Chuck Butler (The Daily Reckoning):

Front and center on the currencies this morning, we have the fears of a default in Dubai, fading, and that brings the risk takers back out… So, we had one day of bloodletting on Friday, and come Monday, the tourniquet had been applied, and things are back on track. The Big Dog, euro (EUR) is off the porch, chasing the dollar down the street once again, and is trading at 1.5050, as I begin to write this morning.

I had a long time customer send me a note on Friday, asking me about the selling going on in the currencies and commodities because of the news that Dubai World was asking for help with their loans… I replied that the research I had read led me to believe that this would fade, in that the ruling families of Dubai and Abu Dhabi have bloodlines, and even though they had feuded in the past, blood would run thick, and the country would step in to help with the loans, which would mean a return to dollar selling once it all got straightened out… WOW!

This morning, there is news that the UAE will back the banks and the loans, so… It’s a “risk on” day once again!

After the Treasury auctions of last week, and a supposed “good covering,” the end result is that we have this pile of debt, and Treasury yields very reminiscent of something right out of the time warp of Eisenhower! But! Here’s the thing that US Treasury Secretary Geithner is hanging is hat on… These low yields reduce the interest expense for the US. Yes, Timothy, that my be true… But when you are issuing the amount of debt that’s on your plate to issue, then the “net” reduction to interest expense is a fallacy. Go ahead, do the math, Timothy… I dare you!

Can you believe that tomorrow is December 1st? WOW! Let the Holidays begin! But what comes to us on December 1st? That’s right, it’s the Reserve Bank of Australia (RBA) meeting. I’ve pinned my colors to the mast of another rate hike by the RBA tomorrow, and by the looks of it, Traders are beginning to pin their colors to that same mast! The reason I say that is the performance of the Aussie dollar (AUD) overnight. The Aussie dollar has a 91-cent handle this morning, which is far better than that 0.8998 figure that Mike reported on Friday morning!

Before I headed home on Wednesday last week, gold had pushed to a $25 gain in one day! WOW! I thought, “Can’t wait to see what the price looks like on Monday when I return!” But the Dubai loan problems took the wind out of gold’s sails, and the shiny metal lost $25 on Friday! UGH! Oh well, it gives buyers the opportunity to buy more at a cheaper level, I thought to myself… Then I thought… You should go check out what your good friend Addison Wiggin has to say about gold… So I did!

Click here for the rest of Mr. Butler’s article at The Daily Reckoning.

Judicial Watch said the Treasury initially said it had no records about the meeting. It didn’t release a transcript of discussions between government officials and bankers.

However, documents obtained under a Freedom of Information Act request confirm that Paulson and other Treasury officials gave nine major banks no options other than allowing the government to take $250 billion in equity.

Judicial Watch said on its Web site that after it made inquiries, the Treasury insisted on Feb. 4 it had no documents about the historic meeting.

Furthermore, “the cover-up continues, as the Obama administration protects Timothy Geithner by withholding a key document about his role in this infamous bankers meeting,” Judicial Watch president Tom Fitton said in a statement.

The group says suggested edits of the “talking points” for the meeting by Treasury Secretary Tim Geithner, then President of the New York Federal Reserve are being withheld by the Obama administration.

Saying the nine U.S. banks were “central to any solution” of the credit crisis, Paulson told their leaders in the meeting in Washington on October 13, 2008, to take the government aid voluntarily or be forced to by regulators.

“We don’t believe it is tenable to opt out because doing so would leave you vulnerable and exposed,” the document said, citing Paulson talking points. “If a capital infusion is not appealing, you should be aware your regulator will require it in any circumstance.”

Within four hours of the start of the meeting the CEOs wrote by hand the names of their institution and multibillion dollar amounts of “preferred shares” to be issued to the government, the documents show.

“These documents show our government exercising unrestrained power over the private sector,” Fitton said in a statement.

The banks were represented by Vikram Pandit of Citigroup Inc. (NYSE: C), Kenneth Lewis of Bank of America Corp. (NYSE: BAC), John Thain of Merrill Lynch & Co., now part of BofA, Jaime Dimon of JP Morgan & Co. (NYSE: JPM), Richard Kovacevich of Wells Fargo (NYSE: WFC), John Mack of Morgan Stanley (NYSE: MS), Lloyd Blankfein of Goldman Sachs Group Inc. (NYSE: GS), Robert Kelly of Bank of New York Mellon Corp (NYSE: BK), and Ronald Logue of State Street Corp. (NYSE: STT).

A spokesman for the Treasury, Andrew Williams, didn’t return calls seeking comment from Bloomberg News.

The Treasury has invested $199.1 billion in the bank-preferred share program, with $1.2 billion since returned by 12 institutions, according to government data, Bloomberg reported.

Despite his heavy-handed nature, Paulson succeeded at stabilizing the financial services industry, J.P. O’Sullivan, an SNL Financial bank analyst in Charlottesville, Va., told Bloomberg.

“It was a calming mechanism,” O’Sullivan said.

This isn’t the first time Paulson has been accused of strong-arming bankers to bend to his will.

As previously reported in Money Morning, Bank of America CEO Kenneth Lewis said in testimony before New York’s attorney general that Paulson and Federal Reserve Chairman Ben S. Bernanke pressured him not only to move ahead with a merger with Merrill Lynch despite reservations, but also to stay quiet about the mounting losses at the crumbling investment bank.

Lewis went on to testify that he felt Paulson threatened him with losing his job if he didn’t go along with completing the Merrill Lynch deal.

“I can’t recall if he said, ‘We would remove the board and management if you called it [off]‘ or if he said ‘we would do it if you intended to.’ I don’t remember which one it was,” Mr. Lewis said.

Source:  Watchdog Alleges Obama Administration in “Cover Up” of Docs from Treasury Meeting with Banks

Good day… The currency markets took back what little strength the dollar mustered over the past two days with the Euro moving back above popping back above 1.36 and the Australian dollar moving back up over .70. The cause for this dollar weakness? Data released in the US yesterday was surprisingly strong again, so investors dumped the ’safe haven’ holdings of Treasuries and moved money back into higher yielding investments.

At one point yesterday the dollar index dropped precipitously (more than 1.5% in less than 10 minutes), and then bounced back up within a half hour. Jennifer McLean, who takes care of our currency trading while Chuck is away from the desk, said the sudden moves were due to Treasury Secretary Geithner’s comments. Apparently Geithner was asked about China’s call for a new international reserve currency yesterday at a NY event. He said that while he hadn’t read the proposal, he understood it as a plan “designed to increase the use of the IMF’s special drawing rights. And we’re actually quite open to that.” After hearing those words, currency traders immediately starting selling off the dollar. After all, if the Treasury Secretary of the US says the administration is open to a new international reserve currency, why do you want to hold dollars? I guess Geithner got wind of what he had done to the currency markets pretty quickly (the power of Blackberries!) and 15 minutes later he clarified his comments to say the US dollar should remain as the world’s reserve currency.

So the Treasury Secretary got a quick lesson in just how sensitive the currency markets are. The props which have held up the US dollar can be kicked out from under it with a few words from him. I have got to believe the quick sell off yesterday is a sign of what will happen in the coming months as we here more and more rhetoric about the need for an alternative reserve currency. Foreign nations are not going to want to continue to invest a majority of their reserves in a currency which is likely going to be losing value because of the inflationary impact of all of the debts and deficits here in the US. If the Euro zone can show some signs of stability, it could take advantage of the weakened state of the US$ to challenge for the reserve currency status. Just what Chuck has been talking about over the past few years.

The big story out of Europe yesterday was the failure of the UK bond auction. The UK Government held an auction to sell 1.75 billion pounds of bonds (commonly called gilts) yesterday. For the first time in 7 years, not enough buyers showed up at the auction so the UK couldn’t sell all of the gilts. This auction ‘failure’ sent interest rates up in the UK as investors demanded higher yields. The main reason the UK couldn’t attract enough buyers were their quantitative easing efforts of late. You see, the Bank of England was one of the first to announce they would be buying UK gilts in an effort to bring down interest rates and stimulate the economy. Sound familiar? This is what the Obama administration is going to do with last weeks announcement that it would be purchasing $300 billion of US treasuries.

This effort to drive rates lower than what the market dictates causes investors to just stay away from the auction. So it creates an environment where the government is the only willing buyer of their own debt, a situation that can become hyper-inflationary. So the government must eventually attract outside investors back into the debt auctions. To do this, they either have to let interest rates rise or let their currency value fall, making the purchases more attractive to outside investors. A combination of the two is the most likely scenario. This is the path the UK has started to walk down with the US close on their heels.

Chuck alerted me to the failed gilt auction yesterday, and sent me this note: “Oh… And did you hear that in the U.K. their Gilt auction (their treasuries) failed yesterday? Now, hasn’t just about everything that happened here in the U.S. during this financial meltdown happened first in the U.K.? Well… I think this is an ominous omen that they couldn’t get enough buyers for their debt auction… ”

As I reported in the first paragraph, the US data releases continued to be surprisingly strong. Both durable goods and sales of new homes unexpectedly rose in February according to yesterday’s reports. Durable goods orders jumped 3.4% in February, after dropping a revised 7.3% in January. This increase was the largest in more than a year, and the first positive move in seven months. The other big piece of data released by the Commerce Department showed New home sales increased 4.7% vs. the January sales. These two positive numbers eased fears in the equity markets, and encouraged investors to take more risks. This is why positive economic data releases in the US cause a sell off in the US$ (the reversal of the trend we were seeing earlier this year).

Does anyone find it odd that all of the data we are seeing this week are surprisingly strong, while the revisions to the prior month’s data show even bigger drops? I’m not accusing the government of massaging the numbers (wink wink) but it just seems odd. Today we will see the GDP numbers from 4th quarter of 2008. The economists are predicting a drop of 6.6% during the last quarter, but the trend with data releases this week would suggest the number will come a bit stronger. We will also see the weekly jobless claims which are expected to show another 650k US citizens were out of a job last week.

This would be the eighth consecutive week of a 600k+ number for jobless claims. The jobs numbers will have to start improving if the US is going to really turn things around.

The strength of the Euro was somewhat tempered by the release of German business confidence data which fell to the lowest level in more than 26 years. The global economic slump is weighing heavily on German companies who rely on exports. The data gave support to those calling for another rate cut by the ECB. The Euro has been caught in a fairly narrow trading band this week, as it has benefited from calls for an alternative reserve currency, but sold vs. poor European economic data.

China’s central bank Governor Zhou Xiaochuan helped investor confidence with a statement that the Chinese economy is recovering. “Leading indicators are pointing to recovery of economic growth,” Zhou said in an article on the central bank’s website today. The government “has taken prompt, decisive and effective policy measures, demonstrating its superior system advantage when it comes to making vital policy decisions,” he said. China continues to try and keep their economy growing above 8%, and will continue to be the growth engine of the global economy. A strong Chinese economy is good for the commodity markets, and global recovery.

As predicted, New Zealand’s current account deficit widened to a record last year as exports fell. Finance Minister Bill English said this week the deficit is “uncomfortably large” and makes New Zealand dependent on foreign funding. It is actually nice to hear a Finance Minister worried about the long term impact of running large current account deficits! Here in the US all we hear is ‘deficits don’t matter’. But the growing current account deficit is the main reason Chuck suggested investors move out of the kiwi last year, and we still think the Australian dollar is a better currency to own.

Both currencies rallied again yesterday, as investors moved out of ’safe haven’ US treasuries and into these higher yielding currencies. The Australian dollar also benefited from an statement by the Rio Tinto Group that predicted the metals markets would recover in the second half of 2009. Commodities account for over 60 percent of Australia’s exports, and 70% of exports in New Zealand. If data continue to show China is on solid footing, these two currencies should continue to appreciate.

It is getting late, so I will head right to the currency wrap-up:

Currencies today 3/26/2009: A$ .7020, kiwi .5770, C$ .8142, euro 1.3574, sterling 1.4561, Swiss .8883, rand 9.4226, krone 6.4553, SEK 8.0229, forint 222.57, zloty 3.3561, koruna 20.1542, yen 98.35, sing 1.5080, HKD 7.75, INR 50.5625, China 6.8319, pesos 14.172, BRL 2.2378, dollar index 83.77, Oil $53.53, Silver $13.575, and Gold… 935.77

Source: Geithner Tanks the Dollar, but then Pushes it Back Up

U.S. stocks fell on Thursday with the major indexes down more than 2 percent after a surprisingly grim earnings report from Microsoft Corp and economic data that showed further deterioration in the labor and housing markets.

Microsoft, raising worries over how it would fare in the economic slowdown, said it would cut up to 5,000 jobs over the next 18 months and that it could no longer offer profit forecasts for the rest of the fiscal year. The stock was among the Dow’s biggest drags, falling 8 percent.

“It is a negative surprise for the market, certainly from a bellwether technology company. For Microsoft to miss its guidance, it brings home the pervasive fallout from the credit crisis,” said Richard Sparks, senior equities analyst at Schaeffer’s Investment Research in Cincinnati, Ohio.

“On Wednesday, we had been able to bounce from the 8,000 level on the Dow. This (Microsoft news) makes it inevitable to retest the November lows for the market.”

The results, which had been expected to be released later in the day, added to the already negative tone after data showing the number of workers filing new claims for jobless benefits rose by more than expected last week, while housing starts and permits fell to a record low in December, data showed.

The Dow Jones industrial average fell 195.30 points, or 2.37 percent, to 8,032.80. The Standard & Poor’s 500 Index was down 21.20 points, or 2.52 percent, at 819.04. The Nasdaq Composite Index gave up 48.55 points, or 3.22 percent, to 1,458.52.

Investors were watching for a vote by the U.S. Senate Finance Committee on the nomination of Timothy Geithner to be Treasury secretary.

Geithner faced tough questioning at his confirmation hearing before the committee on Wednesday. Wall Street had originally cheered Geithner’s nomination but the choice has since come under controversy over Geithner’s failure to pay some taxes.

NEW YORK, Jan 22 (Reuters)

This from Investor’s Daily Edge:

Now that the election is over instead of focusing on what is going to happen over the next 10 weeks until the inauguration, I thought it would serve our readers better to look further out.  Over the next 10 weeks there are going to be numerous news items that will affect the market.  Traders will analyze each cabinet nomination, especially the selection of Treasury Secretary.  There are two more employment reports due out before the inauguration, the holiday shopping season, and the next earnings cycle will start before January 20.

Right now, everyone wants to know how President Obama is going to turn the economy around.  First, it isn’t going to happen overnight.  We aren’t going to go to bed on January 20 and wake up on January 21 and magically the economy is fixed.  And this would have been the same had McCain won.

One thing that might change somewhat overnight is we could see a boost in consumer confidence.  With things looking so dire, a change in leadership certainly couldn’t hurt right now.  Kind of like when a sports team makes a coaching change in the middle of the season.  All of the sudden the team goes on a winning streak with the same players.  When leadership is changed, there is an attitude change.  We better hope this is the case for the American economy.

In order for the economy to turn the corner and start improving, one of the big three has to start improving.  I am not talking about General Motos (NYSE:GM), Ford (NYSE:F) and Chrysler.  I am talking about the other big three.

What are the other big three?

As children, most of us dreamed of having three things when we thought about growing up: a nice house, a nice car, and a nice job.  These are the other big three.  Right now, these big three for most people are about as optimistic as the outlook for the automotive big three.

Over the past year, home values have dropped sharply, auto sales have dropped like a rock, and unemployment has gone through the roof.  Before the U.S. economy can turn around, at least one of these markets is going to have to turn higher.

After the October payroll numbers were released, it isn’t looking likely the job market is going to be the one that turns around anytime soon.  Adding the 240,000 jobs lost in October to the rest of the year, the number of jobs lost so far this year has reached 1.2 million.

Turning our attention to auto sales, the picture is much the same.  October’s numbers are the worst since 1992.  You might recall this was during the ‘91-’92 recession.  Vehicle sales have been falling for over three years now after peaking in the third quarter of 2005.

Much has been written in IDE as well as other publications about the trouble of The Big Three.  Without a doubt the U.S. automakers have serious problems, but as you can see in the chart, import sales are declining as well.

The third of the other big three, housing, may have the best shot at turning around first.

Source: The Economy Won’t Turn The Corner Until The Other Big Three Turn The Corner

But the Fed and Treasury have engineered a strategy to pay off the debt with weaker and weaker dollars. And guess what? So far, so good. Since November 2002, the dollar has fallen against the euro more than 50 percent since its high in October 2000. Of course, this is not the first time we’ve gone through a managed devaluation of the currency. In the 34-year period since Nixon slammed the gold window shut and subsequently ended the Bretton Woods exchange rate mechanism, we’ve had only five major currency trends:

1. Weak dollar 1972–1978 (7 years)
2. Strong dollar 1979–1985 (7 years)
3. Weak dollar 1986–1995 (10 years)
4. Strong dollar 1996–2001 (6 years)
5. Weak dollar 2002– (? years)

The most notable period spanned the 10 years from 1986 through 1995. Then as now, the United States was fighting a historic current account deficit through managed debasement of its currency. But because the present bear market only began in February 2002, the current cycle looks like it still has a number of years to run.

In the best-case scenario, if the current bear market follows the trajectory set by the 1986 — 1995 slump, we could see a weakening dollar for up to 10 years. This presents an opportunity for selling the dollar in one of four ways: direct and indirect speculations, using short- and long-term options for each. These plays will help you safely position your money outside the dollar bear market. And you stand to make a fair amount of money, too.

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But there is great danger ahead. Since the trade deficit passed the $759 billion mark — 6.3 percent of GDP — foreigners now must shell out about $1.5 billion a day just to keep the dollar afloat. And even during the managed dollar decline of 2003, the trade imbalance continued to grow. In 2005, Stephen Roach, Morgan Stanley’s chief global strategist, predicted that the current account deficit at the time was on course to reach $710 billion — 6.5 percent of GDP. He was short by only a few billion.

Herein lies the drama. The Bank of Japan spent the equivalent of $187 billion in 2003 — and $67 billion in January 2004 alone — in a bid to prevent its strengthening currency from choking off the country’s export-led recovery. In dollar terms, the Bank of Japan is now spending more than $1.5 billion every day trying to keep the yen from strengthening against the greenback.

Over a four-week period in the fall of 2003, combined foreign central bank purchases of U.S. securities topped $40 billion, more than $2 billion every trading day. Yet these central bank billions managed merely to limit the greenback’s decline to just 2.3 percent over the same period. Can you imagine what would have happened if the banks hadn’t pumped that money into the Fed’s reserves? One former currency trader has asked, “If $40 billion cannot bring about even a minor rally, just how weak and despised is the once — almighty dollar?”

We have relied on the kindness of strangers for too long. “We’re like the untrustworthy brother-in-law who keeps borrowing money, promising to pay it back, but can never seem to get out of debt,” Jim Rogers writes. “Eventually, people cut that guy off.”

There is no way the United States can possibly pay off its creditors should they decide to cash in their IOUs. Right now, the United States holds only about $70 billion in reserves against its obligations — much less than 2005’s $87 billion. That would last about three minutes should creditors begin to sell the dollar, rather than trying to support it.

It’s hard to imagine, isn’t it? The world’s reserve currency spiraling downward, out of control. But then, that’s what the British must have thought in 1992 when they attempted to manage a devaluation of the pound. Despite the Bank of England’s best efforts, sterling got away from them; the currency collapsed and Britain was kicked out of the Exchange Rate Mechanism (ERM) established to pave the way for the euro. On that day, known as Black Wednesday in Britain, currency speculator George Soros is rumored to have made as much as $2 billion. Don’t be surprised if more fortunes emerge in the future as the dollar slips dangerously close to free fall.

By flooding the system with liquidity, the Fed cannot control the value of the U.S. dollar against foreign currencies; nor can they control its purchasing power — at least not indefinitely. The Fed’s current policies can “give the majority of investors the illusion of wealth as asset markets appreciate,” wrote Marc Faber in November 2003, “while the loss of the currency’s purchasing power is hardly noticed. This is particularly true of a society that has a very large domestic market, where 90 percent of the people don’t have a passport and therefore know little about what is going on outside their own continent. And where the import prices of manufactured goods are in continuous decline because of the entry of China, as a huge new supplier of products with an extremely low cost structure, into the global market economy.” If that’s the case, you should look at any declines in the dollar as an opportunity to make some money.

The dollar is the single biggest element of risk in the world of finance today. Rearrange the current system of world finance ever so slightly, let confidence in the greenback falter, and the mighty dollar could go up in flames. There are many ways to hedge against this risk. Better still, there are many ways to profit from the likelihood the dollar will fall. Some methods are direct, some indirect. Some are leveraged, some unleveraged. There is a methodology for every taste, but before explaining the specifics, we ask: What ails the dollar?

The dollar is a victim of its own success. It is America’s most successful export ever — more successful than chewing gum, Levi’s, Coca-Cola, or even Elvis Presley, Britney Spears, and Madonna put together. Trillions of dollars flow through the global financial markets every week, and they are readily accepted at large and small — and clandestine — business establishments from Kiev to Karachi.

Today, there are simply too many dollars in circulation for the currency’s own good. Why? Americans have been living beyond their means for more than two decades. The U.S. dollar’s problems stem from a single cause. “If there’s a bubble,” wrote David Rosenberg, chief economist at Merrill Lynch,” it’s in this four-letter word: debt. The U.S. economy is just awash in it.”

You’ve seen it firsthand: John Q. Public now holds more credit cards and outstanding loans — with a higher and higher total debt load — than ever before. Outstanding consumer credit, including mortgage and other debt, reached $9.3 trillion in April 2003 — a significant increase from its $7 trillion total in January 2000 — but by the third quarter of 2007, debt had nearly doubled since 2000, to $13.7 trillion. With consumer spending alone responsible for approximately 70 percent of U.S. GDP, that’s quite a hefty personal debt load.

The corporate debt picture is no better. American companies have never depended so much on sales of their corporate bonds. Between 2002-2007, investment-grade corporate bond sales increased nearly 60 percent, growing from $598 billion to $951 billion. But junk bond sales for that same period broke the bank, surging from $57 billion to $133 billion.

The third leg of the debt problem, following consumer and business debt, is Uncle Sam. Government debt as of November 7, 2007, officially passed $9,000,000,000,000. That’s about $30,000 for every man, woman, and child in the country. This total includes debt owned by many types of investors, from individuals to corporations to Federal Reserve banks and especially to foreign interests. (By 2004, foreign central banks had stockpiled more than $1.3 trillion worth of dollar-denominated Treasury bonds and agency bonds at the Federal Reserve. By 2007, foreign debt had nearly doubled, to $2.033 trillion.)

What the $7.8 trillion figure does not account for are items like the gap between the government’s Social Security and Medicare commitments and the money put aside to pay for them. If these items are factored in, the government debt burden for every American rises to well over $175,000. In 2005, the Methuselah of investment mavens, Sir John Templeton, then 93, said you should get out of U.S. stocks, the U.S. dollar, and excess residential real estate. Templeton believed the dollar would fall 40 percent against other major currencies, and that this would lead the nation’s major creditors — notably Japan and China — to dump their U.S. bonds, which would cause interest rates to run up, thus beginning a long period of stagflation. He was right.

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The Slow-Motion “Black Monday” Ahead

Here’s a picture for you: If the market today falls as fast and as far as it did in 1987, you’ll see more than 3,000 points erased from the Dow alone. In a single day.

Could it happen?

Banks hold the same blue chip shares you’ll find parked in your retirement fund. When the “level three” losses get declared, those same banks might have to start dumping those shares to raise cash. And that could send these blue chips…along with most of the rest of the stock market…into full-scale collapse.

I urge you to take the seven steps outlined for you in your free Strategic Financial Survival Library. Click here to reserve yours…

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Don’t let his age fool you — Templeton was still sharp in 1999 when the financial industry hacks in Florida were urging their customers to buy more tech stocks. Templeton warned that the bubble would soon burst. He was right; they were wrong. Of course, he was only 87 back then. He is almost certainly right again. Other great investors, too, are getting out of the dollar. For the first time in his life, Warren Buffett is investing in foreign currencies.

George Soros, who made a fortune selling sterling in the 1992 ERM crisis, warns that the U.S. system could “blow up” at any time. Richard Russell, the influential editor of the Dow Theory letters, speaking at the New Orleans Investment Conference, warned: “If ever there was a crisis that could shake the global economy — this is it.” Jim Rogers is teaching his daughter to speak Chinese. When old-timers nod their heads in agreement — especially when they happen to be the most successful investors in the world — their advice may be worth listening to.

American consumers, companies, the U.S. government, and the country as a whole owe more dollars to more people than ever before. But perhaps the greatest threat to the U.S. economy is its foreign creditors. There is — or should be — a limit to the number of dollars foreigners are willing to buy and hold and thus a limit to their willingness to service our credit habit. Why? Because the United States, while still the world’s number — one economic power, is showing itself to be an unreliable steward of its own currency.

Regards,
Addison Wiggin

Source: How to Sell the Dollar

It is widely regarded that such utterances, if repeated often enough, can constitute the sum total of what is still laughingly known as the nation’s “strong dollar policy.”

Over the past two generations, the American government has launched many failed campaigns. There has been the war on drugs, the war on poverty, and the continued attempts to improve education. But the “strong dollar policy” must be seen as the poster child for all failed Federal policies.

Many in the market took cheer that the policy is now being greatly expanded. In an unprecedented move, the Fed Chairman is now adding his voice to the chorus and using the same rhetoric previously used by Treasury alone. That’s two people saying the words…not just one:

A double-barrel strong dollar policy!

As the administration is so fond of saying, a nation’s currency reflects the underlying strength of its economy. In that sense it can be seen as a nation’s economic report card. In truth, a strong currency is in the interest of every nation, just as good grades are in the interest of every student.

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A flunking student cannot improve his grades by simply telling his parents and teachers that he has adopted a “straight A policy.” If his words are not accompanied by a change in actual behavior, his new policy is unlikely to achieve results. As long as his bad habits persist, the policy will not be any more effective simply because one of his friends chimes in.

In his speech this past Tuesday, Ben Bernanke finally admitted that the weakness in the dollar was contributing to both higher inflation and elevated inflation expectations. This stands in stark contrast to his recent testimony in front of the House Banking Committee, where in response to a question asked by Congressman Ron Paul, he confidently declared that the weakness of the dollar only effected Americans who travel abroad. It is amazing how little attention this complete reversal received.

The media of course wasted no time in declaring that Bernanke’s speech heralded the opening of a new front in the campaign against the falling dollar. For example, CNBC’s Larry Kudlow proclaimed that Bernanke had endorsed “King Dollar” (someone needs to remind Kudlow that the king has long since abdicated his throne) and the network ran an entire segment on how to profit from the new dollar rally. All of this because Bernanke merely mentioned the dollar, acknowledged its effects on inflation, and expressed concern for its plight. As far as the media and Wall Street are concerned, words without action are enough. Too bad that’s not the way things work here on the planet Earth.

The real take away from Bernanke’s comment is not that the dollar is about to rally, but that it is now more likely to sink even lower. I believe the main reason Bernanke has refrained from mentioning the dollar in the past is that he did not want to be put in a position of actually having to do something about its decline. He is now so fearful of an imminent dollar collapse that he must have felt compelled to throw down the gauntlet despite his fear that someone might actually pick it up.

My guess is that currency traders will ultimately see this as an act of desperation. When the dollar keeps falling a chorus will swell to demand that the Fed put teeth in its new policy. If Bernanke does nothing the world will finally see a naked emperor and the dollar’s decline will turn into a rout. If, on the other hand, the Fed raises rates to defend the dollar, and only a short term bounce results, then all remaining confidence in the Fed’s ability to support the dollar will evaporate as well. This is probably Bernanke’s greatest fear and is likely the main reason he waited so long before mentioning the dollar. The fact that he felt compelled to do so now likely means he knows the game is coming to an end.

Source: Dollar Bear Torpedoes the Fed’s ‘Strong Dollar Policy’

Yesterday, we were full of doubts…

But today, we’re not so sure…

Ah, that’s the trouble with growing older. You lose your dreams and youth. You lose your bearings too. We had lunch in the House of Lords yesterday, with our old friend Lord Rees-Mogg, who turns 80 next month. But more on that in a moment…let’s first turn to the financial news.

Today’s big headline concerns Fed chief Ben Bernanke. According the Financial Times, he broke with long standing tradition in order to express himself on the dollar yesterday. Alas, the fall of the greenback has “contributed to the unwelcome rise in import prices and consumer-price inflation,” he said to an international banker’s forum.

The headman at the Fed may want a stronger dollar…or a weaker one; it’s usually not his place to say so. That’s what the Treasury Secretary is for. Henry Paulson, of course, says the same thing; the United States wants a strong dollar. But nobody believes him. Investors seemed to take Mr. Bernanke more seriously.

Stock market investors sold shares and drove the Dow down 101 points. Over in the oil market, the black goo sank $3.45. And gold, too, was sold on the news…it sank $11 to $885.

But let’s think about this. What could the Fed do to protect the dollar? Easy…it could raise interest rates. But if the Fed wanted to protect the dollar, why has it waited so long? The greenback has lost about half its value since 2000, why didn’t it try to protect it sooner?

Ah, dear reader…the plot has become a bit confused. Let’s see if we can remember it.

In the 15-year period known as the “Great Moderation” central banks could increase their supplies of money 2, 3, 5 times as fast as GDP growth. Normally, this would cause inflation. But it didn’t, because globalized markets…along with a few other key trends…we’re holding consumer prices down. So, the inflationary money went into asset bubbles…dotcoms, houses, and the financial industry.

But after the housing/finance bubble popped last year, consumer prices rose – even while the world economy softened. All of a sudden, the world seemed to be spinning in the wrong direction. Instead of holding down prices in the United States and Europe, China was increasing them. China’s domestic inflation is running at more than 8%. And she’s exporting her inflation to the rest of the world. Import prices from China into the United States are now rising at 4% per year…after falling about 1% each year during most of the 21st century. As for imports from the rest of Asia, they were falling in price as recently as the first half of ‘07. Now, they’re going up by 4.3% per year.

And even as demand for basic commodities slows in the developed world, demand from the emerging markets makes them more expensive. Ai yi yi…globalization is no longer a force for good…but a force for evil! Now, earnings and housing prices fall in the United States, for example – while Americans are forced to compete with Asians for food, fuel and jobs too.

House prices in America are still falling. Foreclosures continue to rise – especially in places such as Las Vegas, which has the distinction of being the “mortgage fraud capital of the world.” And now comes word that people are not only abandoning their houses – but their pets too. Yes, the Society for the Prevention of Cruelty to Animals says that owners are leaving their dogs and cats behind. And pet food banks, operated by the SPCA, are said to have people lined up down the block to get free food for their pets.

Meanwhile, Winnebago says it has had to put its Iowa plant in neutral. The company makes luxury land barges, which have been a big hit with Americans for many years, allowing retirees to take to the open road whenever the mood strikes them. Problem is, motor homes are expensive to buy…and now, with gasoline over $4 a gallon, extremely expensive to operate. In real terms, gasoline is higher than it has ever been in the United States…considerably higher than the $3 it hit (in today’s money) in 1981.

On Wall Street, after Bear Stearns fainted, the other financial firms took smelling salts. But some of them are beginning to look a little woozy, nevertheless. Lehman Bros. is said to be looking for $3 to $4 billion in new capital. The company has nine times as much in level 2 and level 3 assets as it has in tangible equity. And it’s not the worst. Merrill Lynch’s level 2 and level 3 assets equal 2,565% of its tangible equity.

And dear readers, be aware: “There’s another Bear Stearns out there,” say our friends over at The Motley Fool. “You may already own it. And just as with Bear Stearns, chances are you won’t see the collapse coming until it’s too late.”

Colleague Dan Amoss, over at Strategic Short Report, has pinpointed the next Bear Stearns – and warns that there is another credit crisis ready to jam the pipeline.

“Right now,” he tells us, “this company is desperately scrambling to dump more of its weak, illiquid assets…while laying off employees by the thousands…in a desperate bid to ‘fix’ its Wall Street profile, keep its ’shameful secret’ under wraps, and protect its stock.”

But that won’t work, Dan continues. “Buried deep in this firm’s mysterious ‘Level 3′ assets, where banks have regularly hid their riskiest mortgage-backed securities, this one company already has one very large multibillion-dollar real-estate-based asset that – just by itself – could be worth nearly 30% less than it was when this firm bought it.

“When this firm is forced to beef up earnings by selling this one asset, you’re already looking at billions in write-down losses right there. And that’s just where the unraveling begins.”

Of course, we can’t tell you what the name of the firm is here – but Dan will in his new special report…along with advice on how to pile up as much as 200% gains, as this firm pays the piper for its massive mistakes. Clink on the link below:

Money-Tripling Gains on the Next Wave of Wipeouts and Write-downs Ahead

The feds’ response to this situation – so far – has been to cut rates, bail out financial firms, and hand out money (rebate checks). This inflation (along with robust demand from the emerging markets) has made itself felt, mainly, where the feds didn’t want it – in oil, gold and commodity prices.

At the time, our debt stood at $7 trillion, with interest payments in fiscal 2003 totaling $318 billion. But now the U.S. national debt stands above $ 9 trillion, with interest payments in fiscal 2007 adding $ 1.4 billion a day.

But the Fed and Treasury have engineered a strategy to pay off the debt with weaker and weaker dollars. And guess what? So far, so good. Since November 2002, the dollar has fallen against the euro more than 50 percent since its high in October 2000. Of course, this is not the first time we’ve gone through a managed devaluation of the currency. In the 34 – year period since Nixon slammed the gold window shut and subsequently ended the Bretton Woods exchange rate mechanism, we’ve had only five major currency trends:

1. Weak dollar 1972 – 1978 (7 years)
2. Strong dollar 1979 – 1985 (7 years)
3. Weak dollar 1986 – 1995 (10 years)
4. Strong dollar 1996 – 2001 (6 years)
5. Weak dollar 2002 – (? years)

The most notable period spanned the 10 years from 1986 through 1995. Then as now, the United States was fighting a historic current account deficit through managed debasement of its currency. But because the present bear market only began in February of 2002, the current cycle looks like it still has a number of years to run.

In the best-case scenario, if the current bear market follows the trajectory set by the 1986 – 1995 slump, we could see a weakening dollar for up to 10 years. This presents an opportunity for selling the dollar in one of four ways: direct and indirect speculations, using short- and long-term options for each. These plays will help you safely position your money outside the dollar bear market. And you stand to make a fair amount of money, too.

But there is great danger ahead. Since the trade deficit passed the $ 759 billion mark – 6.3 percent of GDP – foreigners now must shell out about $ 1.5 billion a day just to keep the dollar afloat. And even during the managed dollar decline of 2003, the trade imbalance continued to grow. In 2005, Stephen Roach, Morgan Stanley’s chief global strategist, predicted that the current account deficit at the time was on course to reach $ 710 billion – 6.5 percent of GDP. He was short by only a few billion.

Herein lies the drama. The Bank of Japan spent the equivalent of $187 billion in 2003 – and $67 billion in January 2004 alone – in a bid to prevent its strengthening currency from choking off the country’s export-led recovery. In dollar terms, the Bank of Japan is now spending more than $ 1.5 billion every day trying to keep the yen from strengthening against the greenback.

Over a four-week period in the fall of 2003, combined foreign central bank purchases of U.S. securities topped $ 40 billion, more than $ 2 billion every trading day. Yet these central bank billions managed merely to limit the greenback’s decline to just 2.3 percent over the same period. Can you imagine what would have happened if the banks hadn’t pumped that money into the Fed’s reserves? One former currency trader has asked, “If $40 billion cannot bring about even a minor rally, just how weak and despised is the once – almighty dollar?”

We have relied on the kindness of strangers for too long. “We’re like the untrustworthy brother – in – law who keeps borrowing money, promising to pay it back, but can never seem to get out of debt,” Jim Rogers writes. “Eventually, people cut that guy off.”

There is no way the United States can possibly pay off its creditors should they decide to cash in their IOUs. Right now, the United States holds only about $ 70 billion in reserves against its obligations – much less than 2005’s $ 87 billion. That would last about three minutes should creditors begin to sell the dollar, rather than trying to support it.

It’s hard to imagine, isn’t it? The world’s reserve currency spiraling downward, out of control. But then, that’s what the British must have thought in 1992 when they attempted to manage a devaluation of the pound. Despite the Bank of England’s best efforts, sterling got away from them; the currency collapsed and Britain was kicked out of the Exchange Rate Mechanism (ERM) established to pave the way for the euro. On that day, known as Black Wednesday in Britain, currency speculator George Soros is rumored to have made as much as $ 2 billion. Don’t be surprised if more fortunes emerge in the future as the dollar slips dangerously close to free fall.

By flooding the system with liquidity, the Fed cannot control the value of the U.S. dollar against foreign currencies; nor can they control its purchasing power – at least not indefinitely. The Fed’s current policies can “give the majority of investors the illusion of wealth as asset markets appreciate, ” wrote Marc Faber in November 2003, “while the loss of the currency’s purchasing power is hardly noticed. This is particularly true of a society that has a very large domestic market, where 90 percent of the people don’t have a passport and therefore know little about what is going on outside their own continent. And where the import prices of manufactured goods are in continuous decline because of the entry of China, as a huge new supplier of products with an extremely low cost structure, into the global market economy.” If that’s the case, you should look at any declines in the dollar as an opportunity to make some money.

The dollar is the single biggest element of risk in the world of finance today. Rearrange the current system of world finance ever so slightly, let confidence in the greenback falter, and the mighty dollar could go up in flames. There are many ways to hedge against this risk. Better still, there are many ways to profit from the likelihood the dollar will fall. Some methods are direct, some indirect. Some are leveraged, some unleveraged. There is a methodology for every taste, but before explaining the specifics, we ask: What ails the dollar?

The dollar is a victim of its own success. It is America’s most successful export ever – more successful than chewing gum, Levi’s, Coca – Cola, or even Elvis Presley, Britney Spears, and Madonna put together. Trillions of dollars flow through the global financial markets every week, and they are readily accepted at large and small – and clandestine – business establishments from Kiev to Karachi.

Today, there are simply too many dollars in circulation for the currency’s own good. Why? Americans have been living beyond their means for more than two decades. The U.S. dollar’s problems stem from a single cause. “If there’s a bubble,” wrote David Rosenberg, chief economist at Merrill Lynch, ” it’s in this four – letter word: debt. The U.S. economy is just awash in it. “

You’ve seen it firsthand: John Q. Public now holds more credit cards and outstanding loans – with a higher and higher total debt load – than ever before. Outstanding consumer credit, including mortgage and other debt, reached $ 9.3 trillion in April 2003 – a significant increase from its $ 7 trillion total in January 2000 – but by the third quarter of 2007, debt had nearly doubled since 2000, to $ 13.7 trillion. With consumer spending alone responsible for approximately 70 percent of U.S. GDP, that’s quite a hefty personal debt load.

The corporate debt picture is no better. American companies have never depended so much on sales of their corporate bonds. Between 2002-2007, investment – grade corporate bond sales increased nearly 60 percent, growing from $598 billion to $951 billion. But junk bond sales for that same period broke the bank, surging from $57 billion to $133 billion.

The third leg of the debt problem, following consumer and business debt, is Uncle Sam. Government debt as of November 7, 2007, officially passed $ 9,000,000,000,000. That’s about $ 30,000 for every man, woman, and child in the country. This total includes debt owned by many types of investors, from individuals to corporations to Federal Reserve banks and especially to foreign interests. (By 2004, foreign central banks had stockpiled more than $ 1.3 trillion worth of dollar – denominated Treasury bonds and agency bonds at the Federal Reserve. By 2007, foreign debt had nearly doubled, to $ 2.033 trillion.)

But some banks didn’t do stupid things. The thing is, there are literally thousands of financial companies. Looking for the needle in the haystack – the one bank that didn’t get into U.S. subprime real estate, didn’t invest in all these exotic financial instruments, and didn’t take on too much risk – is hard work!———- Advertisement ———-
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In the latest issue of my newsletter Sjuggerud Confidential, out on Wednesday, I recommended to my paid subscribers a bank that may be the world’s most conservative. It avoided all those complicated derivatives. I think our upside is 50% in the next 12 months in this one.

The banks in this KBW Regional Bank fund trade at as small a premium over book value as we’ve seen in bank stocks in over a dozen years. The fund pays a nice dividend, too. It holds roughly 50 different regional banks, so your risk is diversified. If one bank has problems… the other 50 can more than make up for it.

How high could it rise? In 1907, it took two years for stocks to double. I think today, we can see the same kind of move, in the same time frame, in regional banks. You can learn a bit more about this fund by typing its symbol into the search box at the fund’s website: www.sgafunds.com.

Well, I’m off to breakfast here at the Jekyll Island Club… which is served in the Federal Reserve room, I believe…

Good investing,

Steve

P.S. To read my entire write up on the “backstop” the government is providing investors, check out the April issue of True Wealth. It contains my favorite way to profit from the huge government intervention I just described. The potential here is hundreds of percent over the next few years. Click here to learn more about True Wealth.