, China, and other things that are easier for us to deal with, like the story that came across the screens yesterday regarding credit card charge offs, than a feel good circus! Yes, the credit card charge offs are up 44% VS last year… Now, isn’t that one of those things that make you go, oooooooohhhhhh nooooooooo!

The currencies drifted most of the day yesterday waiting for the stress tests results, and then rallied at the end of the day with the euro pushing past 1.34 once again. The euro has fallen back below that figure again this morning, but remains close to the 1.34 figure.

Yesterday, the European Central Bank (ECB) did what I said would be the prudent thing to do, if you “had” to do it, and cut rates only 25 BPS, instead of the 50 BPS the markets were expecting. The euro had to deal with the dolts that think larger rate cuts are what values a currency… But, as I said before, the ECB wants to be able to come back to the rate cut table, if needed, and cut rates again.

Unfortunately for the euro going forward is the fact that ECB President Trichet, finally gave in to the “weak links” in the European Union, and announced that the ECB would begin to buy bonds to support the credit markets. This move was fiercely opposed by Germany’s Central Bank, the Bundesbank and it’s President, Axel Weber. I’m with the Bundesbank on this one… To bad Trichet “gave in”… This move now throws the European Union on the roster of nations employing Quantitative Easing… And you know where I stand with that!

Well… Today is the Jobs Jamboree for April… Yesterday, the Initial Jobless Claims fell from 635K the previous week to 601K… And, just like I said they would… The media was all over this move, pointing out that this is mostly likely an indication that the recession is coming to an end. Well… Today’s Jobs Jamboree is expected to show a fall in jobs lost too… I guess they haven’t polled Chrysler and GM workers… But any way, the “experts” believe April’s figure will be right at 600,000, down from last month’s 663,000… That’s quite a ride down the slippery slope don’t you think? I’m going to say that 600,000 is too “pie in the sky” and actual number will be disappointing compared to 600K. But, if it shows a figure below last month’s 663K, then again, we’ll hear about how all is right on the night, and happy days are here again…

That should boost risk assets… Should…

OK… About two months ago, I wrote to you all, and said I wanted to hear from the people that owned or worked at businesses that were doing well… I called them feel good stories, and this time “feel good” had a good connotation! First I was gone for March, then in April I kept forgetting to deal with it on a Friday… But not today! Today, I give you the first feel good story during this recession… A company that’s doing well, despite all the rot on the vine in the economy…

So, here’s how it will work… After the currency round-up, and final sign off, I’ll tell you about this week’s choice… So… Let’s go to the Big Finish, and get this Fantastico Friday started!

Currencies today 5/8/09: A$ .7590, kiwi .5965, C$ .8610, euro 1.3405, sterling 1.5050, Swiss .8860, rand 8.4075, krone 6.4675, SEK 7.85, forint 208, zloty 3.25, koruna 19.88, yen 99.40, sing 1.4650, HKD 7.75, INR 49.34, China 6.8217, pesos 13.10, BRL 2.110, dollar index 83.78, Oil $57.71, Silver $13.96, and Gold… $916.80
>>>>>> St. Louis based Coolfire Media (www.coolfiremedia.com ) has survived and even prospered in the recession. Companies are now looking for new outlets to reach potential clients – it is here where we have found our niche. From late 2007 to 2009, we have doubled in size and expanded our list of services to better serve our clients. We produce ideas, strategy, commercials, branded videos, websites, branded applications, radio spots, meetings and more. We have become an integrated digital media company. We collaborate with advertising agencies, corporations, organizations and entrepreneurs. Our work garners results, and when our clients do well we collaborate on future projects. We have a fun job and we have a good time doing it.

We are optimistic about the prospects for the US and for our place in the economy. With a steady stream of new clients, the addition of some new team members, and beginning the construction of our studio expansion, we feel fortunate and confident knowing things are moving in the right direction.

>>>>> hope you liked it!

Source: A Jobs Jamboree Friday!

This stock is just waiting to explode. He recommends you take advantage of this investing opportunity and says, “because of its strong dividend policies, investors will be well compensated while they wait for that oil-price rebound.”

This from Horacio:

In the face of the global financial meltdown, the price of oil has plummeted from a record high of almost $150 a barrel in July to less than $40 recently. And now it seems to be bottoming.

Clearly, this isn’t the precise moment to call a market bottom, but it is reasonable to think about a bottom around this range for a few reasons.

For starters, the forward curve of oil futures prices is showing a very marked upward slope, known in the commodities business as a forward curve in “contango.”  This means that – the farther out we go – the higher and higher oil futures prices climb. To see what we mean, let’s take a look at the projected price of oil as depicted by this graph.

A futures curve as upwardly skewed as this one provides a great opportunity for profits:  One can just buy oil today, sell it forward and hold it until December 2016 and make a guaranteed rate of return of about 62%.  In a year, you can make about 11% by just buying now, holding it and delivering in a year.  If you add some leverage to the transaction, you can make a nice return.

Some sophisticated players are doing just that: They’re buying oil, and are holding it in a tanker in port – with the obvious intent of capturing these profits.

However, this very favorable contango arbitrage is not going to last for long, as more players have been jumping into it, thus flattening the futures curve with time.  It is easy to see that, at some point, as oil gets absorbed into storage, and the curve gets inverted, the speculative players that shorted oil by selling futures long ago without having production or physical oil will be squeezed into covering at much higher spot prices.  This spike in spot prices situation will develop in less than a year, as demand recovers.

The slope of the curve also indicates widespread expectations for inflation.

From Stimulus to Inflation

The U.S. government has launched a huge stimulus package and its plan for a $3.6 trillion budget for fiscal 2010 will elevate the fiscal deficit to a staggering $1.75 trillion this year – a numbing 12.3% of gross domestic product (GDP).

And we have yet to deal with the massive social-security and health-care entitlement programs, which pose a huge fiscal threat ahead.

The financing of the announced deficits will come through issuance of U.S. Treasuries, which means that the U.S. Federal Reserve will have to monetize the debt. That is, the U.S. central bank will have to print money in order to make it available to buy the debt, since the level of issuance is so high that foreign buyers will not be able to purchase all the debt.

In addition, the Fed has already been very busy expanding its balance sheet in order to pump liquidity into the markets to buy mortgages and other assets. And it has already lowered its benchmark Federal Funds rate to a range of 0.00%-0.25%.

Why are the Fed and the government so intent in stimulating the economy?

The nightmare scenario for any central bank is falling into the so-called “liquidity trap” – a situation that exists when an economy’s asset prices enter a deflationary spiral and people reach the conclusion that by merely sitting in cash, even at a zero interest rate, they are getting richer by the day.  In that situation, monetary policy becomes ineffective, since rates are already at zero, and since it is very difficult to get out of that deflationary spiral.

That is precisely what happened in Japan during its “Lost Decade.” By the time the Japanese figured out that they needed to do something very dramatic in terms of stimulus, it was too late. The drop in prices had already created too many losses in the banking system and taken the entire system into bankruptcy.

Therefore, the theory goes, very aggressive monetary and fiscal action is needed right at the outset, in order to prevent the deflationary spiral and to actually generate some inflation.  At the same time that the United States, at the epicenter of the global crisis, is acting in this manner, countries around the rest of the world, which have been affected to different degrees, have launched their own stimulus initiatives.

China’s Stimulus Points to Strong Global Demand

China, which is at the forefront of global commodities demand, is of particular interest.  China needs to grow its economy at a minimum rate of 8% a year in order to employ the 18 million workers that join the labor force annually.  This is an imperative for a country that has dictatorial government, in order to avoid massive unrest.  That’s why in November, Beijing announced a $585 billion (4 trillion yuan) stimulus plan. It’s also why the country is taking such aggressive steps to assure access to supplies of key commodities.
Since then, the government has been aggressively buying long term access to commodities in such countries as Brazil and Australia.

Aluminum Corp. of China (NYSE ADR: ACH), otherwise known as Chinalco, has invested $19.5 billion in Rio Tinto PLC (NYSE ADR: RTP) to acquire stakes of up to 50% in nine of Rio’s mining assets.

China also struck a deal with Brazil’s Petrobras (NYSE ADR: PBR) for a long-term supply of oil.

China Development Bank, one of China’s largest state-owned enterprises, agreed to lend $10 billion to Petrobras for its ambitious deepwater-development program in order to ensure a long-term daily supply of 160,000 barrels oil. That followed a similar deal with two Russian giants. China Development Bank lent $15 billion to OAO Rosneft Oil Co., Russia’s state-owned oil company, and $10 billion to the Russian state pipeline monopoly Transneft (PINK: TRNFF). In return for the needed financing, Russia agreed to supply China with 15 million tons of oil annually for 20 years.

Hence, the outlook for commodities – given easy global monetary and fiscal policies, and a reflationary bias – is very favorable, and we are going to take advantage of it.

Enter Diamond Offshore Drilling Inc. (NYSE: DO).

Drilling for Profit

Diamond Offshore is the world’s second-largest driller by market capitalization, right after Transocean Ltd. (NYSE: RIG).  It has 31 floating rigs: nine sophisticated deepwater semi-submersibles, one drill ship for very deep water, and 21 other semi-submersibles.  In addition the firm owns only 13 jack-up rigs, of which only seven are in the Gulf of Mexico.

What I like about Diamond Offshore is its conservative, shrewd management and its commitment to shareholders.  The latter is especially ensured because of the situation of its controlling company, the New York conglomerate Loews Corp. (NYSE: L), which owns 54% of the Diamond Offshore’s stock.

Loews, run for half a century by the Tisch family, initially acquired Diamond Offshore’s assets in an opportunistic transaction in 1992.  It then sold 30% of the company to the public in 1995 and later acquired Arethusa (Offshore) Ltd. in 1996, using stock, a move that reduced its participation to the current 54%. Since that time, Diamond Offshore has been using its ample cash flow to repurchase shares from public hands.

Diamond Offshore, also referred to as DO, has been managed very wisely.  As the world’s No. 2 contract driller, DO has concentrated on the higher-priced equipment, that is, the semi-submersible rigs, which operate in deep waters.  And deep water, which require that higher-priced equipment, is where the biggest action is.

And since the specialized deepwater equipment is all taken, DO’s mid-depth equipment benefits because it can be adapted for use on bigger projects.

DO has minimized its exposure to jack-up rigs (those that rest on the ocean floor) and especially to work in the Gulf of Mexico, which has more competition and lower daily rates.

No wonder that DO’s fourth-quarter results handily beat analysts’ consensus estimates of $2.34 per share by posting operating earnings per share of $2.53.  Revenue also beat expectations, showing a 1% increase over the prior quarter.  The company also realized higher day rates and higher utilization rates.

These are all indications of strong management execution.  What is impressive about DO is that the company used the run-up in oil prices last year to enter into long-term contracts at very high prices, registering an impressive $10.3 billion backlog.  That gives Diamond Offshore a great earnings visibility going forward.

But the upside does not stop there.

There is a special situation in the making, because the Loews Group owns CNA Financial Corp. (NYSE: CNA), an insurance company that is trading at half of its book value.  You see, insurance companies have been hit hard financially by markdowns in their fixed-income and hedge-fund holdings, but Loews invested $1.25 billion in CNA last fall in a move to improve the company’s balance sheet.

And in order to be ready to defend debt ratings, a conservative management like Tisch has all the incentive in the world to keep maximizing Diamond Offshore profits to support CNA – should it be needed despite CNA’s current strong liquidity and financial flexibility.

DO recently paid one of its regular special dividends of $1.85 a share, bringing the dividend yield to almost 13%.  If this dividend is safe – and we believe that it is – this is a winning strategy for the group, given the current financial environment, and it will greatly help to maximize profits and cash flow from Diamond Offshore.

Mark Urness, a friend of mine at Calyon Financial, one of the leading energy research specialists on Wall Street, concurs with our assessment of this sky-high dividend. He estimates that DO will continue to offer the 12.5% dividend yield, which is unparalleled in the oilfield-services segment. We, like Mark, expect the company to distribute $8 a share in 2009 in the form of both the regular and the special dividends that DO has been using.

DO has been extremely disciplined with costs and with new investments, maximizing free-cash flow to almost $900 million last year.  In fact, with the ample backlog at higher prices of the contracts signed, DO should increase its free cash flow and net income to about $1.4 billion to $1.5 billion in 2009.

DO’s profit margins are impressive – and exorbitant – thanks to the shortage in rigs: Gross margins are 64% and operating margins are 54%.

These margins are likely to keep growing as management continues to execute thoroughly and oil prices rebound.  This strong growth in revenue and earnings – driven by DO’s savvy positioning in deepwater and mid-water rigs, and bolstered by rebounding oil prices thanks to global monetary and fiscal conditions – will surely help deliver much higher multiples than the meager six times earnings that Diamond Offshore’s shares are currently trading around these days.

Diamond Offshore’s shares closed Friday at $55.58. They are down 62% from their 52-week high of $147.77.

This cash-rich, profit-fountain company is a resounding “Strong Buy,” as its stock is waiting to explode to the upside.

Recommendation: Buy Diamond Offshore Drilling Inc. (NYSE: DO), a top player in its sector, and a company that is poised to capitalize on a projected resurgence in oil prices. Because of its strong dividend policies, investors will be well compensated while they wait for that oil-price rebound (**).

(**)  Special Note of Disclosure: Horacio Marquez holds no interest in Diamond Offshore Drilling Inc. (NYSE: DO).

Source: Buy, Sell, or Hold: Profit From the Projected Oil-Price Rebound With Diamond Offshore

…Markets work. Raise prices and, ceteris paribus, you will reduce sales. Increase production and, ceteris paribus, you will lower prices. Bring on a correction and people will change their feckless ways.

But one scam gives way to another. During the Great Moderation we were assured that our financial authorities had found the magic formula; henceforth, enlightened economic management, along with sophisticated, risk-dispersing financial instruments, would practically eliminate recessions and crashes. There was no need to save for a rainy day, we were assured; because it would never rain! But now we have a downpour… with markets crashing and the world facing its biggest slump ever. And now we are told that markets have failed. Now, we need Barney Frank, Ben Bernanke and Hank Paulson to run our financial system.

Wait a minute…we don’t recall Ben Bernanke warning that the world faced a meltdown when he took over at the Fed in Feb. 2006. And wasn’t Barney Frank the chairman of the House Financial Services Committee even as Wall Street was running amok, inflating the biggest asset bubble in history? We don’t remember him holding hearings about the dangers it presented until after the thing blew up. And Hank Paulson… while all this was going on, wasn’t he the head of one of Wall Street’s most go-go, derivative saturated, billion-dollar-bonus-driven firms?

Well, never mind…

But now we are supposed to believe that markets don’t work… and that these well-meaning public servants are going to save us from the evils of capitalism… and that bureaucrats will be able to fix prices and allocate capital better than Mr. Market.
Deception gives way to hallucination… correction is followed by depression.

Source: Election Day. Pity The Poor Fellow Who Wins

Well… The trading theme remained in place yesterday, but this time it was reversed. For those of you new to class, or any of you who have been playing horse hooky, the trading theme that has gripped the markets since August is: The deeper, darker, and more dangerous the U.S. economy and financial meltdown, including the credit market’s locked status, the dollar gets bought… If there is any sign of light to all this mess, the dollar gets sold, for whenever the markets get their minds off the mess, they are reminded of awful fundamentals for the dollar.

So… Yesterday, the stock jockeys must have read the Pfennig and seen that I called for a 50 BPS rate cut from the Fed… (now don’t get me wrong here… I’m against a rate cut, as: 1. it debases the currency further and 2. it will fuel, along with money stimulus going on, future inflation pressures… But! This is what I see the Fed doing, no what I would like for them to do, which would be nothing. They just cut rates 50 BPS last month, that rate cut hasn’t even filtered into the economy yet, why not wait-n-see, and not put that pressure on the dollar and inflation?

OK, I really got off on a tangent there… As I was saying, the stock jockeys read the Pfennig and noticed a call for a 50 BPS rate cut, and the stocks were off to the races! 600 points later, the Dow was looking perky… And all through the day when stocks were rising, and the overall feeling in the markets were upbeat… The dollar got sold, along with Japanese yen! This trading theme is so prevalent now that one could make some real dough if they were smart enough to trade this thing… But that’s not our bag… Really, I’m telling you that’s not my bag! (Austin Powers on a Wednesday morning, yeah baby!)

So… A currency rally that really had some meat and potatoes to stick to your bones! Stock markets around the world were strong overnight too, so maybe, just maybe, this rally can have a two-day run, and then… Who knows, right? Well… Maybe the shadow knows, and he tells me that the deep, dark, dangerous days (my poetry teacher would be proud of that alliteration!) for the U.S. are still in the cards… So be careful out there! Oh, and this just came across the screens… U.S. stock futures are down this morning, which doesn’t bode well for the stocks or the currency rally!

Consumer Confidence here in the U.S. for this month, fell to an all-time low… I saw that and said, “well it’s about time!” Not that I want gloom and doom for the U.S., I just happen to know that we already have it, and kept wondering what U.S. Consumers were so upbeat about! Well, they aren’t any longer… And wait till they get the news that the Credit Card Companies are curtailing the issuance of credit cards… Uh-Oh! If these guys that send pre-approved credit cards to grade school kids, (not really, it’s an exaggeration, but not a stretch!) are pulling back the reins, then you can be sure that they are feeling the pinch of losses from credit cards…

The Pfennig first told you that the next crisis would come from the Credit Cards… Well, it think we’re about to see it unfold right here in front of us, which is NOT exactly what beleaguered banks need right now… Or the economy for that matter!

In other news… The S&P/CaseShiller House Price Index fell once again in August (that seems like eons ago, isn’t there a way to get this data quicker?) to the tune of -16.6%! OUCH! That’s going to leave a mark! And the overall price index has fallen 20% since July 2006… The real problem though is the report indicated that the inventory of unsold homes remains very large, and that will put further pressure on prices…

You may recall me mentioning Bill Fleckenstein from time to time in the Pfennig… The most recent mention was with regards to he book: Age of Ignorance at the Fed, Greenspan’s Bubbles… I talked about it for months, as it gave me a great inside look at how badly Big Al Greenspan screwed up the economy we are now faced with. Anyway… Mr. Fleckenstein is an outspoken defender of short selling… And was interviewed by Bloomberg regarding his stance. I like his stance… Short selling is part of the fabric of the markets, and was put there for the bears… Short sellers are not jackals, hyenas, vermin or vultures, they are simply bears… How can the Gov’t ban this, and call the market “free”? Anyway… Way to stand up for what you believe, Bill Fleckenstein!

OK… I’ve sat on the sidelines too long on this next subject, and it’s time to get off the bench and get into the game… The Amero…

I know that there are people out there claiming they have Ameros, and that they were minted in Denver, and that the U.S. has shipped them all to China for holding until which time the U.S. can’t pay its bills any longer and calls for a “force majeure”, thus making the dollar worthless, and introduce the Amero. The Amero is supposedly the North American Union of the U.S., Canada, and Mexico, and that it will be back by Silver, thus the reason for the physical silver shortage…

OK… You have to ask yourself this question, if you are a believer of all this… The U.S. dollar is the reserve currency of the world, and by having the reserve currency, they are allowed to run up such huge deficits and the world doesn’t bat an eye! Why would they jeopardize this arrangement? Why would the U.S. give up the reserve currency of the world? I’m sorry, but I can’t get my arms around the Amero story…

But! If you are so inclined to believe in the Amero story, then you’ll want to make certain that you convert dollars to currencies now, before it’s too late!

OK… I’m joshing just a bit there, but in reality that’s the case… If that’s what you believe, then you had better get your dollars converted before the Gov’t proclaims them to be worthless.

Alrighty then… Back to reality (for me at least!, if you’re an Amero believer, then that’s OK!), and the reality right now is watching the euro add on to gains made yesterday! The single unit has gained 1/2-cent while I wrote about the Amero! Of course, I just put the kiss of death on the euro’s rally, by mentioning it! UGH! I seem to be a bit snake bitten lately… But, Shoot Rudy, at least I’m here to be snake bitten!

Regarding the Fed rate cut announcement this afternoon… I’ve said that I believe the Fed will cut 50 BPS, bringing rate to 1%… There is currently a 20-30% chance they could go 75 BPS… Talk about raising the “everybody out of the water flag”! That would really bring Halloween early to the markets, as they would have the bejeebers scared out them by a 75 BPS rate cut! I’ll stick to, and the Fed had better stick to 50 BPS, as if that’s not enough already to bring about memories of Jason or Freddie Krueger!

Norway’s Norges Bank, which did NOT participate in the coordinated round of rate cuts on October 8th, but then did cut 50 BPS a week later, is expected to shave another 50 BPS rate cut at their next meeting… But, I wouldn’t bet the ranch on that rate cut, based on their resistance to joining in the rate cut party earlier this month.

Norway’s krone has rallied along side the euro, and I would not like to see a rate cut from the Norges Bank…

The Bank of Japan (BOJ) announced last night that they are “mulling over” a 25 BPS rate cut this week… But come on! Since when does the BOJ tell us what they are “going to do” ahead of time? I would say they did this to jawbone the yen lower… I wouldn’t go betting strongly that the BOJ will cut rates this Friday at their meeting. Their jawboning did help yen to weaken yesterday, along with the trading theme.

And those wild and crazy guys over at Citgroup are talking up euros again… Recall, about a month ago when these guys issued a report showing charts that indicated the euro was about to take off against the dollar? Well… They’re Baaaaaacccckkkkk…. This time, they’ve tempered their call regarding euros, and it sounds a whole lot like they’ve been reading the Pfennig! Let’s listen in to see what they have to say now… “We believe the euro’s move lower against the dollar has been driven by a strong anti-risk bias that has benefited the yen and the dollar. Today’s improvement in commodities, equities, the rise in yields and emerging market improvements suggest a short-term respite that could send the euro back above 1.30 in the near term.”

That’s the trading theme in a nut shell right there! Glad to see them come around to the Pfennig’s way of thinking! But… If a spanner gets thrown into the works, and the deep, dark, dangerous clouds begin to gather over the U.S. economy again, those improvements seen yesterday will be wiped out in a NY Minute!

OK… A quick check of Economic releases today… Oh, here’s one… Durable Goods for September will print today… Recall last month’s print was awful at -4.5%… This month’s report should remain in negative territory, but probably not as awful as the previous month.

And… Then the Big Kahuna of them all… The FOMC rate announcement that will come right after lunch time today… Fed Funds are already trading at 1%, so, the announcement of 50 BPS is expected by everyone at this point! Should be bad for the dollar, but then… Will the current Trading Theme’s grip be too tight?

Currencies today 10/29/08: A$ .6460, kiwi .5750, C$ .7925, euro 1.2810, sterling 1.6020, Swiss .8715, ISK (no quote), rand 10.22, krone 6.7075, SEK 7.7210, forint 199.50, zloty 2.83, koruna 18.77, yen 96.75, baht 34.90, sing 1.4940, HKD 7.72, INR 49.71, China 6.8485, pesos 12.9590, BRL 2.1675, Dollar Index 85.45, Oil $66, Silver $9.27, and Gold… $748.66

Source: A Currency Bounce…

It’s not a new subject for Soros. He accurately predicted the crisis in subprime loans that punctured the lung of the financial markets.

In the interview Soros also slammed Treasury Sectretary Hank Paulson, saying the onetime Goldman Sachs boss was part of the very Wall Street system of “financial engineering” that caused the crisis in the first place.

Soros also said the American consumer economy — what he called the “motor” of the world economy — has now been switched off.

Watch it here.

During Senate hearings last week, all parties involved completely ignored the Fed’s own culpability in igniting the speculative fever that caused the current conflagration.  It’s as if a senior prom had turned into a wild bacchanalia, and angry parents are now asking why the chaperones failed to notice the disrobing or why the DJ played provocative music, even as they ignored the bearded gentleman pouring grain alcohol into the punch bowl.

The Inflationary Shuffle

A perfect illustration of the Fed’s failure to take responsibility can be found in central bank Chairman Ben S. Bernanke’s explanations regarding inflation, which he solely attributes to the effects of the rapid increase in global commodity prices.  He failed to mention that commodity prices are rising as a direct consequence of his monetary policy, which is debasing not just the U.S. dollar, but currencies around the world.

Rather than accepting the blame for creating inflation, Bernanke is shifting the blame to the free market.  Senators seemed happy to let him get away with the subterfuge, since it provides more evidence to support the “need ” for more government to save the economy from the disastrous effects of unbridled capitalism.

When asked how we got into this mess, Bernanke replied that our problems resulted from an excessive credit bubble characterized by aggressive leverage, reckless lending, and extreme risk taking.  Absent from his laundry list of catalysts was the Fed’s role in irresponsibly setting interest rates below market levels, which mispriced risk, got the party started and kept it raging into the wee hours of the morning. After drinking that potent punch, it’s little wonder that Wall Street investment banks were stripped financially.

For much of this decade, the objective of the Fed has been – and continues to be – to encourage and facilitate borrowing and lending.

Defending a Bailout

During his testimony, Bernanke continued to claim that The Bear Steams Cos. (BSC) was not bailed out. His reasoning: Shareholders only received about $10 per share.  Of course, $10 is better than zero, which is what they surely would have received if the Fed hadn’t thrown taxpayer money around.  What about Bear’s creditors though?

Although the collapse of Bear Stearns would have cost bond holders dearly, the bailout essentially makes them whole.  Here again, the Fed creates an even greater moral hazard by encouraging excessive risk taking.  By bailing out lenders who extend excessive credit, the Fed simply invites more of that behavior.  The free market must be allowed to properly price risk.  Lenders need to know that when they lend money, whether to highly leveraged investment banks and hedge funds, or to over-stretched homebuyers or credit-card users, they run the risk of not getting paid back.  By interfering with this process, the Fed simply guarantees more losses and even bigger bailouts in the future.

Also, leveraged speculators need to know that it is not “heads they win, tails the taxpayers lose.”  Wall Street executives amassed fortunes by making extremely risky bets.  Now that those bets have soured, why is it that the taxpayers have to eat the losses?  Wall Street billionaires earned their bucks on the backs of the middle class, who made little on the way up, but are now forced to foot the entire tab for this mess on the way down.

While Bernanke talked about the underlying strength of our economy, he cried “necessity” in deciding to save Bear Stearns from bankruptcy, claiming the failure would have brought down our entire financial system.  How sound can our economy be if the failure of one investment bank can cause it to topple?  Does this now mean that no more major banks or brokerage firms will be allowed to fail?  Since we routinely accused Japan of practicing “crony capitalism,” what do you suppose we should call our own version?

Not to be outdone in rewarding reckless behavior, Congress earlier last week passed $15 billion in tax breaks for homebuilders, who had made their fortunes overbuilding during the bubble and unloading their shares to a gullible public.  By threatening to hold back on their political contributions, these same homebuilders are awarded still more billions.  The last ones we should be subsidizing are homebuilders.  After all, the last thing we need right now is more homes.

The legislation also contained a provision that offers generous tax credits to individuals who buy homes out of foreclosure.  While this is billed as a benefit to homebuyers, it is just another handout to lenders, since the prospective buyers qualifying for the tax breaks will simply pay more at auctions as the tax breaks subsidize higher bids.  The real winners are the creditors who will now get more in foreclosure than they would have had buyers not been counting on having their bids subsidized by the government.

Of course, for all the talk about taxpayer bailouts, none of the Senators bothered to mention that – for the moment – no tax increases actually are on the table.  Instead, the bailouts are being financed by savers, pensioners, wage earners, investors and the elderly on fixed incomes, who all suffer staggering increases in their costs of living, as the Fed uses inflation to rob Main Street to pay off Wall Street.

[Editor’s Note: Money Morning Guest Columnist Peter D. Schiff is the president of Euro Pacific Capital Inc., a Darien, Conn.-based broker/dealer known for its foreign-markets expertise. A well-known financial author and commentator, Schiff is a regular Money Morning contributor, and has most recently written about the ineffectiveness of the U.S. Federal Reserve, the fiction of the Bush Administration’s professed "strong dollar policy", the futility of "juicing" the economy and soaring gold prices. In mid-August, when analysts were touting beaten-down financial shares, Schiff said the stocks were "toxic," were destined "to get hit hard," and advised investors to "stay away." Investors who heeded that advice, and avoided such shares as Merrill Lynch, also avoided some stressful, subprime-induced losses. Check out Schiff’s first book, "Crash Proof: How to Profit from the Coming Economic Collapse," which was published by Wiley & Sons last February.]