We all know it is going to happen, so why bother discussing it. Right?

There is no doubt the world’s currency of choice has more pressure stacked against it than ever before. But even with $12 trillion in debt and nearly a trillion of annual interest payments due within the next decade, the greenback is still stronger than it was just sixteen months ago.

While so many of us are betting against the dollar and calling for its demise, plenty more investors are using it as a security net, buying American treasuries to protect themselves in case the bottom really falls out.

With the sun someday going to fade, I could sit in my basement and wait for the big day to come, or I could live my life without worry.

It’s the same thing with the dollar. We could bet against the greenback and profit as it drops, or we could forget about the minimal return potential and keep our eyes looking forward, where the real money is at.

No more Chicken Little

Here’s the scoop. The dollar is likely to fade, at most, six percent below today’s value against the Euro. That’s major erosion for such a massively distributed currency, but six percent over a few years doesn’t stack up to a hill of beans in the grand scheme of things.

I can list a couple of dozen stocks that are up by twice that figure today alone.

No doubt, you should pay attention to the dollar, as a six-percent decay in the value of the world’s most important currency will change all sorts of valuations. But don’t invest in the cause, invest in the effect.

The devaluing of the dollar is no surprise. Even a fifth grader can see what’s ahead over the next decade. That’s why there is so little investment potential directly in the currency. Yet, our stubbornness and human greed will not let our eyes focus on anything but taking advantage of the move.

Let that stuff up to the emotional investors.

While they are focusing on gold and the dollar, investments that will provide double-digit returns at best over the next few years, rational investors need to focus on the many other powerful market forces are at work.

The domestic equities market is a wonderful place to be right now, especially if the dollar is collapsing as fast as we believe it to be.

First, anybody exporting goods will see strong top-line growth as the dollar drops. A six percent fall from our currency equals an automatic six percent surge in revenue growth, without the need for any company to do a thing.

Next, if you are a follower of the green-energy craze, you had better be hoping for a weak dollar. The only thing that will ever wean this country from its dangerous addiction to oil is if crude becomes too expensive relative to our alternatives.

With a dollar that is still in demand across the world, dollar-denominated currencies like crude remain fairly inexpensive. But as Uncle Sam’s reserves dwindle in value, crude prices will move inversely. That is good news for all you folks that took Obama’s advice and invested in the “green” sector.

Finally, the markets run on a risk/reward relationship. The higher the risk, the higher the reward. The lower the risk, the lower the reward. Simple stuff.

If we all know the dollar should weaken, where’s the reward potential? But don’t even begin to think there is no risk in the play.

With Washington in charge, especially the current group of legislators, anything is bound to happen. And now that Obama has is political eye set on “saving the dollar,” the road that lies ahead could be very foggy.

My advice? Watch the dollar. Take note of its moves. But invest in anything but the currency. There is better return potential, with much less risk, elsewhere.

“I have always depended on the kindness of strangers,” said Blanche DuBois, in the final words of the play A Streetcar Named Desire. Well, don’t we all.

Many citizens probably still cling to the old saw that public debt doesn’t matter because “we owe it to ourselves.” Wrong. Debt always matters. And as for whom we owe it to, it is a lot of kind (or, at least, not yet unkind) strangers.

As recently as 1970, foreign holders of U.S. debt were essentially non-existent. But their slice of our obligation pie has steadily increased, especially over the past two decades, until now foreign governments and international investors hold about 35% of Treasuries, as the following chart reveals.

Chart of U.S. national debt holders, domestic and foreign

Of about $11 trillion in U.S. debt, foreigners have about $3.8 trillion, with China in the lead at nearly $1 trillion and Japan not far behind at around $750 billion.
Most likely, though, this trend has already leveled off. The Chinese, Japanese, Russians, and Indians have openly announced their decision to cut back on further purchases and existing holdings of U.S. government debt. Beyond that, the source of funds previously allocated to their purchases — trade surpluses — has declined sharply with the recession. As a consequence, going forward, foreign buying is more apt to shrink than increase.
While foreigners are continuing to show up for the record-sized Treasury auctions, it’s due to the dollar retaining its status (albeit shakily) as the world’s reserve currency. But they have become quite cautious, generally investing towards the front end of the yield curve, which is a vote of no confidence in the buck’s future. As the chart below illustrates, sales of long-term bonds to foreigners are way down.

Treasury bond sales graph

So what does all this mean?

It means that a big chunk of our prosperity during the past twenty years was due to a trade deficit that put billions of dollars into the hands of foreigners, who then turned around and bought Treasuries with them, helping the U.S. government finance its massive deficit spending. That’s over — and the unwinding process has just begun.

Yet federal deficit spending, far from reflecting this reality, has grown by leaps and bounds. But who will finance it? Let’s extend our first chart out a few years.

Projected U.S. Debt

As you can see, we project that foreign participation has plateaued. U.S. private domestic investors can probably increase their holdings moderately, now that households are consuming less and saving more, and financial institutions have money to invest in Treasury paper. The agencies and trusts (like Social Security) are really not a part of the equation, but rather reflect programs on “auto-pilot” and quickly headed to the point where they will negatively impact, not help, the deficits.
Adding it all together, even under the most conservative of assumptions, there are simply not enough buyers to cover the accelerating federal deficits. That leaves the lender of last resort, the Federal Reserve, as the only remaining candidate to satisfy the government’s grotesque appetite for funding. There is no viable alternative.
The Fed will take up the slack in the only way open to it, by printing money out of thin air and exchanging it for promises from the Treasury. That means an escalation of monetary inflation and, somewhere down the road, serious price inflation as well. We don’t know exactly when that will happen, only that it must.
The editors of The Casey Report have been alerting subscribers to this very possible scenario for quite some time. If foreigners stop buying U.S. government debt, the whole house of cards will come crashing down. But you can do a lot to protect yourself financially – run with the trend instead of swimming against it. Find out more about the accurate predictions of trend hunter Doug Casey and his team, and how to profit from them . . . click here.

So gold is now publicly loved by armchair investors, famous hedge fund managers and central banks… even as we write, Erin Burnett is “squawking” about it on CNBC. Are your contrarian senses tingling yet?

“So many hedge fund managers and pundits are singing the same tune: long gold and short U.S. Treasuries,” our friend Dan Denning wrote in today’s Daily Reckoning. “The bond bubble could go on much longer than anyone expects. And when so many people agree on something, none of them are usually right. As a contrarian, you’d be worried about becoming a victim right about now.”

Finish reading this article on DailyReckoning.com.

In the last two years, I’ve:

• Gone long the dollar when it was in the tank…
• Shorted oil near its peak…
• Shorted the big move to Treasuries on the heels of the credit crisis…
• And, most recently, shorted gold at $918 an ounce.

At the time of recommendation, each trade was extraordinarily unpopular, prompting some folks to flat out question my sanity. And yet, taking the dissenting opinion made money each time (the jury’s still out on the shorting gold trade.)

How’d I find the wherewithal – and nerve – to do it?

David Dreman – The Father of Contrarian Investing

I’ve been under the tutelage of David Dreman, known as “The Father of Contrarian Investing,” for many years.

Dreman literally wrote the book on contrarian investing. (If you don’t own a copy of his latest work – “Contrarian Investment Strategies: The Next Generation” – get one!)

In the book, he lays out his straightforward, time-tested investment philosophy to consistently outperform the markets: choose cheap investments that other investors hate.

Sounds too simple to be true, I know. But like any trading genius, Dreman’s track record underpins his investment philosophy…

• Since inception in 1988, his flagship large-cap value fund’s average annual return of 9.2% beats both the S&P 500 and Russell 1000 Value index by a full percentage point. His small-cap value fund has performed even better.
• Since inception in 2003, it has trounced the Russell 2000 Index (the benchmark for small-cap investments) and the S&P 500 index by more than seven percentage points.

Investing in Small Caps Predictions Ring True…

Recall, in January I predicted small cap investing would shine this year because they always do coming out of recessions. And this time has been no exception.

• From the March 9 bottom, small-cap stocks are up 50%, compared to 40% for large-caps stocks.
• And using history as our guide, we can expect more of the same ahead – small caps to trump the gains of their larger-cap peers for at least three more years.
• Thus, not capitalizing on this disparity would be foolish.
• Furthermore, the recent rally has increased stock valuations virtually across the board, so finding winning stocks will require increasingly more investment skill.

And that’s where Dreman comes in… No one on earth is better at unearthing small-cap value investments than he has been.

So how does he do it?

• First, he exploits the fact that the U.S. stocks with the lowest 20% of price-to-earnings ratios returned 16.8% per year from 1920 to 2004 – four percentage points better than the market as a whole. He buys nothing but such undervalued stocks.
• That said, he doesn’t just focus on the “cheapness” of a stock to determine its worthiness. “We don’t like dogs,” says Dreman, adding that, “All our stocks are financially strong, have high yields and earnings growth faster than the market.”
• He pays great attention to the stock filtering process, as well. Specifically, Dreman looks for companies with market caps between $300 million and $2.5 billion. Those are then screened based on their respective P/Es.
• Stocks with P/E ratios greater than the market get discarded, immediately (Dreman is innately opposed to paying a premium for growth). And the remaining companies (those with P/E ratios below the industry median) must possess an above average dividend yield, low leverage, low price-to-book and price-to-cash flow ratios, strong management teams and a catalyst that could spur future growth.

The result is typically three to four stocks in each industry group, with only one or two making the final cut.

Collectively, Dreman uses this investment process to construct a portfolio of 95 to 100 stocks from 50 different industry groups, with a 1% weighting to each. Such a small position size means that a single security can’t sour the overall portfolio performance. Which adds another layer of downside protection. (Deep-value stocks are inherently less risky than high-flying, high P/E growth stocks, anyway).

So clearly, Dreman does much more than simply buy small cap companies that investors have discarded, or ones in the midst of tough times. As he puts it, “We look for reasonably strong companies on the whole.”

But to really put his words into perspective, let’s consider a recent purchase…

Dreman Invests In Small-Caps With Aaron’s Inc.

Last year, Dreman added Aaron’s Inc. (NYSE: AAN) – a small-cap company that allows consumers to rent-to-own plasma TVs, household and office furniture and computers, without any credit checks.

Most investors looked at that business model, cringed and sold the company’s stock, causing it to lose 33% in 2007. After all, could you get any riskier than catering to consumers with poor or no credit during a credit crunch?

Dreman, of course, is too smart to fall for that. This guy can sniff out his prey from a mile away. He knew the current credit freeze was about to push previously credit-worthy buyers away from Best Buy and right through Aaron’s front doors. And with the stock trading at a historically low valuation below 11 times earnings, it was a no-brainer.

Sure enough, with an uptick in demand, Aaron’s earnings jumped a solid 19% last year alone.

And the stock defied the market, rallying 39% in 2008 while everything else took a bath. This year, it’s tacked on another 25%, thanks to a 55% jump in earnings in the first quarter.

Bottom line, small cap stocks can be some of the most profitable investments in any market. Should this market pull-back continue, consider this another great opportunity to pick up some attractive small caps.

But like Dreman, I recommend you stay away from dogs at any price.

Source: Investing in Small Caps: Why it Pays to be Contrarian

The euro has received some additional love this morning, as the Eurozone’s economic growth printed better than expected, albeit still negative… But… Germany and France showed growth, which I must say is very unexpected! That means that both Germany and France have exited the recession… Well, that is at least for now! For those of you keeping score at home, Eurozone GDP fell -.1%, which is far better than the -.5% that was expected… Oh! And this is for the 2nd QTR… You would have to think that data like this would be very good for the euro, and from the looks of it, that’s exactly what’s happening!

Whenever the Big Dog, (euro) gets off the porch to chase the dollar down the street, all the little dogs get to chase too… And so, the usual suspects have posted gains since yesterday morning, like Norway, Switzerland, Aussie and so on…

The BIG news yesterday was from the FOMC meeting, where the Fed Heads left rates at near zero, but were kind enough to tell us that their Quantitative Easing would remain in place through October… That’s all nice and sweet, eh? So… What, are they going to do here, Buy some Treasuries out in the open and say see we told you we were going to do this, and then go back to the dark, smokey room and buy some more from the Primary Dealers just for GP? That just ticks me off! But there’s not a darn thing I can do to stop them!

What I would like to do is to start a movement to abolish the Fed… OK, who’s with me? I just had a chuckle, because that reminded me of the Will Ferrell Old School movie when he’s trying to get people to streak to the commons… Come on now, if you’ve seen that movie, you know you’re laughing right now!

I had a guy one time tell me, I know of no one that can talk serious one minute and go right into some funny thought, sing a song, or whatever the opposite reaction would be to the serious thought, like you do, Chuck… I thanked him!

But getting back to the thought of abolishing the Fed… Think about this for a minute… What good are they? Have we not had dozens of recession and one Great Depression since they were created? Have we not seen a 95% loss of purchasing power for the dollar since they were created? Let me tell you something else, folks… If the markets set the interest rates based on activity, we would never experience inflation or deflation…

OK, I’ll stop there, I know that I’ve ticked off a few people that think the Fed walks on water, and is here to protect us financially…

Well… In news you won’t hear on radio or TV… The U.S. Budget Deficit swelled to $180.7 Billion in July, from $102.8 Billion in June… Hmmm… Think about that for a minute folks… In June, when quarterly tax receipts should be enough to cover the expenditures, they not only were not enough, but they fell short by $180.7 Billion dollars! This is a combination of slower tax receipts because of the depression were in, and… The unsustainable deficit spending by the Gov’t. Oh! And the Budget Deficit year to date is now $1.27 Trillion… But you don’t see the knuckleheads in Washington D.C. doing anything about it, except for coming up with new things to spend more money on… I say fire them all!

Speaking of tax receipts… My friend, and writer & Marketing genius extraordinaire, David Galland, had this to say recently in one of his most excellent news letters… Here’s David…

“I like the idea of also forcing the government to stop automatically withdrawing taxes from paychecks. Instead, wage earners would be responsible for sending out their tax payments on a monthly basis. By my back-of-the-envelope calculations, it would take about two months of writing out the big checks to Uncle Sam before people came to grips with just what government (or, in this case, one slice of government) is actually costing them… and out would come the pitchforks. We cannot afford our current level of government, and the sooner we get around to cutting it back, the better. Period.” — Thanks David… As always you think on a different level than the rest of us!

The Trade Deficit also grew larger in July as Oil prices rose… The Trade Deficit moved to $27 Billion from $26 Billion… Now, the Trade Deficit is much smaller than it used to be thanks to the depression, but, the fact remains that it is still nipping at the heals of the dollar like one of those small dogs, and whenever it is that the U.S. comes out of this depression, this figure will balloon once again…

Today’s data will be dominated by Retail Sales for July, which because of the CARS program, will be stronger than usual, probably getting quite close to a positive 1% for the month… Less Autos, the data would be quite disappointing at just .1%, but, you know me… I don’t like that taking this, that and the other thing out just so things look the way you want them to look!

It’s also a Thursday, so the Weekly Initial Jobless Claims will also print. Recall that on Monday of this week I told you the data would get going again this week? Well, we’ve got it going on today for sure!

Yesterday, Norway’s Norges Bank met, and while they left rates unchanged, they became the first Central Bank to move to a tightening bias! YAHOO! And the krone was the best performing currency yesterday and overnight on that news, as it should! Long time readers know my affection for the krone due to a number of reasons, but none so important than the fact that Norway has a financial surplus, has had one, has one, and will have one for as long as I can see… Norway didn’t get involved in the sub-prime bond buying game… And they have a very strong Central Bank in the Norges Bank… Last spring, the NY Times, which I don’t read for a number of reasons, but had this sent to me, called the Norwegian krone the safest currency in the world. Now… I like it when someone other than me climbs out on that limb, especially if your going to climb that far out!

Tonight, the Gov. of the Reserve Bank of Australia (RBA), Stevens will provide a testimony to the Parliament regarding the economy, etc. I think that the A$ traders are holding their breath until he speaks, as this could be a real market moving speech! But then it could also be as dull as watching paint dry…

The A$ is back above 84-cents after spending a couple of days down in the 82-cent handle…

OK… So… We had good news from Germany, France and Norway this morning… Not so good news from the U.S. though…

Realty Trac Inc. is reporting this morning that a total of 360,149 properties received a default or auction notice or were seized last month. UGH! Foreclosure filings in the U.S. climbed to a record for the third time in five months in July. All those jobs that were cut and still being cut, are having a real negative affect on this, and personally, I don’t see this getting any better any time soon! UGH!

There’s been a lot of talk about the news the other day that China’s loan growth had seen a huge fall last month… A lot of people think that this is the end of China’s growth… I see it differently… I see it as China just taking some air out of the balloon… They saw their economy moving ahead of the rest of the world at a very fast pace, and didn’t want it to: 1. overheat, and 2. Have nowhere to go with everyone else in recession… Now, I’m sure a lot of you will say, Chuck… Doesn’t China risk the chance of popping their economic bubble altogether? Well… Yes, they do… But, they knew how to administer stimulus to make the economy click, I assume they know how to pull some if back when they need to…

And… I just think about the fact that since 2003, I’ve seen story after story by writers that thought they knew what was happening in China, say the economic growth was going to slow down… And they were WRONG!

And with that thought… No wait! I’ve got another thing from David Galland… He said that Dan Ferris sent this to him… “Members of Congress should be compelled to wear uniforms just like NASCAR drivers, so we can identify their corporate sponsors.” yeah, right on! Now that’s change that’s really change!

Currencies today 8/13/09: A$ .8440, kiwi .6795, C$ .9245, euro 1.4275, sterling 1.6625, Swiss .9315, rand 7.9675, krone 6.0220, SEK 7.1475, forint 188, zloty 2.88, koruna 18, yen 96.20, sing 1.4415, HKD 7.7515, INR 48.10, China 6.8337, pesos 12.84, BRL 1.8385, dollar index 78.50, Oil $71.64, 10-yr 3.73%, Silver $15, and Gold… $957.15

That’s it for today… I had a long time reader send me a note yesterday and tell me that I have enough to worry about with the Fed, Treasury, deficits, etc. and shouldn’t get worked up when the Cardinals lose a game they should have won… HA! Yes, that’s correct! It is just a game… And yes, I’m talking about baseball, not the Fed, Treasury and deficits! HA! Well… I go to the knee doctor today, I’m afraid of what he’s going to find… All I know, is that the pain, swelling and stiffness is much worse in this knee than it was in the right knee that I had scoped in 2003! UGH! My little buddy, Alex is home. He seemed to have grown 6 inches while at camp! OK… I must really be running late, as Mike, Suzy Q, and Mary are all here! So… Get that Tub Thumpin’ Thursday going!

Source: Germany & France Exit The Recession

That will all change beginning today with the Nonfarm Productivity report for the 2nd QTR… Long time readers know my dislike for this data, as I believe it simply shows that one person works longer hours! The Fed Heads used to be all over this data like a cheap suit, and probably still trip over themselves to see the data when it prints… But to me, it’s not what Big Al Greenspan made it out to be…

Tomorrow is the big data day this week with both the Trade & Monthly Budget Balances printing for July… The Trade Deficit should tick up some, as Oil prices have gained in recent weeks, and the Monthly Budget Deficit? Oh my! It is forecast to be $180 Billion in the red! Which annualized would be more than $2.1 Trillion! But don’t worry about it folks, no biggie according to the folks in Washington D.C. The Treasury will just issue more bonds, and the Fed will buy up any that don’t get bought, and pay for them with money they printed up fresh that day!

You know that I’m be facetious with the “don’t worry” talk… I’ve been talking about this deficit spending for quite a few years now… I like the fact that others have joined in now that the numbers have gotten so large they are as obvious as a man with a hatchet in his forehead, but at least they’ve joined the “stop the deficit spending movement”…

Speaking of The Treasury issuing Bonds… This week alone the Treasury will auction $37 Billion of 3-year Notes, $23 Billion of 10-year notes, and $15 Billion of 30-year bonds… Even using “new math” that brings this week’s issuance to $75 Billion! That sound? That sound you hear is foreigners choking on all this issuance! Does anyone know how to apply the Heimlich maneuver?

The “got yield” scenario I talked about yesterday, didn’t play out yesterday, as stocks came back… The A$ saw some selling along with kiwi, reals, and any other “high yielder”… The selling wasn’t bad, so we can probably put it down to profit taking.

I’m doing some research on the years around the depression, looking at market movements, and confidence levels… It’s amazing the things that were being said right up and to the stock market crash about how everything was fine… Then skip ahead to the 80’s and you had the same things going on with lofty praises for the S&L industry, especially one by Big Al Greenspan, and then the S&L industry circled the bowl… Makes you wonder, and I’m not talking about wondering who wrote the book of love… No, I’m talking about how this should make you wonder, or question, what’s being said about how great stocks are right now… When the President makes comments about “a good time to buy stocks”, you’ve got to stop and think folks… Just stop!

OK… I wanted to give everyone an update on the popularity of the BRIC MarketSafe CD we introduced last month… With over a week to go until we reach the funding deadline, this CD has received a ton of newsletter writer coverage, and interest… The funding has gone quite well, and we expect to open this CD with a very large amount of cash… That’s exciting for me, as I saw this as an opportunity to deal in “speculative” investments, without market risk, and jumped on getting this available to our customers…

I also wanted to follow up on the Jobs Jamboree data we talked about yesterday morning… I had a very nice reader tell me that I “hadn’t fallen off turnip truck” as the participation rate fell! That’s right! As she said to me… “So, all those poor men and women that were hit at the beginning of the recession have the great pleasure of no longer being counted as either employed or unemployed.”

I also wanted to follow up on last week’s talk on the Weekly Initial Jobless Claims that fell for the previous week… I had a reader who recently became unemployed in California tell me the problems with trying to file as unemployed! Let’s listen in to him explain his attempt to file as unemployed…

“Filled out the unemployment application on-line the day I was laid off.
About four days latter they send you another form to fill out and return. If not returned immediately, you lose your benefits.

Received a letter indicating they would call me 7 weeks after applying, to determine eligibility. It is scheduled for September 27th at 1 PM to
3 PM.

About two weeks afterwards, found there is no way to reach a human. The only way to reach them is EMAIL, which takes a couple of days to respond. EMAIL has a canned response, we will contact you on Sept 27th.”

OK… Enough of that! China came out with some data today… While exports continue to suffer the stimulus that the Gov’t put into the economy, which made sense due to the fact that the Gov’t had a war chest of cash to put into the economy, which is the exact opposite of the situation in most countries including the U.S. Chinese Industrial Production growth was strong, marking three consecutive months of improvement in Industrial Production. The ongoing recovery of domestic demand is good, while consumer demand keeps holding up well with July retail sales growth up 15.2% year-on-year…

Now, I fully understand how there can be questions about the validity of Chinese data… But come on! We don’t live there, we have no idea! And they don’t have a John Williams (Shadow Stats) to show everyone that the Gov’t’s official data prints are misleading and most times inaccurate!

I saw this report on the Bloomie this morning from Zillow… “Almost one-quarter of U.S. mortgage holders owed more than their homes were worth in the second quarter and that figure may rise to as much as 30 percent by mid-2010 as job losses and foreclosures climb.”

That’s depressing stuff… Very depressing… So! Before I go to the Big Finish, I’ve got to find a “feel good” story… Of course if I were the Gov’t I would have a pocket full of those, to pull out whenever the consumers needed one! HA! But, I’m not the Gov’t! thank goodness! Whenever I think of the Gov’t, I think of those words that Ronald Reagan spoke regarding the scariest words a person can hear… “I’m from the Gov’t and I’m here to help”

OK… The euro looks to be catching some wind in its sails this morning, as it has gained 1/4 euro since I came in… I know that’s chicken feed, but Hey! You’ve got to start somewhere, and after Friday’s bloodletting, the tourniquet was applied on Monday, and today maybe we’ll see it gain back lost ground… For… It is “Turn-around Tuesday!” (well hopefully it will be!)

And if the risk assets (like stocks) are rebounding, Gold and Silver should be on the docket to rally too… And a quick look at the Bloomie tells me they are indeed, rebounding… So, now, let’s go to the Big Finish!

Currencies today 8/11/09: A$ .8365, kiwi .6715, C$ .9125, euro 1.4170, sterling 1.6475, Swiss .9250, rand 8.13, krone 6.2125, SEK 7.28, forint 191.80, zloty 2.9370, koruna 18.19, yen 96.50, sing 1.4460, HKD 7.7505, INR 48.02, China 6.8350, pesos 12.96, BRL 1.84, dollar index 79.12, Oil $70.73, 10-yr 3.78%, Silver $14.43, and Gold… $947.60

That’s it for today… I barely mentioned it yesterday, and have been remiss in not mentioning it before, but next week I head to San Francisco Money Show. San Francisco has always been one of my fave cities to visit, and last year I had a blast there, except for that red-eye I had to take home so I could be on the desk Monday morning! I played in San Francisco when I was a young man playing my guitar… Right there in the Cannery… Last year, we went across the peninsula to an awesome restaurant named the Cliff House… I hope to make it back there this year! But, the real reason I go there is to talk to audiences about diversifying, and what I see going on, and or happening in the future… It’s just my thoughts, but I seem to fill the rooms, so that’s a good thing! Nice win by my beloved Cardinals last night. I was in bed by the 6th inning when they scored all their runs! UGH! Time to go… Try to make your Tuesday Terrific!

Source: $75 Billion in New Treasuries this Week

Just when you thought the bond bubble was being saved for another day…

The government managed to auction $39 billion worth of 5-year debt yesterday… barely. Wednesday’s debt sale drew a bid-to-cover ratio of 1.92, the lowest investor demand since September 2008. Low demand forced Uncle Sam to jack up interest rates at the last minute in two separate bond auctions this week — yesterday’s sale and Tuesday’s $42 billion auction of 2-year notes.

So what’s an indebted government to do? Manipulate the market, of course. Bond yields have given back yesterday’s spike partly thanks to the Federal Reserve, which bought $3 billion in U.S. bonds yesterday. They’ve announced their intention to buy again today, which will bump its total purchases of U.S. Treasuries to over $222 billion since March 25.

The U.S. government has already shoved more than $1 trillion in bonds down the market’s throat this year. They’ll likely issue another trillion before 2010. Another $28 billion in 7-year notes will be pawned off today… might be worth keeping an eye on.
The proceeds of some of those bond sales will go straight tothe U.S. Postal Service, which is on track for a record $7 billion deficit this year. That’s more than double last year’s loss.

Postmaster General John Potter bumped up his previous projection by a billion bucks yesterday, citing the growing expenses of six-day delivery and employee retirement/health care plans. Potter and his team are scrambling to cut costs left and right — from a yearlong hiring freeze to early retirement offers to branch closures. But we wonder… will it even matter?

The Government Accountability Office recently labeled the USPS a “high risk” federal program, and while we’re hard-pressed to think of any risk-free government program, we’re inclined to agree.

The Postal Service is facing a perfect storm of business risk: The business is already loaded up with debt. Minimum wage and benefit costs are rising while revenues are plummeting. For example, they are expected to handle at least 27 million fewer pieces of mail this year than in 2008. Is there any business in America that isn’t looking to cut shipping costs? (There’s this new technology we’ve heard about called “e-mail.”)

Then there’s UPS and FedEx, two worthy private-sector rivals. And what about Peak Oil? A summer of 2008 redux could cripple the whole industry. Above all, the USPS is run by the government… c’mon.

Snail mail might not be dead, but we suspect the USPS is going the way of Amtrak, at best.
They can’t even deliver our mail without losing money, yet the public looks to the government to manage our health care? Oy…
“Personalized medicine will revolutionize the medical field with a huge array of technologies,” reports our breakthrough technology analyst Patrick Cox.

“We know that many current treatments work on some people, yet not others. Some drugs are safe for many people, but have dangerous side effects for others. This is because all of us have individual differences in our genetic code based on heredity and environment. Even slight differences can lead to very different reactions to medications.

“This has created serious regulatory problems. Drugs are denied regulatory approval not because they do not work, but because some fraction of the population suffers adverse effects. As a result, we are often denied incredibly effective therapies simply because they are not universally effective.

“This shockingly primitive state of affairs exists because, until very lately, we simply have not had the tools to get to the genetic roots of disease. Scientists and pharmaceutical companies haven’t precisely known how a particular drug’s chemical profile interacts with a genetic one. Medical science, in turn, has been unable to tailor drugs to work with a specific genetic makeup.

“This is rapidly changing. Just a few short years ago, the human genome was first mapped. The genome, as you know, is the entire collection of genetic code that defines us at a biological level. Now scientists are studying single genes and their individual expressions.

“It is meaningful, from the investor’s perspective, that Dr. Francis Collins, the head of the Human Genome Project, has just been selected by the Obama administration to head up the National Institutes of Health. Collins has long been a prominent champion for using the knowledge gained from human genome to accelerate personalized medicine.

“Incidentally, Collins has stated that genomics is currently where the computer industry was back in the 1970s — at the beginning of a technological revolution. While he was speaking in scientific terms, we should remember that the ’70s was also the right time to begin investing in a diversified portfolio of breakthrough computer technologies. Those who did so, despite claims that it was too risky or early, were made rich.”

Want to learn more, including how to get in on the ground floor of this blossoming tech? Check out Patrick’s Breakthrough Technology Report.
No debt woes or health care debates can stand in the way of today’s stock rally. Major indexes opened up 1% this morning and are sitting on 2% gains as we write.

On what news? Heh… mostly Goldman Sachs, which upgraded GE from “neutral” to “buy.” Other than a slightly better-than-expected earnings report from Motorola and a not-so-terrible jobless claims number, that’s it.
“And after months of research, development and testing,” says one of our small-cap analysts, Jonas Elmerraji, “the Small-Cap Recovery Index is finally ready to be put to work.

“Historically, penny stocks lead the stock market out of recession. Small stocks are nimble and able to adapt — and a recovery in our sector is usually a telltale signal to mainstream investors that it’s a bit safer to test the waters of the market.

“So we’ve created an index to forecast market recovery. The index is made up of 100 small caps from a number of different industries. Each stock is equally weighted, but we’ve chosen to weight some industries more than others (by including more stocks from certain sectors). We gave more potency to industries that either signal to us that growth is under way (based on experience) and/or have a bigger impact on the economy. For instance, retail, the biggest sector of the U.S. economy, is also the biggest industry in our index.

“Our database collects fundamental data on the companies as well as market data and combines it with economic indicators like savings rate and employment numbers. Every day, the database spits out a number that represents our index on that given day. We’re still in the process of collecting data to get a statistically significant range to start making inferences from.

“Right now, we’re waiting to get a statistically significant amount of data before we go public with the index. Eventually, when enough data are compiled, we will have a small-cap index that can point us in the direction of where the market’s going.”

Since forecastin’ is our business, we’ll be keeping an eye on this one… stay tuned.
Today’s stock rally has put the kibosh on the dollar. The greenback had been on the rise this week, given the return of market pessimism. But the dollar index came to a screeching halt today, around 79.5. That puts the pound at $1.65, the yen at 95 and the euro at $1.40.
“We have established a number of longer-term positions based on a weakening euro scenario,” says our currency trader Bill Jenkins.

“The euro has made several efforts at the 1.4300 mark, but has never been able to hold above that. As a matter of fact, given the rebuffed price action from early this week, the euro may be setting up an impressive double top on the hourly chart.

“We suspected something was afoot when Monday’s release of the U.S. housing numbers didn’t even elicit a yawn from the currency market. In case you missed them, here’s the skinny: Economists expected new home sale to be up by 3.8%. The actual number was 11%! That is a HUGE upside surprise.

“Since many forecasters presume that the U.S. housing market must recover before anything else positive happens, the numbers should have shot the risk currencies to the moon.

“But they didn’t budge. Why not? In a word — reluctance.

“The housing numbers should have inspired investors to believe that the recovery is well under way. The very fact that the market refused to respond is telling us that there is some real hesitation about pushing this risk rally further.

“The euro fell to a key support level, the 1.4120-30 area. Over the next few days, we will look to see if it drops below there. If so, a violation of that level would have the euro looking down toward 1.3750. Should that become the case, we may be looking at a double top on the daily chart, which would portend a deeper slide.”

If you’d like to trade this trend, look no farther than Bill’s Master FX Options Trader.
What other currencies of the world are mispriced versus the dollar? Here’s one clue:

“The index is based on the idea of purchasing power parity (PPP),” explains The Economist, “which says currencies should trade at the rate that makes the price of goods the same in each country. So if the price of a Big Mac translated into dollars is above $3.57, its cost in America, the currency is dear; if it is below that benchmark, it is cheap.”

Of course that’s a pretty simple study of PPP, which is probably why it’s so interesting. But as Bill Bonner often notes, things have a way of “regressing to the mean.” We won’t be too surprised if China slowly grows more expensive while Scandinavia comes back down to earth. Great Britan is a good example of this tendency… just a year ago, the Big Mac Index claimed the pound was 25% overvalued versus the dollar.
Commodities are on the rise today. The stock-buying spree has added $3 to crude oil, now at $66 a barrel. And the dollar’s reprieve has stopped gold’s decline. The spot price is up $10, to $940 an ounce.
“The government has started a ‘cash for clunkers’ program,” writes a reader, “to encourage car sales into the slumping U.S. economy. This program may cause some people to buy cars today, instead of next year, but what does that do to next year? The program may give a bump up in car sales this year, but can’t we expect a slump next year? Wouldn’t it be better to have level sales, even if they are low, rather than a bump today and a crisis tomorrow?

“Seems to me the government better be ready to issue the car companies more bailout funds next year. Perhaps the ‘clunkers’ are the car companies, rather than the older cars that qualify for the program. At the end of the day, we have two ‘clunker’ programs: The ‘cash for clunkers’ old car program and the ‘cash for clunkers’ car companies that are too big to ‘NEVER’ fail.”

Source:  Bond Bubble’s Back, USPS in Trouble, Healthcare Tech, Short the Euro and More!

But in fact, foreigners have, over the last decade, been by far the single most important source of buying for U.S. Treasuries.

Given the Treasury’s need to flog on the order of $3 trillion worth of its unbacked paper this year just to keep the government’s doors open – and that is a four- or fivefold increase over 2008 – the foreign buyers not only have to show up for the Treasury auctions, they have to show up in droves.

In mid-July, the Associated Press reported that “Foreign demand for long-term U.S. financial assets dropped by the largest amount in four months in May, as Japan and Russia trimmed their holdings of Treasury securities … foreigners actually sold $19.8 billion more long-term U.S. securities than they purchased in May. That compared with net purchases of $11.5 billion in April.”

Below you see the big picture of all cross-border flows in May as published by the U.S. Treasury. It shows both foreign investment in the U.S. and U.S. investment abroad. It includes Treasuries, agencies, corporate bonds, equities, and short-term instruments like T-bills. Foreigners bought a lot of T-bills when the credit crisis became acute.

This should be a serious situation with a big drop in foreign investible funds for meeting U.S. borrowing needs. The borrowing by households and business has dropped close to zero, decreasing demand, while government borrowing has jumped but is still smaller than the private borrowing drop. The Fed has added some lending.

A look at just the longer-term Securities (not T-bills) is even more convincing of the slowing of lending by foreigners:

This decrease in credit should pressure rates higher.

And here is the breakdown of foreign investment into the U.S. Foreigners only continued to buy Treasuries, shunning new investment and selling off agencies in the riskier real estate market.

It’s not for nothing that the Goldman Sachs Secretary of the Treasury Timothy Geithner is hotfooting it around the world lately, last week to Saudi Arabia and the UAE… last month to China.

The purpose of his trip, Geithner told reporters in Paris, he was doing this tour ”to make sure we keep working with governments around the world to continue to provide enough support to lift this global economy back to a sustained pattern of growth.”

Translation: Look here, we’re all in this together. If you jump ship now, we’re all doomed… DOOMED, I say!

But the fact remains that the foreign holders of U.S. dollars have it within their ability – either deliberately or inadvertently as the result of a panic setting in – to literally destroy the U.S. currency.

The latest report shows Russia and longtime monetary ally Japan edging toward the door. China and the oil-exporting nations continue to convert an increasingly moderate amount of their trade surplus into Treasury bills – but not on a nearly large enough scale to meet the inflated (and inflating) borrowing needs of the utterly bankrupt U.S. government. And how long will they continue to show up, when an increasing number of other foreign buyers start selling their Treasuries? No one likes to be the last one to leave a party, especially when the bananas flambé has tipped over on the floor and the curtains are on fire.

Put simply, the only thing now standing between the U.S. dollar holding its own and an almost overnight debasement (and history has shown us that when things go wrong with a currency, they can go wrong very quickly) is the willingness of foreigners to play nice. This was never a threat that the Japanese had to deal with during the worst of their recent dark days, but it’s a very real risk here and now in the United States.

That that risk sits on top of the monetary inflation that has been the steady response of the U.S. government so far –  and will continue to be its response as the economy further erodes – is not something to be sniffed at.

On July 17, Bloomberg reported that “China’s finance ministry failed to meet its debt-sale target for a third time in two weeks at a 182-day bill sale, according to traders at Galaxy Securities Co. and China Citic Bank in Beijing. The ministry had tried to sell 20 billion yuan of bills and only sold 18.51 billion yuan, traders said. The average yield for the bills sold was 1.6011 percent, they said.”

Here’s our take on this news item: The problem from the Chinese government’s point of view is that they were not able to borrow as much money as they wanted, in the light that they are now spending at a very fast clip with a big stimulus program to keep their own economy (bubble?) growing. So how can they fund the spending? They can sell off the stash of foreign-currency-denominated holdings they are sitting on. That could mean Treasuries dumped on the world market.

There are other alternatives, like getting the People’s Bank of China to print up some new money for the government, which would inflate the renminbi (RMB) and decrease its international price and attractiveness. They might like to let the RMB fall to encourage exports and keep relative worker pay low on the world competitive scene. But they are also trying to make the RMB a world currency by itself, so they don’t want it to look weak and at risk.

Our guess is that they are selling Treasuries and not telling.

[Note: In latest news this week, Chinese Prime Minister Wen Jiabao said China “will use its foreign exchange reserves to support and accelerate overseas expansions and acquisitions by Chinese companies.” Jiabao called it China’s “going out” strategy. Going out (with a bang), though, may be a better description of what the U.S. will ultimately do.]

This is what The Casey Report, Casey Research’s flagship publication, does: spotting budding trends in the economy and the markets, and then devising ways to profit from them. A strategy that – as thousands of happy subscribers can vouch for – is paying off… and paying off big. Right now, one of our favorite plays, and surest bets, on the economic quagmire we’re in is an investment that is almost guaranteed to be a winner. Let Casey Chief Economist Bud Conrad tell you all about it in his free report. Click here to learn more.

Source: Foreign Investment in the U.S. – Going Down, Down, Down

Conveniently, the second-quarter jump — plus revised GDP growth expectations of 8% in the third quarter and 9% in the fourth — puts China perfectly on track for the 8% annual growth they promised earlier this year.

Looking through the fine print of today’s data… oy, these are some la-la land numbers:

• New lending in the first half soared 201% compared to the year before
• First-half property sales up 53% per annum
• Chinese home prices are growing at a 10% annualized pace
• First-half auto sales up 17% per annum
• Retail sales up 15% in the first half
• Inflation down 1.1% from a year ago.

Of course, not all is well over there. Exports, the backbone of the Chinese economy, are down 22% so far this year. Construction starts, another staple of Chinese growth, just ended 11 straight months of decline. But still, today’s numbers show nothing short of a V-shaped recovery for China. Too good to be true? Maybe.

But here’s one more amazing Chinese stat for today, one we don’t doubt: China’s official foreign reserves now exceed a record $2.13 trillion. At least $763 billion of this sea of money is pure U.S. debt. In spite of all the global turmoil and market ups and downs, China has remained the world’s steadiest accumulator of sovereign debt — namely American Treasuries… a fact of life that will surely haunt us one day.

By the way, another Chinese debt auction failed this morning. That’s the third time in the last two weeks that the Chinese government was unable to sell as much debt as it planned. In order to continue financing their rabid growth, maybe they’ll have to start selling some assets — like, call us crazy, American IOUs.

Source:  China Booms… Too Good to be True?

After peaking north of the $1,000 per ounce price level last year, gold hit a stumbling block when deflationary fears in the world’s largest economy sucked the air out of commodities prices and sent hoards of investors stampeding into the safe-haven of U.S. Treasuries, and helped spawn a rebound in the U.S. dollar.

Since that time, the global economic outlook – especially beyond U.S. borders – has improved, and gold prices have stabilized.

The next step – many gold bulls say – is for the yellow metal to make a run for new highs.

Whipsaw Trading Patterns

Gold started 2009 at about $870 an ounce – down substantially from early 2008 when prices hit a record-high $1033.90, but significantly higher than the $712.30 an ounce it was trading at in mid-November.

Then, when talk of inflation resurfaced in February, and later in April, prices surged well over $900 an ounce, again testing the $1,000 level. Gold prices hit $983 in early June – a 38% jump from their November low.

Gold prices have since lost some of that momentum, dropping back down to $940 an ounce, but many analysts believe this is where gold will find support before eventually shooting back to $1,000 – and possibly even higher – by the end of the year.

There are many reasons to believe that gold is poised for such a strong showing: Supply of newly mined gold is dwindling, fresh discoveries of deposits are on the wane, and demand has remained strong.

But the biggest reason analysts believe gold will rebound to its 2008 apex is that the medium and long-term outlook for dollar is rapidly darkening.

Government Support for Gold

With the U.S. Federal Reserve pursuing a policy of quantitative easing and a federal budget deficit that’s spiraling out of control, the dollar is extremely vulnerable.

The Federal Reserve has lowered its benchmark Federal Funds rate to a range 0%-0.25% and has said it will remain there for “an extended period.”

The Fed has also injected more than $2 trillion into the financial system, expanding credit through increased loans to banks to provide liquidity. It’s also created the Commercial Paper Funding Facility – which holds $109.2 billion in short-term IOUs issued by corporations – and the Term Asset-Backed Securities Loan Facility (TALF) – which has lent $25 billion to investors to buy securities tied to auto and other consumer and business loans.

And the central bank itself has pledged to buy $1.75 trillion in mortgage-backed securities, Treasury notes, and federal housing agency bonds.

“In the last year alone, the U.S. Federal Reserve has actually doubled the U.S. monetary base,” said Money Morning Contributing Editor Peter Krauth. “That can only lead to serious inflation, perhapseven hyperinflation.  This will cause the value of the U.S. dollar – which has been eroding since 2001 – to decline at an even-more-frenetic pace.”

In addition to the Fed’s action, the United States’ spiraling debt poses a significant threat to the dollar’s value, as well.

Federal debt will reach $12 trillion by this fall and exceed $13 trillion by September 2010, according to theCongressional Budget Office (CBO).

The CBO projects the U.S. budget shortfall will reach at least $1.85 trillion – equivalent to 13% of the nation’s gross domestic product (GDP), a level not seen since World War II – in fiscal 2009. And if the economy doesn’t rebound soon, that number will very likely top $2 trillion by the end of September.

The CBO anticipates the deficit will shrink to about $1.4 trillion in fiscal 2010 and $1 trillion in fiscal 2011, if the economy continues to stagnate, there is a good chance that those budget shortfalls will be even greater than the fiscal 2009 deficit.

Some of U.S. President Barack Obama’s advisors have already acknowledged that the administration underestimated the rapid rise in unemployment and that a second stimulus may be in the cards.

Laura Tyson, former chair of the U.S. President’s Council of Economic Advisers during the Clinton administration and current advisor to President Obama, said July 6 that the $787 billion stimulus passed in February was “a bit too small,” and that more may be required.

But if another stimulus is needed, how exactly does Washington plan on financing it?

While the government has continued to find buyers for its Treasuries, the question being asked by analysts is at what point will investors start to balk at continuing to finance the American expenditures.

China – the largest holder of U.S. debt – is already losing its appetite for U.S. Treasuries. In fact, the world’s fastest growing economy has already admitted to stocking up on gold to hedge against the dwindling value of its dollar holdings.

With the Dollar Diving, China Turns to Gold

China bought less than a sixth of the Treasuries issued by the U.S. government in the 12 months through March.  That stands in stark contrast to the Treasury market of two years ago, when China’s demand for U.S. securities actually exceeded the United States’ own borrowing needs.

Additionally, when China has purchased Treasuries, it has done so by swapping them with other U.S. assets, rather than exchanging foreign currencies or commodities. China has increased purchases of short-term Treasury notes – those that mature in a year or less – while at the same time unwinding its position in Treasuries with longer maturities.

“They are worried about forever-rising deficits, which may devalue Treasuries by pushing interest rates higher,” JPMorgan & Co. (NYSE:JPM) analyst Frank Gong told The Associated Press. “Inside China, there has been a lot of debate about whether they should continue to buy Treasuries.”
As Money Morningreported in June, Treasury Secretary Timothy F. Geithner traveled to Chinato reassure the nation about the value of its holdings. But not everyone was convinced.

“I worry about details,” said Yu Yongding, a former central bank adviser who interviewed Geithner for the China Dailynewspaper. “We will be watching you very carefully.”

Prior to Geithner’s visit, Yu told Bloomberg News that he was hopeful for details on the U.S. plan to support the dollar. He also warned that despite its sizeable commitment to U.S. debt, China has other options.

“I wish to tell the U.S. government: ‘Don’t be complacent and think there isn’t any alternative for China to buy your bills and bonds,’” said Yu. “The euro is an alternative. And there are lots of raw materials we can still buy.”

One such raw material is gold. China recently announced recently that it has increased its holdings of gold by about 450 metric tons in the past six years.

“Gold is shifting back from a sovereign reserve asset central banks were inclined to underplay to one of growing, strategic interest,” said Trevor Keeley, global head of sovereign client services at the Anglo-Swiss bank UBS AG (NYSE: UBS). “This shift is logical; gold remains the world’s primary financial asset that is no one’s liability.”

And China’s not the only one loading up on the yellow metal.

Whether it’s through exchange traded funds (ETFs), or acquiring actual gold bullion, investor demand for gold continues to soar.

Individuals’ bullion purchases almost doubled last year to 862 metric tons, The Wall Street Journal reported. And while gold buying by investors has fallen from its 2008 peak, the volume still remains historically high. The 130 metric tons of gold purchased in the first quarter of 2009 is 50% higher than this decade’s average quarterly volume.

Of course, bullion isn’t the most practical way to get in on gold’s pending surge.

How to Stock Up on Gold

One way to stock up is to buy gold outright, either in bars, or though the gold-linked, exchange-traded fund (ETF) SPDR Gold Shares (NYSE:GLD). Today, SPDR itself holds more than 1,000 ounces of gold, and has a market capitalization of $33 billion.

The fund’s price fluctuates in concert with the price of gold, which adds a small mount of risk. On the other hand, however, buying this ETF is more convenient than buying gold bars directly, because the fund dispenses with the accompanying storage problems that comes with actually owning physical gold.

Buying stakes in gold miners is an excellent way to hedge against the enormous inflationary pressures filtering through the U.S. economy.

In this case, the Market Vectors Gold Miners ETF (NYSE: GDX) – composed chiefly of major gold miners – offers both company and geographic diversification, while including substantial leverage to the price of gold.  Market Vectors is based on the AMEX Gold BUGS Index(HUI), which represents a portfolio of 15 major gold mining companies that do not hedge their gold production beyond a year and a half.

Source: With Inflation on the Horizon, Gold Prices are Ready to Rally