Precious metals have always been intriguing to investors because they tend to hold their value. In times of geopolitical crisis or currency devaluation, for example, the value of paper money might fluctuate, but a hard asset will always be worth something. As a result, historically, precious metals have been considered a “safe haven” in times of economic and financial instability.

That brings us to why gold is on a tear today. It declined in 2008 and early 2009 as panicked investors rushed into cash in an attempt to weather the financial crisis. But sometime in the middle on 2009, when investors began to move their money from the sidelines, gold started to rally. It returned 32.59% through the third quarter of 2009, vs. 19.26% for stocks.

The question is, where can we expect gold to go from here? In order to predict whether gold prices will skyrocket or come crashing down, it’s important to understand the principal factors that affect the price of any commodity: supply and demand.

The supply side of the equation is not particularly relevant in regard to gold because gold supplies remain fairly constant. That’s because production has not significantly increased due to a lack of new mining sites. Should supplies increase, however, investors may want to be cautious.

The demand side of the equation, then, is the one gold investors must look at. And as we noted above, demand for gold tends to increase when investors have a lack of confidence in the U.S. economy and financial markets.

That’s certainly the case today. In fact, we see two factors, that could lead gold to outperform in the near future: inflation and currency devaluation. In response to the financial crisis of 2008 and 2009, the Federal Reserve injected massive amounts of liquidity into the money markets. Ultimately, that increase in the money supply could devalue the U.S. dollar and lead to inflation. In fact, the U.S. dollar is already shockingly low. On October 14, 2009, it fell to a 14-month low against the euro, hitting $1.4947, the weakest since August 2008, according to Bloomberg. And while inflation is not yet a problem, economists are on the lookout for it.

These conditions led Standard & Poor’s (S&P) to raise its gold price assumption for 2010 from $750 per ounce to $800 per ounce. “Investors seeking a hedge against inflation risks and uncertainty in the financial markets continue to support gold prices,” the S&P analysts write. “The metal’s properties as a safe haven, and to a lesser extent the demand for jewelry, also support its longer-term price prospects.”

S&P’s estimate, however, may be on the low side. As of November 2009, gold was trading at more than $1,000 per ounce. And since gold exceeded $1,000 per ounce level, the price has been extremely resilient, with no meaningful pullback seen. There have been periods of profit-taking, but increased demand quickly appears on any weakness in price.

In sum, then, good old-fashioned gold fever is back—and investors who are looking for a promising trend may want to consider investing in it and other precious metals.

But don’t consider gold an investment only for troubled times. One of the greatest advantages of precious metals exists regardless of economic and market conditions. Precious metals tend to perform differently from other assets. As a result, investing in precious metals may be a good diversification strategy for a portfolio comprised mainly of stocks, bonds and real estate—in all environments.

This article was written by OilPrice.com – who offer free information and analysis on Energy and Commodities. The site has sections devoted to Fossil Fuels, Alternative Energy, Metals, Oil prices and Geopolitics. To find out more visit their website at: http://www.oilprice.com

Walking the long, windy road toward the demise of the dollar, we spy another mile marker today: China is officially putting their money where their mouth is.

After clamoring for a reserve alternative all year, the Chinese government agreed to a $50 billion currency-diverse deal with the IMF today. Back in June, the deal seemed imminent. This morning, it finally came to fruition.

In their deal with the IMF — the first of its kind for any nation, ever — China buys $50 billion worth of bonds denominated in Special Drawing Rights, which will represent a basket of global monies. (That basket will be a split between the dollar, euro, pound and yen… not exactly the gems of the global currency batch.)

Still, it’s probably a win for China on several fronts: They get to ditch the dollar (sort of) without making a big geopolitical stink. In fact, since their funds will prop up the IMF’s rescue coffer, China gets to play the global good guy for once — while also purchasing some political influence over the IMF.

Russia and Brazil have each promised to buy $10 billion of these bonds, as well.
The U.S. dollar has already given back gains made earlier this week. The panic on Monday and Tuesday helped bump the dollar index up to just shy of 79. But the buzz has worn off, and the DX is right back to where it started the week, around 78.3.
Gold, on the other hand, has done nothing but rise this week. The spot price inched up, thanks to its “safe haven” status, and then accelerated skyward as the dollar fell. The spot price is up to $985 this morning, from $950 and change on Monday. That’s a three-month high.
“Over the past four decades, September has been the best time for gold in terms of its month-over-month price appreciation,” Frank Holmes reminds us in his latest Daily Reckoning essay. “You can see this on the chart below — in a typical year, the price of gold in September rises 2.5% above its August price. The gold price has risen in 16 of the 20 Septembers since 1989, by far the best success ratio of any month of the year.

“What accounts for this predictable trend?

“September kicks off several of the planet’s most potent gold-demand drivers:

• The post-monsoon wedding season in India and Diwali, one of the country’s most important festivals
• Restocking by jewelry makers in advance of the Christmas shopping season in the United States
• The holy month of Ramadan in the Muslim world, whose end in late September is marked by a period of celebration and gift giving
• And in China, the week-long National Day celebration starting Oct. 1 and the run-up to the Chinese New Year in early 2010.

“Based on the long-term record, this may represent a good time for investors who want to establish or add to a gold or gold stock position in advance of seasonal demand growth. The guidance provided by historical patterns may improve the chances for investment success, but of course, there are no guarantees that this September will follow the well-established trend.”
For stocks, traders took a breather after Tuesday’s sell-off and finished yesterday around break-even. This morning, the S&P 500 opened just a bit higher, thanks mostly to this:
Chinese banks lent more money in August than many had anticipated, the China Securities Journal reported this morning. At $24 billion, that’s right around July’s level.

If you recall, it was a rumor that Chinese lending had slowed even further in August that sent stocks around the world plummeting Monday. Thus, this “not so bad” report shot the Shanghai Composite up 4.8% today, and has helped other worldly indexes start off in the black. (Whether more easy money in China is a good thing… well… traders can save that for another day.)
“Market prices should reflect underlying demand and supply,” notes Chris Mayer. “As in a vegetable stand, the prices come from the buying and selling of people in the market.

“But with all the artificial stimulus money floating around, here and abroad, you can never be sure of what you see. Is this a real recovery or is it an artificially ripened tomato, and hence an imposter? When the stimulus money stops flowing, will the recession get worse?

“CNN’s bailout tracker reports that U.S. government stimulus has totaled $2.8 trillion so far this year, with another $8.2 trillion in commitments. Most of this money has gone to the financial sector. Some of it has gone to infrastructure projects and to consumers (“cash for clunkers,” for example).

“That is a lot of money. It is hard to say how all of this spending has artificially boosted economic activity in some sectors of the economy. It is obvious that such spending cannot continue indefinitely.

“Take a look at this next chart, which shows you how the stimulus spending reaches a peak sometime in early 2010 at $57 billion and then takes a dive.

“Of course, the government can always decide to spend more. But as it is now, this is a pattern of spending we can expect to distort the various sectors it flows to. You can see also on the chart where the money goes, including that big red layer that goes toward highways and transportation.

“We may yet see a surge in business activity as we get to 2010. But after that, we’ll see if this seeming recovery in the making is real or manufactured by funny money.”

If the latter scenario occurs, wouldn’t you want a portfolio full of companies in essential industries… like water, food and energy? That’s part of the reasoning behind Chris’ latest project: The Primeval Portfolio. Check it out here.
Whether real or artificial, hopes of recovery got a firm slap this morning, courtesy of the data patch. Here’s the quick and dirty:

• The U.S. service sector contracted for the 11th month in a row, the ISM said today. After Monday’s ISM manufacturing gauge, which showed surprise growth, traders had their fingers crossed for a score above 50 in today’s ISM service sector reader. Not so, said the group. Their index stood at 48. In other words, 70% of our economy was still shrinking in August
• Retail sales fell 2.9% in August, the 12th straight month of decline. Despite of the “back to school” rush, only low-cost brands showed signs of life last month… Costco, BJ’s, Gap, Aeropostale, Target and T.J. Maxx all outperformed
• Jobless claims from last week came in at 570,000, worse than the Street expected. Coupled with yesterday’s worse-than-expected ADP jobs report, the outlook is none too rosy for tomorrow’s government employment data
• Personal bankruptcies shot up 24% in August, year over year, putting the U.S. on track for over 1.4 million filings this year.

And here’s the one statistic that troubled us the most this morning: Student debt grew 25% in the 2008-2009 school year, says the latest from the Department of Education. So much for “the great deleveraging.”

Total student loans outstanding exceeded $75 billion during the period, up from roughly $60 billion the year before. An estimated 66% of U.S. college students borrow money for school, with the average individual debt load of $23,186 by graduation.

So let’s get this straight… the next generation is borrowing more than ever, at a faster rate then ever, during extremely worrisome credit conditions, heading into the worst employment environment in recent history, while on the verge of inheriting the biggest federal debt burden the world has ever known?
“Don’t let the recovery pundits fool you,” urges our currency adviser, Bill Jenkins. “As just about everyone knows, the stock market crashed in a big way in 1929. What most don’t realize is that it rallied 15 times before it hit bottom fours years later, having lost 90% of its value.

“And the truth is, when adjusted for inflation, the market didn’t break even again until 1960. (If you’re a ‘buy-and-hold’ investor, you MUST account for inflation. It is the single biggest ‘invisible’ tax in our wonderful Fed-managed economy.)

“But before people could get too happy with making money again, along came President Johnson and the ‘Great Society.’ I don’t know who it was so great for — the market began crashing again in ’66. Once again, adjusted for inflation, it didn’t get back to break-even for another 30 years.

“So 30 years from the Great Depression to the Great Society. Then 30 years from the Great Society to the Great Depression II. Each of the peaks resulted in 10-15 years of declines.

“We are now in just the second year of this disaster. We are witnessing an almost-perfect copy of the first Great Depression. And there are more nasty little secrets in the economy, waiting like ticking time bombs to explode. We will see more businesses in trouble, more banks failing, more foreclosures and more commercial real estate losses.

“At the end of June alone, there were over 5,300 commercial properties in the United States in default. That’s more than double the number from the end of 2008 — and there are still six months to count. Still think American companies are recovering? What will a 300% rise in commercial defaults do for jobs? Profits? Banks?

“So don’t let the recovery pundits fool you, even though they’re out in force.”
“I’ve recently moved to Florida from South Carolina,” a reader writes, “and we decided to rent the first year here, for several reasons. But now that we’re here, we’re thinking of staying renters for a while. My wife and I realized that by living in Florida and — here’s the key part – renting, we’re saving about $15,000 per year.

“After we read the news about Florida losing population for the first time in 50 years, it got us thinking — what are the prospects for Florida? I don’t think they’re as sunny as they used to be.

“Here’s how our savings add up:

• Don’t have to pay property tax, which is 2% of the purchase price where we are (Palm Beach County) — so that’s $10,000
• No homeowners insurance in Hurricane Alley, which saves us another $2-3,000
• No homeowners association fees, which are $3000 per year in the neighborhood we’re currently residing. Many neighborhoods are higher.

“Add it up and we’re saving $15,000-plus as renters. I don’t think we’re missing out on any home price appreciation, so tell me, why do I want to own a home in Florida?”

The 5: We’re not the right people to ask. This editor’s been renting a condo in one of Baltimore’s more swanky/artsy neighborhoods for over two years now. It’s close to the city — but quiet — with a great park in the backyard and the sexiest pool in Baltimore. It’s not without faults, but we really like it.

Despite it being one of the city’s finer locales, the condo’s owner — who got together with some friends and made an investment in the building during the bubble — hasn’t rented the apartment at a profit for years… if ever.

The idea of owning a home has its merits, but watching him sink underwater on this place has been tough (he’s a really nice guy) as well as educational. Of course, we don’t have “a place of our own,” and we’re not “building equity,” “establishing credit” and all the other mortgage broker sales pitches. But after watching all this go down, that seems like a risk worth taking.

Source:  China’s New Investment, Student Debt, The Faux Recovery and More!

Major U.S. stock indexes <.DJI> <.SPX> <.IXIC> were down nearly 2 percent in afternoon U.S. trading as investors fretted that chatter from hedge funds on a bank failure could prove accurate.

The decline came despite upbeat economic news from the United States and euro zone as well as a stabilization in Chinese shares after a rout on Monday.

The hedge fund talk “is a huge driver” of currency markets, said Dan Cook, senior market analyst at IG Markets Inc in Chicago. “When you have data like we had but the Dow drops, people are running for that safe haven.”

In midafternoon trading in New York the dollar index <.DXY>, which tracks a basket of six major currencies, was up 0.8 percent at 78.786, rebounding from a session low of 77.944, according to Reuters data.

The dollar was little changed against the yen at 93.01 yen, slightly above Monday’s seven-week low of 92.53, according to Reuters data.

But the yen was up 0.9 percent against the Canadian dollar , 0.7 percent against the Swiss franc , 0.8 percent against the euro and 0.8 percent against the pound .

The euro was down 0.9 percent against the dollar at $1.4205 , well below a session high of $1.4377 .

WHAT RECESSION?

The U.S. manufacturing sector expanded in August for the first time in more than a year and a half. The Institute for Supply Management’s index of national factory activity rose to 52.9 from 48.9 in July. For more see

Separate data showed pending sales of previously owned U.S. homes raced to a two-year high in July, further evidence the housing market was on a steady recovery path.

“Clearly, the U.S. data is surprising to the upside,” said Jack Iles, senior portfolio manager who helps manage $2.5 billion assets at MFC Global Investment Management in Boston.

But despite a batch of upbeat U.S. economic numbers, major currencies remained in ranges as investors continued to debate about the outlook for the global economy, analysts said.

“At the end of the day, the market is still in wait-and-see mode,” said Firas Askari, head of currency trading at BMO Capital Markets in Toronto. “We’re getting jostled around by every piece of data that comes out and I don’t think there’s a consensus that this economy has legs.”

Data released earlier also showed euro zone purchasing managers’ index (PMI) rose to 48.2 in August against forecasts for a 47.9 reading while German unemployment unexpectedly fell in August.

The data comes before a European Central Bank policy meeting on Thursday widely expected to keep benchmark rates steady at a historic low of 1 percent, with the focus on policymakers’ outlook on the economy.

Sterling erased early gains against the dollar and the euro after an unexpected dip in UK manufacturing in August, stoking concerns about the pace of recovery in the British economy.

Sterling was down 0.9 percent at $1.6135 , after touching a six-week low, and was little changed against the euro at 88.02 pence .

In other trading, the Australian dollar fell 2.1 percent to US$0.8265. The Reserve Bank of Australia, holding its cash rate at 3.0 percent as expected, said the current low level of rates was appropriate, countering speculation it would adopt an explicit tightening bias.

Sept 1 (Reuters)

You can rest easy today… the financial crisis is over.

CIT Group, the new epicenter of systemic financial risk, got thrown a lifeline this week from its bondholders. As we reported Friday, the company needed $3 billion — fast — in order to stay afloat. It was rightfully denied a government bailout, but was able to strike a last-minute deal with holders of its debt. Of course, the market rejoiced… the S&P 500 rose 1.1% yesterday largely on the news.
But again, we’re calling the market’s bluff. Anybody read the fine print of this deal? The loan was secured by “substantially all unencumbered assets.” That lawyer talk means CIT will have no collateral left over for a similar deal in the future. What’s more, the company will have to pay 13% annually on the $3 billion loan… no small order.

But most importantly, the whole deal is an ugly microcosm of 2008-2009. No problem has actually been fixed at CIT. The business still finances loans to tens of thousands of small businesses by borrowing from the credit market. CIT’s business model is still broken. They are still massively in debt. All they’ve done is create another liability.

(Just as we were about to publish today, CIT filed a warning with the SEC, saying that their bondholder rescue might not keep them out of bankruptcy. Wouldn’t you know it – they’ve got more bills coming due! On August 17th they’ll have to cough up another $1 billion. And so the madness continues.…)
Nevertheless, coupled with the recent earnings surprises from JP Morgan, Goldman Sachs and Citi, “investors were encouraged to see that the financial sector can take care of itself, without government bailout funds,” as CNN put it. Heh… right.
“Anyone who takes this as evidence of a recovering economy should work for the government,” sneers Bill Bonner. “Only a government economist or a mental defective (excuse us for being redundant) could believe that genuine prosperity can be built on a foundation of speculating by large financial institutions. You can see why by asking a simple question: Whom were they trading against?

“The banks’ core business is actually getting worse! The core business of banking is lending to people who are capable of paying it back — out of earnings. If the borrower is counting on higher house prices… or higher stock prices… to allow him to refinance on better terms, the lender is asking for trouble. Prices may go up… or they may go down. And if they go down, down goes the lender’s collateral too… and his hope of getting repaid.

“The banks made big mistakes in the bubble years. And now they’re paying the price. But so far, they’ve only made the first installment payment. Subprime loans started going bad two years ago. Then, people began losing their jobs… and loans of all sorts were in trouble.

“There is no sign that this process is over. Instead, it is merely proceeding in good order… just as you’d expect.”
The stock market rally has been tempered today. Ben Bernanke is testifying on the Hill — as good a reason as any for traders to sell a few shares. As we write, the S&P 500 is down 0.5%.
“Here’s a way to take some risk out of biotech investing,” says our small-cap adviser Greg Geunthner. “Check out the clinical testing sector. Companies in this industry oversee and review tests performed by the big pharmaceutical corporations, as well as biotechs. Usually, these firms offer full regulatory compliance, as well as laboratory services for a variety of clinical tests.

“Thanks to a regulatory environment that’s becoming increasingly difficult to navigate, drug companies large and small are outsourcing research and development spending more often. In fact, R&D outsourcing is increasing 17% per year. This puts clinical testing firms in prime position for tremendous growth.

“That’s why we’re looking at a virtually unknown clinical testing industry leader right now. It’s been in business for two decades, and it’s about to kick its business into high gear. It’s taking its newfound cash flow and investing it back in its business. Management has also laid out an aggressive plan, which includes the company completely paying off its long- and short-term debt by the end of the fiscal year, as well as growing its biomarker services division to meet growing needs in the industry.”

Want the ticker? Check out Greg’s Penny Stock Fortunes.
The California budget crisis has come to and end, but it looks like the whole mess is really just beginning. State lawmakers closed their $26 billion budget gap last night in a manner that will likely irritate every single special interest group in California and send shivers down the spines of the other states still facing similar crises.

So how’d the Governator and his brood pull it off? $15 billion in budget cuts, including mob-inducing measures like cutting health care benefits for underprivileged kids and cuts for welfare, education and municipal governments. Almost $4 billion will come from “new revenues,” aka higher taxes. $2.1 billion will be borrowed and the remainder will be “fixed” with good old-fashioned accounting fraud… no kidding. For example, the government will shift the last state payday of the current fiscal year into the next. Save that little problem for 2011!
No surprise, California’s faux budget fix failed to inspire a dollar rally. The dollar index found a new six-week low early this morning at 78.6.
When it comes to the fate of the U.S. dollar, “Two tsunami waves are crashing in to one another,” Rob Parenteau told us last night, “debt deflation on one side, and policy inflation on the other.” Rob delivered quite a speech at our first ever meeting of the Richebacher Society, amid the spectacular views of the hotel’s rooftop lounge. Our highlight came during a period of open dialogue between Rob and Riche Society members when he was asked how will we know when deflationary period is over and inflation — or hyperinflation — begins?

The answer, said Mr. Parenteau, is found in credit and wages. No matter how inflationary the government may be, true hyperinflation can’t be had until the consumer has access to excessive credit and his wages rise as the value of money falls. In the current environment, where credit is tight and wages are falling, rapid inflation would only be possible if there were a true crisis of confidence in the dollar. If that were to happen, he assured us, it’d be pretty obvious.

(We apologize to Rob if we hacked up his much more eloquently phrased explanation. Regardless, the first meeting of the Richebacher Society was a notable success. If you’d like to be around for the second, look here.)
Gold is holding steady after yesterday’s rally. The spot price hit $950 yesterday and has stayed put since.
“Around the world, miners are finding out that a mine is only worth something if you can keep it,” warns Chris Mayer. “And mining companies are finding it tougher to keep them as governments seize them or rewrite deals.

“Rio Tinto, for example, was knee-deep in a $6 billion iron ore project in Guinea. The government just stripped it of 50% of the mine. Guinea said Rio Tinto was moving too slowly.

“The problem is that as commodity prices have crashed, companies have cut back and slowed down new projects. But governments in these developing countries, which granted the rights to mine in their countries, were banking on getting all kinds of royalties and taxes. Plus, governments don’t want to see job losses, which in a lot of these countries could be seeds for unrest.

“China, for instance, is threatening to revoke a coal license from ArcelorMittal after the company warned it would cut jobs. In South Africa, the largest trade union wants the government to nationalize all the mines. In Zimbabwe, in Zambia and other countries, miners face all kinds of political threats.

“In short, political risks are on the rise. It’s fallout from the economic bust. Times are tight everywhere, but only governments don’t cut back. They just figure out new ways to grab money. So for now, focus on valuable resource companies in safer jurisdictions.”
Last today, a (little bit creepy) sign of the times: The depression has caused a revival of the DIY home burial.According to The New York Times, there are now at least 45 organizations around the country that help families bury their loved ones in their backyards, compared to just two in 2002. The rag says the average American traditional funeral costs about $6,000 and, naturally, families and the soon-to-be departed are looking for ways to save. The family the paper interviewed spent just $250 on their father’s burial.

Our favorite bit from the story was a fellow named Chuck Lakin. The humble old carpenter specializes in multipurpose coffins for home burial. After all, if you’re going to shell out a couple hundred bucks for a pine box to rot in, might as well have a place to store some of your favorite books while you wait for the hereafter.

How morbidly convenient!

“We’ve been looking around in Florida at foreclosures/short sales,” writes a reader, “and talking to people and have come to realize that the housing stats y’all get grossly underestimate the direness of the situation. We came across an approximately 300-unit condo project in Panama City Beach that purportedly cost the builder (bank) $66,000,000. These units were being pushed by a realtor for less than $200K each (159-199K). This realtor led me to believe that there are very few of these available (as in these are being ‘released by the developer’). Another realtor told me they are a bunch of short sales. I later learned that 15 are owned by individuals (sold in the past year), 20 are owned by some company in New York and the rest are owned by the apparent developer in Texas. It was like a beautiful ghost town. These condos do not show up as foreclosures or anything close.

“Talking to another realtor in Orlando, he had stories of people living in their homes for at least 18 months without making a payment and not receiving foreclosure notices. These also do not show up in the distressed numbers. The banks are using very creative ways of keeping from flooding the market and propping up prices as much as they can just to get whatever they can. We’re going to rent and figure the whole nasty thing out. Buyer beware.”

The 5: Thanks for your note. You are likely the first person to ever accuse us of grossly underestimating the housing bust. Considering vintage promotions like this, we don’t know how we could have rang the bell much louder.

Source: Banks on the Mend? Biotech Safe Haven, CA’s Budget Crisis, DIY Funerals and More!

Good day… And a Tub Thumpin’ Thursday to you! I’m late, I’m late! I don’t believe I ever heard the alarm go off this morning! I overslept by more than an hour, and will still be here more than an hour before any sign of someone else! But! That puts me behind by more than an hour today… I’ve got to play catch-up! So, let’s get this Tub Thumpin’ Thursday going!

Well… Let’s see… G-8 never had the opportunity to shoot fireworks because China’s leader had to return home to deal with the street riots going on in his country. So… The call for a replacement for the dollar as the reserve currency will have to wait for another day! And, with that news, the dollar got to remain in the sunlight, and bask in the glory of being the reserve currency and so-called “safe haven” another day…

There was added Risk Aversion yesterday when it was reported that an Australian shipment of coal to China was cancelled… This sent bad vibes through the markets for the currencies and commodities with the thought that China was putting the brakes on their buying of raw materials, and that their recovery had not taken hold like many had believed…

But… Overnight, calmer heads have prevailed. You see, it was my opinion when I heard that news yesterday, that it was simply one bad shipment to a customer that was having difficulties… Not ALL OF CHINA! And then overnight the data came out… This was one shipment, maybe 150,000 tons of coal… Australian coal shipments to China on a monthly basis run about 3 million tons! I truly believe that Australia’s trade with China is on terra firma, and this was a one-off deal that went bad… I also believe that the sell-off of the Aussie dollar (A$) was completely overdone… Completely!

I don’t know this to be a fact… But, given the relationship of the Asian investors and the A$, I would think the Asian investors to be licking their chops to have the opportunity to buy the A$ at these lower levels! Buy on the dips, right? Don’t I always say that to be a prudent investment strategy?

Of course it didn’t hurt that U.S. stocks rebounded yesterday a bit on the news that Alcoa’s losses weren’t “as bad as expected”… Talk about setting the bar low! It’s not like ALCOA didn’t still have a LOSS! But, don’t get me started on this mental giant thought process that has a grip on stocks these days… “oh, don’t worry, you only burned down 1/2 of the house, I would have expected it to all burn down!”

I’ve got to leave that alone before I really burst! Let’s see, what can get my mind off of that subject… OH! The Bank of England (BOE) just announced that they would keep rates unchanged. Well, my goodness, what else would we expect them to do? Their base rate is .50!

Here in the U.S… The Obama administration is trying desperately to nip in the bud, the whispering campaign for another stimulus package… “No one in the administration is talking about a second stimulus at this point,” said Robert Nabors, deputy director of the Office of Management and Budget. However he also mumbled something about how the President is not “ruling anything out”…

I don’t care what they say… I’ll believe it when I see it… And I still believe that the Gov’t will believe that another stimulus is needed…

One of the discussions that I had with my fave economist the other day was about “delaying the inevitable”… I’ve talked about this before, but for new readers, I thought I would give them a dose of “Chuck’s Thoughts” this morning… (HA! As if they don’t get that every day!)

This “delaying the inevitable” is all about the TARP (troubled asset relief program) and how it all did was allow bad banks to continue to be bad banks longer, with toxic waste in their portfolio… This, even in the face of a suspension of the mark to market rules! Bad Banks should have been sent packing, then… And now, all we’ve done is let them hang on to cause even more collateral damage!

OK… I’ll get back to the daily discussion now…

It looks as though the auction of $35 Billion in 3-year Treasuries went smoothly, which is another reason the dollar was strong yesterday… Every time one of these auctions go smoothly, the “deficits don’t matter” crowd all point and say… “see, we told you, that foreigners will always come to the auction to buy Treasuries, so it doesn’t matter what we run the deficit up to”…

Right! You just keep thinking that, and see where it eventually gets you! Ty sent me a note yesterday from an article he was reading, that plays nicely with this discussion… So… Let’s play Marvin Gaye, and see what’s going on!

“For now, the Treasury continues to find takers for government savings bonds at low interest rates. But somewhere between here and infinity lies a point at which American debt reaches unsustainable proportions, at which investors will balk at continuing to finance the American expenditures absent a higher return on their investments. Then, everything could change quickly, with interest rates soaring and the value of the dollar plummeting, as foreign investors lose faith in its fundamental value.

“We’re running this $10 trillion gamble that interest rates aren’t going to rise,” said Kenneth S. Rogoff, a former chief economist at the International Monetary Fund and now a professor at Harvard. “If they do, we could end up in a very difficult situation.”

Hey, you think so, Kenneth? My goodness, we have a new “Mr. Obvious!” I would think that we are already in a very difficult situation, given the fact that when the you know what hit the fan the U.S. had no war chest to use, like China did… Why? Because we didn’t think “deficits mattered”… Dealing with problems from a position of strength, it would have made a HUGE difference from the get-go!

However, having said that… I believe that a larger problem is still on the horizon for the U.S. and the “deficits don’t matter” flag wavers… And Hey! It’s not going to happen overnight… It’s going to be a slow, dragged out, problem that goes on for years, and then finally snaps! I’m talking about the entitlements and the retiring baby boomers… And more specifically when I’m talking about entitlements, I’m talking about Medicare!

The Big Boss, Frank Trotter, showed me a graph that he came across from the Concord Coalition the other day that illustrated this… While I wasn’t shocked, having seen this all in the movie I.O.U.S.A. and in the book of the same name, there it was again staring me in the face…

The reason I tell you all this, is that the Current Administration has no other choice but to allow the dollar to weaken considerably over the years so that these deficits that “didn’t matter” can be paid off with cheaper dollars… And it won’t be this administration that has to deal with it… That’s why this one and the previous one aren’t concerned about the size of the National Debt…

Ok, enough of all that… I didn’t mean for this to be gloom and doom! Let’s move on…

The data cupboard has the Initial Weekly Jobless Claims for us to view today… I expect for the weekly number to remain above 600,000, and the Continuing Claims to have risen… Though this all sounds bad, the markets have become comfortably numb with this unemployment data… It will take something really BIG to slap the markets in the face and say WAKE UP!

And then, finally… The Japanese yen has really been on a tear this week as the Risk Aversion crowd dominated the markets… I find it very strange that Japan is considered a “safe haven” currency, given their national debt problems… And their once “Ace in the hole” the Trade Surplus, is taking on water… But… This is what the markets do, and they are never wrong! However, there’s a road block ahead for the yen, as it trades with a 92 handle this morning… And the road block is in the form of the Bank of Japan. (BOJ).. It was reported that last night the Bank of Japan issued a statement to the markets that “they were checking FX levels”

That’s Central Bank parlance especially coming from the BOJ, for… We don’t want the currency to get any stronger, and we’re just letting you know that we’re ready to intervene if you don’t settle down. Sort of like when grandma would tell you that if you didn’t settle down she would send you to the woods to find your switch… Believe me you only didn’t settle down once!

And when the Risk Traders come back and push the Risk Aversion crowd to the back of the room… Again, we’ll see yen sell off again… So be careful here!

Currencies today 7/9/09: A$ .7845, kiwi .6305, C$ .8650, euro 1.3980, sterling 1.6260, Swiss .9250, rand 8.11, krone 6.4925, SEK 7.8590, forint 196.70, zloty 3.1150, koruna 18.55, yen 92.90, sing 1.4580, HKD 7.75, INR 48.71, China 6.8317, pesos 13.47, BRL 2.00, dollar index 80.21, Oil $61.29, 10-year 3.39%, Silver $12.95, and Gold… $915

That’s it for today… Well… I got the news from the eye specialist yesterday regarding my left eye… The tumor and the fluid on the eye is gone, they successfully shrunk it and removed it… Unfortunately it left a ring of “stuff” on my eye, and my eyesight from that eye will never get any better. Of course, I still have my right eye, so I’m not completely bummed… My cutie little granddaughter, Delaney Grace came by to see me yesterday, she wanted me to come “sit by her” She’s almost 2 now, and saying her ABC’s, and singing songs, and she showed me how she knew her right from left now… Such a little joy to be around… I’ll get to spend a whole week with her in about 10 days when we all go on vacation together… Can’t wait! Well, my lateness has put me way behind this morning, I had better get going… Don’t forget… Today is going to be a Tub Thumpin’ Thursday no matter what!

Source: Risk Returns… Slowly

Sterling fell as weak industrial output data reinforced doubts about a UK recovery. The euro dipped against the dollar, but losses were capped by a surprise increase in German factory orders that initially pushed it to a session high above $1.40.

When risk aversion rises, investors often cut holdings of stocks and higher-yield currencies and buy back the yen and dollars that were used to finance the trades.

“We’ve been getting very mixed signals, with some positive data and some very poor data, so it’s extremely difficult to pinpoint direction,” said Fabian Eliasson, vice president of currency sales at Mizuho Corporate Bank in New York.

“As a result, people are backing out of high-yield assets and into the yen and dollar. Now, the focus will turn to corporate earnings as the main driver for the market.”

The dollar was last down 0.4 percent at 94.95 yen while the euro fell 0.6 percent to 132.44 yen and 0.2 percent to $1.3946 , according to Reuters data.

Sterling dipped to the day’s low just above $1.61 after data showed UK manufacturing output fell 0.5 percent in May, confounding expectations of a 0.2 percent rise.  It last traded down 0.8 percent at $1.6148.

“The risk is clearly that the ‘green shoots’ are turning dry,” said Michael Klawitter, senior currency strategist at Dresdner Kleinwort in Frankfurt.

EARNINGS, G8

The Australian dollar was down 0.2 percent at $0.7955 after the Reserve Bank of Australia left interest rates at a record low 3 percent on Tuesday and left the door open to more cuts.

Traders are bracing for second-quarter U.S. corporate earnings, which will be released in coming weeks. Analysts said poor results, especially from financial institutions, would likely crank up dollar demand.

“If bank earnings disappoint in any way or the S&P breaks crucial levels, traders will probably start reducing long positions in (high-risk currencies) and the dollar could be bid more,” said Chris Turner, currency strategist at ING in London.

Analysts were also keeping an eye on this week’s Group of Eight leaders summit that starts in Italy on Wednesday.

China, Russia and Brazil have said they will push their view that the world needs to start seeking a new global reserve currency as an alternative to the dollar, though they admitted such a shift would take time.

U.S. President Barack Obama and Russian Prime Minister Vladimir Putin did not discuss oil prices or the dollar in Moscow on Tuesday, according to a U.S. official.

NEW YORK, July 7 (Reuters)

The greenback pared some of its earlier gains as stock markets in Europe gained ground and U.S. stock futures pointed to a higher opening on Wall Street .

Analysts said currency movements would remain subdued ahead of U.S. payrolls data and European Central Bank (ECB) and Sweden’s Riksbank comments expected later this week, while some said that the dollar may eke out some gains.

“There is some position squaring … Normally the week before payrolls numbers investors tend to be defensively positioned and right now being defensive means to be long dollar,” said Geoffrey Yu, FX strategist at UBS in London.

The market will pay close attention to U.S. payrolls figures, due on Thursday, for any signs of improvement in the economy’s health. According to a Reuters poll, forecasts are for a reading of -363,000 in June compared to -345,000 in May.

By 1035 GMT, the dollar index was essentially flat at 79.922. The euro slipped 0.1 percent to $1.4033, having touched the day’s low of around $1.3984 earlier in the day. The dollar was up 0.2 percent at 95.40 yen .

H1 PERFORMANCE

The dollar has suffered broadly in the first half of 2009 as recovering stock prices has stoked demand for risk — chipping away at the U.S. currency’s safe-haven appeal — while concerns about the U.S. fiscal position has also weighed on the currency.

The dollar has struggled the most against higher-risk currencies including sterling and the Australian and New Zealand dollars, which have each gained more than 10 percent this year.

Some analysts said that market focus may turn away from risk issues in the second half, while economic fundamentals may take up more of the spotlight, which could reward currencies whose economy are seen improving in the mid-term.

“The dollar should recover in the second half if U.S. recovery expectations increase,” said Johan Javeus, chief currency strategist at SEB Merchant Banking in Stockholm.

Other analysts agreed, but said the dollar may falter if concerns grow about Washington’s debt burden as it borrows aggressively to help its economy out of recession, along with ongoing speculation about reserves diversification.

The dollar had come under pressure last week as debate intensified about the use of an alternative global currency to the greenback, with China’s central bank renewing its call last week for a super-sovereign reserve currency.

However, China said at a meeting of central bankers in Basel at the weekend that the policy governing its currency reserves, which comprise mainly U.S. Treasuries, was stable and consistent with no sudden changes, giving some respite to the dollar.

Analysts said that while the issue of diversification would likely continue, any move away from the dollar as the reserve currency of choice could take a long time to materialise.

“There will be a structural shift away from the dollar as global players begin to diversity away from dollar assets as well (but) people are so cautious on the outlook right now. No one is too sure when to pull the trigger and they’d rather err on the side of caution,” said Yu.

In a sign that the economic downturn may be easing, euro zone economic sentiment improved more than expected in June.

A survey by the European Commission showed economic sentiment in 16 countries using the euro rose to 73.3 points in June from 70.2 points in May. The data had little initial impact on the euro.

LONDON, June 29 (Reuters)

Well… The dollar came back with some vengeance yesterday pushing the Big Dog, euro, back well within the 1.38 handle, and all the other little dogs, other currencies, followed. There wasn’t data to speak of yesterday to push the dollar higher, it was simply a case of fright, as safe haven flows went the dollar’s way after the news of a N. Korea attack warning spread throughout the markets.

Funny thing… I get a daily email from a news source that gives the highlights at mid-day… And yesterday, the email said, well, the email didn’t really “say” anything, it can’t talk! Any way, the email contained these two headline stories… 1. Crude rises for third session… And 2. Gold down for second day… I then glanced at the screen, and saw Crude Oil trading down on the day, and Gold up $5.80 on the day… So much for that news source, eh?

Yesterday, I talked about the high yielders, highlighting Brazil’s return to a Current Account Surplus… But the high yielders have more to say about the dollar’s future value… You see, it’s more than the Commodity Currencies… It’s also the Emerging Markets currencies, which seem to have a life of their own. There was a lot of talk last year about how the Emerging Markets economies had decoupled from the U.S. and a U.S. slowdown would no longer affect them negatively as a U.S. slowdown would have in the past. For a few months there, the decouple story was laughed at, as the Emerging Markets sold off just like everyone else. But then, like the Phoenix Bird, they rose from the ashes… And it’s these Emerging Markets currencies that have taken the biggest bite out of the dollar this year!

OK… This is not an endorsement to run out and buy Chilean pesos! You’ve got to be very careful with these Emerging Markets currencies, as they are smallish, they are illiquid in most cases, and they have wild swings. Take for instance two more “mature” Emerging Markets, Brazil and South Africa… These two do NOT fall into the illiquid category… But currencies like S. Korean won, and Chilean pesos definitely do!

The real point here was to talk about the decoupling… It’s happening just as those that saw that it could, said it would. It just took some time to get legs underneath themselves. Remember last year they called the action from July to December, “De-Leveraging”… This simply meant people were selling everything non-dollar and buying dollars… You might recall me questioning this thinking, but who am I to say this was wrong! Well, I read yesterday that this price action in Emerging Markets is being called the “Re-Leveraging”!

Speaking of an Emerging Markets Country / currency… The Russian ruble (illiquid!) was in the news yesterday… And here’s where, I just didn’t get the dollar strength yesterday… Here’s the skinny… Rumors were flying around yesterday that Russia is planning to revise the weightings in their basket of currencies they use to value the ruble… The rumor had the weighting in euros for the basket, changed from 45% now, to 55% in October, and 60% in December….

Now… If true… This would be HUGE for the euro! Now we just need to all be Sherlocks and find out what’s going on here… The Truth is Out There!

OK… Back to the majors!

The euro has recovered a bit this morning on the news from the European Commission, who, this morning said that European Confidence in the economic outlook increased to a 6-month high this month… The people surveyed repeated the thought that record-low interest rates, and the Government spending plans may be starting to work, and the economy may have bottomed… Hmmmm… I hate to be the bearer of bad news to these people, but I don’t think their economy has bottomed…

I say this because I truly believe there’s another hic-cup for not only the European economy, but the U.S. economy. I see where quite a few economists are now saying that the U.S. recession will in this year… Hmmm… Here’s what I think… I do think that we’ll see a quarter later this year with positive growth… But then I think it’s followed by a negative growth quarter, thus… A bump…

And… Yesterday, I talked about how we might be seeing the end of the link between stocks and currencies, and stocks had gained the previous day, and currencies had not… Well, yesterday stocks sold off, and so did currencies… But this time, I think it had more to do with the N. Korea news than any “link” between the two… I really do think we’re beginning to see a break… Let’s hope so, because that would mean that we’re taking baby steps toward getting back to “fundamentals”…

And these fundamentals include the fact that stocks and currencies have a low correlation to each other, and different pricing mechanisms…

U.S. Treasury yields continue to climb with the 10-year Treasury gaining 19 Basis points in yield yesterday… That pushes the annual climb in yield for this note to 148 Basis points… Hey! You can’t say I didn’t bring this to your attention before it happened!

My friend, Bill Bonner, had this to say about Treasuries yesterday in the Daily Reckoning (www.dailyreckoning.com) “The US Treasury market is in a bubble. Like all bubbles, it will pop. And as always, when bubbles pop, there are those who get hurt – and those who profit. The difference is how well you’re prepared for it.”

Oh, and one more thing… With Treasury yields rising… Mortgage rates will HAVE to follow… And that’s not going to make Messrs Obama, Bernanke, Geithner and anyone else involved in artificially keeping mortgage rates low, happy… But, that’s fine with me! I don’t really care if they are happy with this development or not! They are responsible for this rise in yields, so they can only be unhappy with themselves!

In New Zealand overnight… The 2009-2010 Budget printed, and showed remarkable restraint (for New Zealand!) The Finance Minister, Mr. English, then spoke about how near term deficits are high, he believes that they are at a “peak”… Which is Finance Minister parlance for: We’ll see our debt to GDP ratio shrink from here on out! That kind of talk is manna from heaven for kiwi investors, and the folks over at S&P liked it too, as they immediately raised the outlook for New Zealand’s debt from negative to stable…

Last week, we had S&P lower the U.K.’s debt outlook and the pound sterling took off for higher ground… Sort of backwards thinking, eh? Any way… Kiwi has responded favorably for the time being, but without the Big Dog, euro, off the porch chasing the dollar down the street, kiwi will have a difficult time adding to these gains…

Someone asked me yesterday why I hadn’t mentioned the Canadian dollar / loonie lately, given my statement that crude oil was rising yesterday… OK… The reader was right! I should have been all over the loonie like a cheap suit! The Loonie has gained 13% since March 1st, and Crude Oil has moved from $40.15 to $63.40 since March 1st…

It was a year ago, that the loonie was basking in the sun of parity with the U.S. dollar… All the talk then was that the loonie could go into uncharted waters VS the dollar… We all know that didn’t happen… And the reason? Oil fell and commodities like Gold fell… But guess what’s happening again? Oil and Gold are rising again… Hmmmm…

I saw something yesterday that hit me as strange… Forbes Magazine had a lead story titled: “Make A Buck On The Rising Euro”… The reason I found this strange, is that I’ve heard Steve Forbes talk the past few years and each time he emphasizes that the dollar is strong and will remain strong… But now his magazine had a story on how to make money buying the euro… Which means, to make money in the euro, (for dollar based investors) the dollar would have be weak! Strange, eh?

Anyway, the writer, Ryan Campbell, goes on to talk about how the euro has risen VS the dollar since March (something I told you weeks ago!), but also adds that the “charts sound the all-clear for euro bulls.” Interesting… I hadn’t heard from my charts guy lately, maybe this will wake him from his slumber!

And Swiss francs continue to defy the Swiss National Bank (SNB)… Francs have pushed to near 92-cents… Recall that the SNB issued verbal warnings pre- 90-cents that they were not happy with franc strength… Well, apparently that’s all the SNB has… Verbal warnings, because they have not stepped in front of this franc fueled bus!

And Swedish krone is seeing some selling pressure this morning, as the old story regarding the Eastern European Banking woes, was brought up again… This is old news! Wrap it up in newspaper and carry it out with the other trash!

So… As I get ready to head to the Big Finish, I see that the currencies, led by the Big Dog, euro, are getting off the porch once again to chase the dollar. One currency that’s not participating is the Japanese yen, which has taken a big spill overnight to near 97… However, that bad performance in yen hasn’t spilled over to other currencies…

Currencies today 5/28/09: A$ .7840, kiwi .6255, C$ .8955, euro 1.3895, sterling 1.5960, Swiss .9195, rand 8.0425, krone 6.4730, SEK 7.7690, forint 204.30, zloty 3.2250, koruna 19.2450, yen 96.90, sing 1.4525, HKD 7.7530, INR 47.66, China 6.8289, pesos 13.24, BRL 2.04, dollar index 80.75, Oil $63.43, Silver $14.94, and Gold… $952.10

Source: Russian Rumors

The dollar and yen rose as worries persisted about global economic prospects despite a batch of better-than-expected U.S. economic data, prompting investors to seek shelter in the two safe-haven currencies.

Gold climbed to a six-week high after data showed U.S. core inflation rose more than expected in April, boosting the precious metal’s appeal as a hedge against rising prices.

Oil fell toward $56 a barrel, pressured by weak global demand and a stronger dollar.

Europe sank to what may have been the recession’s low point in the first quarter of this year as tumbling German exports and investment plus further sharp drops in output elsewhere hastened the pace of a year-old contraction.

Official GDP estimates showed the period was the worst since records at the European level began in 1995.

“Overall risk appetite is still down because of the bad numbers from Europe,” said Matthew Strauss, senior currency strategist at RBC Capital, in Toronto.

European shares closed higher, with gains for most banks outweighing losses for defensive plays such as telecoms.

But U.S. stocks turned lower after earlier gains due to the expiration of option contracts and a fresh assessment of a jobs report on Thursday that was worse than expected, said Rick Meckler, president of LibertyView Capital Management in New York.

“Yesterday’s rally, given the news, caught people off guard and left the market in a place where no one’s quite sure of the next direction,” Meckler said.

“With the weekend coming up and the potential for weekend news, some people are taking some money off the table,” he said.

Shortly after 1:30 p.m., the Dow Jones industrial average <.DJI> fell 46.43 points, or 0.56 percent, to 8,284.89. The Standard & Poor’s 500 Index <.SPX> shed 8.77 points, or 0.98 percent, to 884.30. The Nasdaq Composite Index <.IXIC> slipped 4.02 points, or 0.24 percent, to 1,685.19.

The FTSEurofirst 300 <.FTEU3> index of top European shares rose 0.5 percent to close at 839.94 points. Over the week, the index fell 3.1 percent, but is up 30 percent from a lifetime low on March 9.

But analysts were skeptical about when, and how strongly, an economic recovery will come through.

“We’ve had a spectacular rally,” said Philip Lawlor, chief portfolio strategist at Nomura. “Risk appetite has rebuilt. The question is about more green shoots.

“I don’t think the data is actually going to turn positive for another six or nine months,” he said.

U.S. and euro-zone government debt slipped after U.S. industry and consumer sentiment reports bolstered hopes the economy might soon start to recover.

U.S. industrial production fell 0.5 percent in April, a more modest pace than in recent months and less than the 0.6 percent economists had expected.

The data dimmed the allure of safe-haven investments such as U.S. Treasuries. Separate reports showing improved national consumer sentiment and a slower rate of contraction in New York state manufacturing this month also trimmed flight-to- safety bids.

The benchmark 10-year U.S. Treasury note fell 16/32 in price to yield 3.16 percent. The 2-year U.S. Treasury note fell 1/32 in price to yield 0.87 percent.

In Europe, June Bund futures fell 53 ticks on the day to 121.17, well off a one-week high of 122.07 set earlier in the session.

The dollar rose against a basket of major currencies, with the U.S. Dollar Index <.DXY> up 0.41 percent at 82.777.

The euro fell 0.80 percent at $1.3524. Against the yen, the dollar was down 1.04 percent at 94.87.

U.S. light sweet crude oil fell $2.06 to $56.56 a barrel.

Spot gold prices rose $4.70 to $930.05 an ounce.

Asian stocks rose as investors bought shares that stand to benefit from an expected global recovery. MSCI’s index of Asia Pacific stocks outside Japan rose 1.7 percent, while Japan’s Nikkei share average <.N225> added 1.9 percent,

May 15 (Reuters)

Good day… And good Monday morning to all of you. I can’t believe March is nearly over, it seems as though it just started. March will end up being a pretty good month for the currency markets, as investors exited the safety of US treasuries and started moving funds back into higher yielding assets. But the markets continue to be volatile, and news released on Friday and over the weekend has sent these investors rushing back to the safe haven of the US dollar.

The Japanese Yen and US dollar benefited after a US Government official said Friday that bankruptcy may be the best option for GM and Chrysler. The dollar continued to gain strength this morning after US Treasury Secretary Geithner warned yesterday that some financial institutions will need “large amounts” of aid. When the Treasury Secretary says large amounts, you know it is going to be billions or trillions! Geithner was making the rounds of Sunday morning talk shows to try and justify the money already spent and prepare the taxpayers for another request of funds.

Bad economic data released on Friday here in the US helped drive investors back into the US$. Consumer confidence in the US remained near a three decade low this month as the jobless rate continues to climb. The number of US states with a double digit jobless rate almost doubled in February; with Nevada, North Carolina, and Oregon joining Michigan, South Carolina, California, and Rhode Island with unemployment rates above 10%.

The Japanese yen benefited from the safe haven buying, with the yen turning in the only positive performance vs. the US$. A report in Japan which indicated a cut in inventories added to the yen’s good day. Inventories fell 4.2% last month, and companies said they would increase production in coming months, indicating the worst of the manufacturing slump may be over. But with exports falling, and retail sales tumbling, I don’t expect manufacturing to pick up anytime soon. Deflation continues to be a problem in Japan, as consumer prices remain stalled. With benchmark rates as close to zero as possible, the Bank of Japan has little ammunition left to combat the falling prices. If you still own the Japanese yen, take advantage of these small rallies to exit your position, as the yen will probably not be able to maintain this strength.

Another currency you may want to consider exiting is the Singapore dollar. According to a story I read on Bloomberg this morning, the Monetary Authority of Singapore may devalue their currency and allow it to drop 4 percent against the US dollar in the next few months. The central bank reviews the currency’s position twice a year, and some are now predicting it will shift the value of the Singapore dollar in April. Singapore’s exports continue to fall and some are blaming the strength of the Singapore dollar vs. its regional competitors. While I believe the Asian economies will lead the world out of the global recession, the Singapore dollar will likely come under some selling pressure going into April.

With a general move back toward safety, the higher yielding currencies of Australia and New Zealand suffered. The Australian dollar dropped below .68 but will still end March with over an impressive gain vs. the US$. The New Zealand dollar also gave back some of its recent gains, moving down to the .55 handle. But like the Australian dollar, the kiwi will still end march with nice gains vs. the US$, likely to be in the double digits.

Other commodity based currencies also suffered, with the US dollar moving higher vs. the Brazilian real and Canadian dollar. But many investors still feel these commodity currencies will be some of the first to recover, as countries invest stimulus money into infrastructure projects.

News from Europe fed into the dollar’s strength as a report showed industrial orders plunged 34% in January, the most on record. Another report showed France’s economy shrank by 1.1% in the fourth quarter, the steepest decline since 1974. With all of this negative data, it isn’t hard to see why European confidence fell to the lowest on record in March. An index of executive and consumer sentiment in the euro region released this morning fell to a record low. All of this negative data is boosting calls for further rate cuts by the ECB. After the 50 basis point cut at the beginning of March, most currency traders expected the ECB to pause and hold rates steady for a couple of meetings. But now the calls for further cuts are becoming louder.

The Euro had the worst day vs. the US$ in nearly three months on Friday, and is not holding just above 1.32. Some are now even suggesting the ECB follow the US and UK down the path of “quantitative easing”, buying bonds to pump more money directly into their economy. As I have written recently, this is one of the most inflationary moves a central bank can take, and would be a dramatic step by the typically hawkish ECB.

But not everyone in Europe is wanting the ECB to follow the paths of the US, UK, and Japanese central banks. Germany’s leader, Chancellor Angela Merkel warned against inflating the global economy to revive growth. Frank Trotter sent me an article from this weekend’s Financial Times in which Merkel rejected calls to spend more public money in Germany to speed the recovery. “This crisis did not come about because we issued too little money but because we created economic growth with too much money, and it was not sustainable growth,” Merkel said, according to the FT. “If we want to learn from that, the answer is not to repeat the mistakes of the past.”

Merkel’s position is in stark contrast to our own administration, who have taken a somewhat short sighted ‘grow now, worry about inflation later’ stance. In fact, the US administration is excited about how they have been able to manufacture a new ‘refinance’ boom by forcing mortgage rates back down. But the concern I share with Merkel is how will policy makers unwind all of this ‘easy money’ once the recovery begins?

Does anyone think the Fed will have the courage to end their emergency-lending programs while the unemployment rate remains near double digits? You know the administration is going to push the Fed to wait until there are clear signs the US is in recovery before moving rates back up. But any slight hesitation on the Fed’s part will probably spark inflation which could quickly grow out of control if left unchecked.

But Treasury Secretary Geithner said yesterday that the Fed’s injections of reserves into the economy are “not going to create the risk of hyperinflation in the future.” “We have a strong independent Federal Reserve with a very strong mandate from the Congress, and they will do what’s necessary to keep inflation low and stable over time,” Geithner said on ABC’s Meet the Press. At the same time, he warned policy makers shouldn’t “put the brakes on too quickly.”

I hate to disagree with the Treasury Secretary (ok, you caught me, I actually kind of like disagreeing with the Treasury Secretary) but I just don’t think they have the ability to keep inflation at bay. The Fed has injected record amounts of liquidity into the system, using some untested ‘quantitative easing’ procedures which will need to be reversed. With the Fed pledging to purchase another $1.25 trillion of mortgage debt and $300 billion of Treasuries, inflation is inevitable.

Finally, I read where Wednesday has been dubbed ‘Financial Fools Day’ in London. Protestors attracted by the G20 summit plan to target London bankers for their role in the financial meltdown. This should make things interesting on Wednesday, as protestors plant to try and block roads and prevent people from getting to work at the heart of the global currency trading.

Currencies today 3/30/2009: A$ .6808, kiwi .5625, C$ .8001, euro 1.3192, sterling 1.4183, Swiss .8706, rand 9.7274, krone 6.7765, SEK 8.2889, forint 234.97, zloty 3.595, koruna 20.89, yen 96.63, sing 1.5213, HKD 7.7502, INR 51.2825, China 6.8364, pesos 14.539, BRL 2.2911, dollar index 85.66, Oil $50.57, Silver $13.03, and Gold… 912.14

Source: Bad News for GM and Chrysler Rallies the US$