Earlier today, the Treasury auctioned off yet another chunk of American debt. This time it offered seven-year bonds to the tune of $32 billion. In all, the nation will go in hock for yet another $118 billion this week.

It may sound like a lot, but it’s just another busy week of financing Washington for Geithner and his crew.

While so many of us in the financial punditry business are worried about a lack of foreign borrowers, it is far from the case today. Yesterday’s $42 billion five-year auction came with a bid-to-cover ratio of 2.81 (alarmingly high) and today’s auction boasted a ratio of 2.76, proving there are still plenty of buyers willing to “enable” Uncle Sam’s spending addiction.

If you are a bullish investor, this is not good news.

Let me repeat… this is not good news!

Here’s the deal, plain and simple. When hundreds of billions of dollars are flowing to Washington, they are not flowing to Wall Street. When Geithner passes his hat, there is that much less money to boost up share prices.

Fine, you say. I invested in gold. With low interest rates and a weak dollar, my gold position will soar.

Wrong!

Why are most gold speculators buying? Because they think countries like China and India are dumping the dollar and pouring into gold.

Well, according to the folks that walked out of the Treasury empty handed this afternoon, their precious metal buying may be less robust than many thought. That certainly is not good news for gold bugs. Gold is a purely speculative bet right now.

If you own any, sell it.

I know that is a sore subject with many readers, so we’ll deal with the topic on Friday.

Just about the only thing Washington’s ever-increasing debt is good for is propping up the housing market. As mortgage rates drop to all-time lows once again (thanks to dwindling bond yields), potential buyers still have a significant incentive on their side.

While Uncle Sam may stash $6,500 in a buyer’s pocket, a 30-year fixed rate of 4.99% will ultimately put much, much more cash in their accounts.

A young friend asked me this morning, “I’ve got sixty grand in a savings account. Should I max out my IRA or buy a house?”
Buy the house!

The markets are setting a trap. And it’s a darn good one. Most investors have no clue it’s there. But if you pay attention, the trip wire is obvious. We’ve got stagnant, if not falling, interest rates, soaring national debt, all the workings of a gold bubble and, guess what, your taxes are going up.

If you think the Dow will hit 14,000 anytime soon, you had better think again. Somebody is about to hit the reset button and it’s not Hillary.

*** Before I go any further, let me tell you that my wife has one of those cushy union jobs. She pays about half a nickel in monthly insurance premiums, she gets a raise in January and her job is as secure as it gets these days.

With that off my chest, let me tell you this.

I hate unions!

They are the reason I have to call India to fix my laptop and why I drive past empty factor after empty factor on my 55-mile commute to work.

But like anything well played, even a union can make a savvy investor money.

Here’s a bit of what I wrote for the TFN site this morning:

“For Harley Davidson, unions have been an unreachable thorn in its side. The problems are almost mirror images of the woes in Detroit: not enough flexibility, high wages, top-notch benefits and a constant threat of a strike.

“This economic downturn is just what the motorcycle maker was prayer for. It gave the company all the leverage to say shut up or get out. More specifically, Harley told the union shut up or we’ll get out.

“The company’s largest manufacturing facility is located in York, Pennsylvania. The union’s current labor contract is set to expire early next year. Knowing the company had a major battle brewing, executives went proactive.

“They started a search for a replacement factory, one with better technology and, more importantly, a cheaper workforce.

“It’s basically a reverse strike. Sign the contract or the factory walks.

“While nothing has been signed just yet, there is a very good chance York’s union will vote in favor of ratification on December 2. When it does, Harley shareholders will be in a good spot.

“I got a peak at the contract last week. It gives the company just what it needs… flexibility.

“While pay is an issue, Harley has no problem paying top dollar if it means high-quality workers. But Harley can’t afford to pay some gray-bearded grump to sit in the break room. That’s why the new contract cuts the labor groups to a mere fraction of previous levels.

“No longer can a worker claim, “I’m a welder. I don’t touch a wrench.” Now, if he’s working, he’s doing what the boss says. It will allow Harley to cut the factory’s headcount nearly in half, saving massive annual labor expenses.

“The new contract also calls for Harley to put about $90 million into modernizing the current facility. While it will be an added line on the expense sheet, you can bet executives are counting on a quick payback.

“I wish I could claim to be the only investor watching the action unfold, but I’m not. Over the last few days, shares of Harley have climbed steadily, sending shares to new 52-week highs.

“Over at TFN Strategic Trader, we took full advantage of the action. Last Friday, we entered a set of the company’s December call options. And yesterday, we sold them for quick-and-easy gains of 60%.

“For once, I have a reason to be thankful for unions. They made us money.”

Can’t complain about that. Keep reading here.

*** Before I go, let me remind you to take time to give thanks for what you’ve got. It’s more important to count our blessing now than ever before. We may not have them tomorrow.

Here’s just a glimpse of what I’m thankful for…

A lovely wife, a baby on the way, a roof over my head, a freezer stuffed with food, friends that would kill their prized pig for me, a steady job, family, the freedom to say I don’t like our government, anything with peanut butter in it and of course, a loyal group of readers that are not afraid to let me know their thoughts.

– T. Boone Pickens

Inflation can do tricky things to markets. It creates distortions. In those distortions, an intrepid investor can find some big moneymaking ideas. I think we’ve got one opening up in oil and gas, and it is not without precedent in financial markets. In fact, it’s starting to look a little like the tail end of the 1970s in some respects.

In the spring of 1969, the Dow Jones industrial average stood at 969. By 1982, the Dow hit 1,071. That’s thirteen years of going nowhere. (We’ve had 10 years or so of going nowhere, though the ride between the poles has been anything but boring).

The problem is inflation makes that performance look better than it really was, like when a crooked judge makes a fight look close with a split decision even when the one fighter can barely walk to his corner and everybody in the building knows it was a rout.

Adjusted for inflation, or the weak dollar, the Dow was really more like 400. That makes it one of the worst stretches for the market since the 1930s.

The consumer price index, that flawed measure of inflation, doubled from 1960 to 1982. This is why a generation of people grew to believe that the best way to buy a house was to borrow all you could afford. And for a time, that looked brilliant. As Robert Sobel relates in a history of the period, a modest suburban home going for $30,000 in 1969 sold for $300,000 13 years later. With a lot of debt, your returns were much greater.

Of course, that kind of thinking eventually got us into a heap of trouble, as we now know.

But that period of time also had an effect on Corporate America’s balance sheets. When a company buys an asset, say a factory, it records its cost on its books. It will then depreciate this asset over time. So the value of the factory on its books will decline over time.

In a period of high inflation, its book value will be understated. The cost of a similar factory will be a lot higher in dollar terms, though the company will still show the old figure.

In other words, during periods of inflation, book values understate the true value of corporate assets. This happened in the 1960-82 period. Combine that phenomenon with a stagnant stock market and, eventually, you get some very cheap stocks. This is exactly what happened during the inflationary 1970s. Thus, by the early 1980s, stocks were quite cheap indeed.

In fact, by July 1984, S&P reported that 30% of the stocks on the NYSE traded below net tangible book value. The old value mavens like Ben Graham would have had a field day.

What happened next, though, is what interests us especially. The low stock prices kicked off a takeover boom. The 1980s takeover mania was the busiest since the “age of Morgan at the turn of the century,” Sobel reports in his The Age of Giant Corporations. The 1980s was the age of the LBO, Barbarians at the Gate, Michael Milken and the corporate raider.

The oil industry also had its takeover boom. In fact, the outlines of the 1980s oil and gas industry look similar to today’s. In 1970s, there was a drilling boom as people thought that oil and gas prices would rise indefinitely. That collapsed and then you had oil and gas companies sitting on huge reserves they built up during the boom.

So in a time when it cost $15 a barrel to get oil out the ground, many oil companies traded for $5 a barrel in proven reserves. Getty Oil traded for $72 per share, with assets of $250 per share. Marathon’s stock went for $68, even though each share had $210 in assets backing it up. And on and on it went.

Enter T. Boone Pickens. An Oklahoma-born geologist, Pickens was well aware of the value of these companies. He started going after them and making millions of dollars as bidding wars ensued. He lost several of these, but still cleared millions in profits.

There was a roll call of takeovers in the industry during this time — Shell bought Belridge Oil for $3.6 billion, DuPont bought Conoco for $7.4 billion and U.S. Steel took out Marathon for $6.5 billion. (Yes, U.S. Steel thought it would be smart to diversify). These were some of the bigger deals.

I won’t go too much into the history of this period, and perhaps I’ve already gone into too much detail. But I think something similar may be unfolding in today’s market.

In oil and gas, we have many companies trading cheaply in the wake of a drilling boom gone bust. What we need now is a T. Boone Pickens to shake things up.

When I look at some of my favorite oil and gas stocks, like Contango Oil & Gas (MCF:amex), I see stocks trading for far less than what it would cost you to find those reserves. If I were a natural gas producer, I’d look to pick up stocks like these, rather than drill new wells. At some point, I think that will happen and we’ll see lots of buyouts in the oil and gas sector.

Natural gas is very cheap right now, but it won’t always be the case. In a new research report by Tudor Pickering Holt & Co., a very good firm specializing in energy, $7.50 natural gas prices is forecast for next year! That’s pretty bold considering natural gas is under $3.00.

The firm bases this prediction on a comprehensive, bottoms-up model that takes into account rig count, decline rates on existing wells and other variables. According to Tudor Pickering, “The die is cast for 2010” — there is no way to get around a dramatic decline in natural gas production next year. And even assuming tepid demand for natural gas, we’re going to have a very different picture in natural gas next year.

After that, Tudor Pickering predicts the market will get full again by 2011. If it is right, we have a great window to make money between now and probably the middle of 2010 in natural gas.

Source: The Coming Takeover Boom

Spot gold hit an intra-day high of $961.00 an ounce, its highest since June 11, and was bid at $959.10 an ounce at 1329 GMT, against $953.90 an ounce late in New York on Friday.

U.S. gold futures for August delivery on the COMEX division of the New York Mercantile Exchange rose $5.70 to $959.40 an ounce.

“At the moment we’re seeing the dollar as the key factor to movements in the gold market,” said Eugen Weinberg, senior analyst at Commerzbank.

“In the past few months (gold) has gone from being a safe haven to becoming a dollar play. The dollar right now is so weak because no one is looking for a safe haven — because corporate results are so good and stock markets are performing so well.”

Silver was at $14.40 an ounce against $13.89, earlier it touched a high of $14.47, the highest since mid-June.

“Silver tracks gold in both directions,” Weinberg said.

The dollar hit a 2009 low versus a basket of currencies, stung by buoyant risk demand. The dollar index <.DXY>, a gauge of the U.S. currency’s performance against six other major currencies, fell to its lowest since December.

Appetite for risk was boosted by rising stock markets. European shares hit a nine-month high, as financials advanced after earnings results from Europe’s biggest bank HSBC cheered investor sentiment.

Rising equity markets also boosted interest in oil, with prices hitting a one-month high. Stronger crude prices support interest in gold as a hedge against oil-led inflation.

SILVER INFLOWS

Silver took further support from fresh inflows into exchange-traded funds last week.

The largest silver ETF, the iShares Silver Trust, said its holdings rose to a record 8,828 tonnes on Friday, while Switzerland’s Zurich Cantonal Bank said its silver holdings rose 1.929 million ounces last week.

Investment demand for gold and jewellery buying remain lacklustre, however. Holdings of the largest gold ETF, the SPDR Gold Trust , fell nearly 50 tonnes in July.

ETFs issue securities backed by physical commodities, and constituted a big source of gold demand in the first quarter.

Jewellery demand was also weak as Indian consumption softened on the back of higher prices. “Traders are waiting for lower prices,” said one dealer.

Among other precious metals, platinum was at $1,218.50 an ounce against $1,207.50, while palladium was at $267.50 against $261.50. Platinum traders are awaiting U.S. car sales data due later in the day for direction.

Government measures to boost demand for new cars supported European car sales in July, data showed, with French sales rising 3.1 percent, helping to lift both platinum and palladium which are chiefly used in automobile production.

“We view the development in vehicle sales as a positive signal,” Standard Bank said in a note. “We view this as a bullish signal for platinum, palladium, aluminium demand.”

In Japan industry-wide auto sales fell 5.2 percent in July from a year earlier.

LONDON, Aug 3 (Reuters)

Spot gold was bid at $912.50 an ounce at 1417 GMT, against $908.45 an ounce late in New York on Wednesday. U.S. gold futures for August delivery on the COMEX division of the New York Mercantile Exchange rose $3.50 to $912.80 an ounce.

Gold sold off on Wednesday in line with other commodities, slipping to an eight-week low, after the U.S. Commodity Futures Trading Commission said it was considering a clampdown on excessive speculation in commodities.

Afshin Nabavi, head of trading at MKS Finance in Geneva, said the slip was met with some light physical buying in the Far East and Europe.

“We saw some small demand out of the Far East this morning,” he said. “But India and the Middle East is still very quiet.”

“Also, the U.S. dollar is a bit weaker today,” he added.

The dollar gave back some of the previous session’s gains on Thursday as equities firmed in Europe and U.S. stock futures rose, denting interest in the currency as a haven from risk.

A recovery in stock markets after a five-day losing streak, gains in industrial commodities such as oil and base metals and a less cautious tone to currency markets suggested recent sessions’ heavy risk aversion may be abating.

Oil’s tick higher also helped support gold, which can be bought as a hedge against oil-led inflation.

Demand for gold investment products such as exchange-traded funds — a major support of prices earlier in the year amid volatility in other markets — remained sluggish, however.

Holdings of the world’s largest gold ETF, the SPDR Gold Trust , declined more than 10 tonnes on Wednesday, while those of ETF Securities’ ETFS Physical Gold product slipped 12,500 ounces 0.4 percent.

OUTPUT FALLS

In supply news, South Africa, the world’s third largest gold miner after China and the United States, said its output of the metal fell 10.5 percent in May from a year ago.

Among other precious metals, platinum was at $1,104.50 an ounce against $1,096, while palladium was at $235 against $231.50. Both metals are primarily used in car manufacturing as a component in catalytic converters.

Traders of palladium in particular were cheering news from China that its passenger car sales rose 47.7 percent in June from a year earlier.

Chinese cars are usually petrol-fuelled, meaning they use a higher proportion of palladium than platinum, which is a primary component in diesel catalysts.

Dealers say as palladium is still relatively expensive, it is unlikely to immediately post significant new gains, although platinum has met some interest.

“Even though there is very little obvious buying taking place right now, platinum is still managing to hold its head above $1,100,” said one analyst, adding strong turnover in Shanghai suggests good Chinese buying at these levels.

Elsewhere silver was at $12.85 an ounce against $12.84.

LONDON, July 9 (Reuters)

Your family’s share of the government debt is now over half a million dollars. A record $546,668, to be exact.

That cheery Monday stat comes courtesy of a USA Today study, which claims that each American family’s share rose 12% in 2008. That’s $55,000 in new government debt last year for every U.S. household — thousands more than the median household annual income. Here’s how it breaks down:

Last year’s spike is the biggest since the Medicare prescription drug benefit was added in 2003. According to the rag, the government garnered $6.8 trillion in “new obligations” in 2008, bringing the total U.S. tab to $63.8 trillion. Given our spending record so far in 2009, it’s safe to say your family’s burden is already much, much larger.

And you ain’t seen nothin’ yet… the Social Security program will grow by 1-2 million beneficiaries every year until 2032 as baby boomers retire. Medicare will add just as many each year starting in 2011, when that same demographic starts turning 65.
Unless the U.S. becomes a net saver, “another global financial crisis triggered by a dollar crisis could be inevitable,” forecast former Chinese central banker Yu Yongding over the weekend. (Oy… Beijing is 7,000 miles from Washington, and even they can see this coming.)

Yu’s comments were purposefully timed — U.S. Treasury Secretary Geithner embarked on a sudden PR tour of China this weekend. His mission? Keep the cash flowing from America’s No. 1 creditor.

“No one is going to be more concerned about future deficits than we are,” said Geithner, whose government’s budget deficit will exceed $1.75 trillion this year. “As we recover from this unprecedented crisis, we will cut our fiscal deficit [and] we will eliminate the extraordinary government support that we have put in place to overcome the crisis.”

In the meantime, Geithner assured students at Peking University that China’s investments in U.S. paper are “very safe.”
“I doubt the Chinese believed him,” says the man, the myth, the legend Chuck Butler. “Of course, I’m not a Chinese official, so I don’t really know what they are thinking. But I’ve watched them smile and tell former U.S. Treasury Secretary Paulson that they were going to allow greater currency flexibility, and after he would board his plane, it would business as usual… Same thing for Graham and Schumer, who thought their prestigious status as lawmakers would get them someplace with the Chinese.

”It all comes down to the fact that the U.S. needs China more than the other way around.”
General Motors, once the backbone of U.S. manufacturing, is officially bankrupt. As you’ve no doubt heard, the company declared bankruptcy this morning. But since it’s 2009, lord knows it can’t be a run-of-the-mill insolvency. The Obama administration has its hands deep in this thing… here’s the fine print of the biggest industrial bankruptcy in U.S. history:

• Uncle Sam gets a 60% stake. The government will pump an additional $30 billion into GM (on top of the $20 billion already squandered). In exchange, the government will be the largest shareholder… leverage it will use to usher GM through bankruptcy and convert it to this “leaner, stronger company” we’ve been promised
• Half of the UAW’s $20 billion health care fund will be converted to GM stock, which will give it a 17.5% stake in the company. 12-20 factories will be closed, at the cost of approximately 21,000 union workers. 40% of the 6,000 GM dealers will have to close, too
• The Canadian government gets a 12% stake, given all GM’s design/manufacturing activity up north.
• Bondholders were bought (bullied?) out. They’ll swap their $27.1 billion in unsecured debt for 10% of GM, with warrants to own 15% more. Surely, they learned from Chrysler’s bondholders, who were publicly vilified by President Obama for demanding what was lawfully theirs… so much for that hallmark of American capitalism
• Current shareholders get nada. At least that rule of bankruptcy is still intact. If you were long GM, please consider letting someone else manage your money. Anyone.

“GM Bankruptcy to Bring Taxpayer Ownership,” headlined Bloomberg this morning. Shame on them and the U.S. government for perpetuating this “taxpayer ownership” BS.

We must have been asleep when the “taxpayer” got any say in this one. GM is owned by wealthy politicians in Washington who, under threat of imprisonment, forced their constituents to finance the deal. Insinuating the public has any control is “Orwellian in the extreme” Addison suggested when we discussed the matter late Friday. Amen.

And let’s be really honest… taxes haven’t gone up to cover the GM bailout (or any credit crisis expense), but government borrowing certainly has. If any “taxpayers” truly own GM, their tax returns get mailed to Beijing or Tokyo.
Sign of the times… GM and Citigroup are getting kicked off the Dow. Cisco and Travelers will replace them next Monday. Extra irony (and foreshadowing?) in this exchange, as Citi is the former owner of Travelers, which it spun off in 2002.
The market baked in GM’s insolvency a long time ago. In fact, the Dow’s off to the races this morning, even though one of its 30 components is rapidly approaching zero (the “beauty” of a weighted index). The big indexes rose 2% within the first 30 minutes of trading.
“We have reached a pivot point in financial markets,” forecasts Rob Parenteau, steward of the Richebacher Society.

“As we have documented in recent weeks, the list of U.S. macro series showing stable nominal levels over the past three-four months continues to increase. These include retail sales, new orders for durable goods and imports of materials and finished goods. That is not what usually happens in a debt-deflation dynamic, which cumulatively builds on itself. It appears the debt-deflation risk is being contained by extreme fiscal and monetary measures.

“Stability is better than free fall, but it is not the same as expansion, and we believe equity investors have shoved valuations high enough over the past three months that they now require signs of economic growth, not just stability, to carry equity indexes higher. We think the odds of them getting that could improve after we get past the auto production and dealer downshift later in the summer, but the rise in Treasury yields is becoming alarming.

“So from a strategic point of view, we believe equity investors want and need to see stronger economic and earnings results to drive indexes higher, while bond investors need just the opposite to calm Treasury yields down. In addition, through near-zero interest rate policy (ZIRP) and quantitative easing (QE) approaches, the Fed has been trying to push private investors into riskier asset classes while the Treasury’s debt issuance calendar implies they need private investors to prefer owning Treasury bonds, which are generally not the asset of choice in an economic recovery scenario.

“In other words, we have contradictory cross currents here. If the Fed doesn’t intervene to slow or halt the Treasury yield backup, there is a chance the stabilization in unit home sales will wither away. If the Fed does step up QE operations to halt the Treasury yield rise, professional investors taking the ‘green toilet paper’ view will continue to sell dollars and buy commodities. Down the line, that implies higher energy prices for consumers and higher input prices for manufacturers, neither of which we would consider growth-supportive developments.”

If you seek a better, richer life through macroeconomic awareness, you’ll be right at home in the Richebacher Society. Get in, here.
Like last week, materials and energy companies are leading the way today. The great global rebound argument is still hot, and this data point is keeping the commodity fire ablaze:
China’s manufacturing sector expanded for the third month in a row in May, its government reports today. China’s purchasing managers index registered a score of 53.1 during the month, down just a bit from April but still above the expansion/contraction score of 50.
Oil’s up to a fresh seven-month high of $67 a barrel today, largely due to China’s PMI number.
The dollar is still falling, giving commodities an even bigger boost. The dollar index fell right through support at 80 on Friday and has plunged another point and a half since. It’s at 78.8 as we write, just off its 2009 low.

Thus, the cost of your European vacation has popped 7% since the start of May. The euro is up 9 cents over the last 30 days, to just under $1.42 as we write. The pound has followed suit, up 11 cents over the last month, to $1.62.

And could parity be around the corner for our neighbor to the north? The Canadian dollar is up to 92 cents today, its highest level since October 2008.
Gold continues to flourish, but silver has been the real precious metal story of late. The yellow metal is up about 9% over the last month, to roughly $980 today. Silver, on the other hand, shot up 29% in May, to $15.50 an ounce.

“In general,” says Byron King, “the precious metals are up because the big-spending politicians in Washington have no respect for the U.S. dollar. Break out the black crepe and armbands of mourning for the U.S. dollar.

“Specifically, silver has always been the “poor man’s gold.” Silver tends to lurk in the shadows of the price of gold, sort of a stepchild to the yellow metal.

“But on occasion, silver undergoes a slingshot effect. Between the basic industrial demand for electronics, plus jewelry demand (’cuz gold’s getting pricey!), and now the monetary pull… silver is accelerating in a price rise that is — believe it or not — leaving gold in the dust.

“Silver could break $20 sooner than we’ll see gold at $1,200, and the silver miners (my readers own several) will soar to new heights. Do you have your ticket for this ride? All aboard!!!”

Heh, get your ticket here: Byron’s latest special report on precious metals investing.
Silver may continue to outperform gold. If you’re a believer in historic ratios, silver still has room to rise in order to meet its average gold price ratio over the last decade.

Either that, or gold’s price needs to fall. And in this environment, we’d sooner go long silver than short gold. Do you agree?
“I’m a raving fan, but sometimes you guys get misled a bit,” writes a reader in response to Robert Gordon’s call that the recession has bottomed.

“The so-called ‘ultimate indicator’ of recession ends of the four-week moving average of initial jobless claims is hardly as accurate as suggested. It is true that it does turn down typically, just as a recession ends from the retrospective declaration of that recession, but it is NOT true that every time the four-week moving average of initial jobless claims turns down during a recession, the recession ends.

“In the ’81-’82 recession, the indicator turned down from over 500k four times before a correct signal — in December ’81, February 82, May 82, June 82, and finally at the real ultimate peak in October 82. In the 1990 recession, it turned down in January of ’91, before its ultimate peak in April 1991.

“In the 2000 recession, it turned down in June 2001 from high levels, to give a false signal before peaking in October 2001, although many other recession indicators suggest that the recession went on for far longer than in the graphic you presented.

“Virtually every recession therefore has witnessed false signals of at least one and often many times before the ultimate peak in initial claims and before the later declared end of the recession. Why would this time be any different — particularly in view of the potential for auto mess to lead to accelerated claims?”

The 5: We agree… guess we didn’t lay the skepticism on thick enough when we introduced the idea. Glad to hear you’re a fan.

Source: Your Share of the Debt, GM Dies, Silver Still a Buy, A Pivot Point and More!

“The pace of economic activity appears to have slowed markedly, owing importantly to a decline in consumer expenditures,” the Fed said in a statement. “Business equipment spending and industrial production have weakened in recent months, and slowing economic activity in many foreign economies is damping the prospects for U.S. exports.

“Moreover,” the statement added, “the intensification of financial market turmoil is likely to exert additional restraint on spending, partly by further reducing the ability of households and businesses to obtain credit.”

The Fed also lowered its discount rate – the rate at which it lends directly to banks and Wall Street firms – by a half-percentage point to 1.25%.

A wave of failures among banks and financial institutions have stymied lending and roiled global credit markets. The world economy faces a significant uphill battle as a result.

The U.S. economy expanded by 2.8% in the second quarter, but that expansion was largely the product of government stimulus checks and a weak dollar. The federal government returned roughly $168 billion back to American taxpayers in the form of rebate checks earlier this year. The tax rebates, which were mailed through May, kept U.S. consumers afloat, while a weak dollar accelerated a torrent of exports out of the country.

Since then, consumer spending has been undermined by rising unemployment and the dollar has strengthened substantially.  The advance estimate for third quarter gross domestic product (GDP) is to be released today (Thursday), and most analysts anticipate the U.S. economy shrunk during the three months ended Sept. 30.

“The growing reality is that this is not just a slowdown, but a true recession,” Joel Naroff, president and chief economist of Naroff Economic Advisors said in an interview with Money Morning.

“U.S. GDP contracted significantly in the third quarter,” said Naroff, who believes the economy may have contracted by 2.5% to 3.0% in the quarter. “Such a sharp slowdown is not expected.”

Citigroup Inc. (C) analysts Geoffrey Dennis and Jason Press said last week that they now expect an entire year of contraction before the economy gets back on track in the second half of 2009.

“We are now expecting one of the sharpest recessions in the post-war period,” Dennis and Press wrote in a report to clients on Oct. 21.

The Fed statement said the rate cut “should help over time to improve credit conditions and promote a return to moderate economic growth,” but noted “downside risks to growth remain.”

This is the ninth time that the central bank has lowered rates since September 2007. The Fed has also loaned hundreds of billions of dollars to banks through a new lending program and earlier this week began loaning money directly to major businesses by purchasing commercial paper.

The Fed yesterday lowered the interest rates it will charge to buy unsecured commercial paper to 1.84%, down from 1.89% on Tuesday. It lowered the interest rate on asset-backed commercial paper to 3.84% yesterday, down from 3.89% the day prior.

The central bank created its program to buy 90-day commercial paper directly from issuers on Oct. 7, meaning it’s now three weeks old.

The Fed’s new loan programs have expanded assets on its balance sheet by 104% during the past year to $1.804 trillion, or 12.6% of GDP, Bloomberg reported.
Rate Reductions Around the World

While the Federal Reserve struggles to keep the U.S. economy from sinking into a second Great Depression, central banks in Europe and Asia are also on the defensive and could soon join the Fed in slashing rates – if they haven’t already.

The British Office for National Statistics last week said that, after a flat second quarter, the U.K. economy contracted 0.5% in the three months ended Sept. 30. It’s likely that Germany, France and Italy have already entered into a recession, as their second-quarter GDP fell 0.5%, 0.3% and 0.3%, respectively.

The International Monetary Fund (IMF) said last week that the economy of the 15-country Eurozone would grind to a virtual standstill in 2009.

The European Central Bank (ECB), which raised rates as recently as July, backtracked and cut its benchmark rate by half a point on Oct. 8, dropping it down to 3.75%. ECB President Jean-Claude Trichet said Monday that the central bank’s Governing Council could take additional steps at its next meeting, currently scheduled for Nov. 6.

“I consider it possible that the Governing Council would decrease interest rates once again at its next meeting,” ECB President Jean-Claude Trichet said yesterday. “Taking into account the recent substantial decline in commodity prices together with a substantial weakening in demand which has emerged lately, upside risks to price stability have diminished.”

Nick Parsons, head of markets strategy at nabCapital (OTC: NABZY) in London, told The Guardian that the Bank of England (BOE) could also follow the Fed’s move with a one-point cut of its own. That would leave the BOE’s rate at 4.5%

China, on the other hand, wasted no time in following the lead of the U.S. Fed. The People’s Bank of China cut its interest rates yesterday, reducing its key one-year lending rate from 6.93% down to 6.66%.  The rate cut was the central bank’s third reduction in two months.

China’s economy registered a solid GDP expansion of 9% in the third quarter – a noticeable step down from the 11.9% pace set in 2007.  Beijing is clearly worried about the effects a global recession would have on its economy and wants to ensure growth does not slow any further.

Of course, lowering rates will also help keep the Chinese currency, the yuan, from appreciating against the dollar and the euro as central banks in the West pull out all the stops in dealing with the credit crisis.

“This cut was driven by the slowdown in the third quarter and the likelihood that the U.S. and other central banks will cut rates,” Xing Ziqiang, an economist at China International Capital Corp. in Beijing, told Bloomberg.

GDP growth in China has slowed for the past five quarters but so long as the nation keeps inflation in check it should be able to maintain a “reasonable” economic expansion of at least 8% next year, said Liu Erh-fei, managing director and chairman for China at Merrill Lynch & Co. Inc. (MER).

Whether Chinese banks were “wise, lucky, or better regulated,” they avoided exposure to the risky subprime mortgages and derivative products that caused the current financial firestorm,” said Liu. “There is no systemic risk in China’s banks that could spill over into a full blown financial crisis.”

China has more than enough economic weapons at its disposal to ensure strong growth going forward, including a world-leading $1.9 trillion in foreign currency reserves. China also has a budget surplus of 2% of GDP, according to Stephen Green, of Standard Chartered PLC. And public sector debt is just 16% of GDP.

Earlier this year, Beijing shifted the focus of its policy to growth rather than inflation – a choice analysts say is now paying dividends.

Inflation in China, and worldwide, is beginning to ease alongside commodities prices. Inflation in China receded to 4.9% in the year to August, from 8.7% in February. And Goldman Sachs Group Inc. (GS) forecasts that it will fall as low as 1.5% in 2009.

Source: Federal Reserve, Bank of China Cut Interest Rates as Financial Crisis Deepens

The next meeting of the Federal Open Market Committee is scheduled for tomorrow Wednesday Oct. 29. There is no doubt that growth will be the central issue of the committee’s discussion, as fears of a global recession are intensifying alongside deteriorating economic data.

The British Office for National Statistics’ said Friday that, after a flat second quarter, U.K. gross domestic product (GDP) contracted 0.5% in the three months ended Sept. 30. There’s little doubt that other European nations have already succumbed to recession, and the near bankruptcy of Iceland has highlighted the interdependency of the world’s financial system.

It’s likely that Germany, France and Italy have already entered into a recession, as their second-quarter GDP fell 0.5%, 0.3% and 0.3%, respectively. Japan – the world’s second largest economy – is also dangerously close to recession, with its economy having contracted 2.4% in the three months ended June 30.

The International Monetary Fund (IMF) said last week that the economy of the 15-country Eurozone would grind to a virtual standstill in 2009. And the prognostications for the United States are equally bad, if not worse.

The U.S. economy expanded by 2.8% in the second quarter, but that expansion was largely the product of government stimulus checks and a weak dollar. The federal government returned roughly $168 billion back to American taxpayers in the form of rebate checks earlier this year.  The tax rebates, which were mailed through May, kept U.S. consumers afloat, while a weak dollar accelerated a torrent of exports out of the country.

Since then, consumer spending has been undermined by rising unemployment and the dollar has strengthened substantially.

The unemployment rate hit a five-year high of 6.1% in September and jobless claims have continued to mount this month, with a seasonally adjusted 478,000 Americans filing for first-time unemployment benefits in the week ended Oct. 18. Initial jobless claims have soared 47% in the past year and continuing claims are up 44%.

Meanwhile the greenback has posted a strong rebound over the past month, making U.S. goods more expensive to foreign nations, and thereby weakening exports.

The dollar climbed 5.9% against the euro last week and yesterday (Monday) surged to a two year high of $1.2462 versus the European currency.

The economy has nothing left to lean on at this point, and that fact has most economists projecting a debilitating recession for the United States.

“We are now expecting one of the sharpest recessions in the post-war period,” Citigroup Inc. (C) analysts Geoffrey Dennis and Jason Press wrote in a report to clients on Oct. 21. Citi sees an entire year of contraction before the economy gets back on track in the second half of 2009. Dennis and Press predict U.S. unemployment could climb as high as 8.5% next year.

“The growing reality is that this is not just a slowdown, but a true recession,” Joel Naroff, president and chief economist of Naroff Economic Advisors said in an interview with Money Morning.

“U.S. GDP contracted significantly in the third quarter,” said Naroff, who believes GDP may have contracted as much as 2.5% – 3.0% in the quarter. “Such a sharp slowdown is not expected.”

So far, Federal Reserve Chairman Ben S. Bernanke has turned to his ever-expanding arsenal of liquidity measures in an attempt to thwart what now seems to be an unavoidable recession. However, he may eventually be forced to cut interest rates all the way to zero like the Bank of Japan did in 1999.

But first the Fed will reduce its benchmark Federal Funds target rate tomorrow by 25-50 basis points.

“The cut is already in the market,” John Ryding, economist at RDQ Economics told AFP.
“The question is whether it’s 25 or 50 basis points.”

The latter would mean reducing the key rate from where it currently stands at 1.5% to just 1%. Cutting below 1% could be seen as a sign of panic, according to some analysts.

Earlier this month, the Fed conducted a joint rate cut with a number of its global partners, and other central banks around the world could again join the United States in reducing rates.

The European Central Bank (ECB) could cut its rates as soon as next week at the next meeting of the central bank’s Governing Council scheduled for Nov. 6.

“I consider it possible that the Governing Council would decrease interest rates once again at its next meeting,” ECB President Jean-Claude Trichet said yesterday. “Taking into account the recent substantial decline in commodity prices together with a substantial weakening in demand which has emerged lately, upside risks to price stability have diminished.”

Nick Parsons, head of markets strategy at nabCapital (OTC: NABZY) in London, told The Guardian, that the Bank of England (BOE) could also follow the Fed’s move with a one-point cut of its own. That would leave the BOE’s rate at 4.5%

The ECB, which raised rates as recently as July, cut its benchmark by half a point on Oct. 8 to 3.75%.

The Fed’s Broadening Balance Sheet

Cutting rates would certainly fit into Chairman Bernanke’s tactic of flooding the market with liquidity – a tactic that began last August and has broadened over the past year to include more and more tools at the Fed’s disposal. As a result, the role of the U.S. Federal Reserve as an institution has completely changed.

After previous rate cuts and cash injections failed to unfreeze credit markets, Bernanke got the green light to start buying up troubled assets and taking equity stakes in financial institutions.

Up until a year ago, the vast majority of the Federal Reserve’s holdings were in Treasury securities. However, over the past several months, Bernanke has expanded the role of the Fed to include the programs ranging from the Fannie Mae (FNM) and Freddie Mac (FRE) bailout, to becoming a buyer of last resort for undesirable assets.

In fact, the Fed set the interest rates it will charge for its purchases of commercial paper from banks and companies. The Fed said it would charge 1.88% for unsecured commercial paper and 3.88% for asset-backed commercial paper, Reuters reported.

The Fed created its program to buy 90-day commercial paper directly from issuers three weeks ago, on Oct. 7.

“The net effect of these facilities has been a truly staggering pace of growth in the Fed’s balance sheet,” said Jan Hatzius, chief U.S. economist for Goldman Sachs Group Inc. (GS).

The Federal Reserves balance sheet has more than doubled as a result, and it’s showing no signs of abating. As of Oct. 15, the Fed’s balance sheet had ballooned to $1.754 trillion from around $850 billion last year, according to The Wall Street Journal.

“In coming months, further rapid growth in the Fed’s balance sheet is likely,” said Hatzius. Hatzius also pointed out that during the Japanese credit crisis of the 1990s, the Bank of Japan’s balance sheet hit 30% of GDP, compared to the United States where the Fed’s balance sheet is currently at about 12% of GDP.

“To be sure, part of this increase occurred in an environment of outright quantitative easing by the Bank of Japan, which is not our current forecast for the Federal Reserve,” he said. “Nevertheless, the Japanese experience illustrates that central balance sheets can grow to very large numbers when the monetary authority is called upon to take over short-term financing for a large part of the economy.”

Japan suffered a decade of stagnation in the 1990s after its property and stock market bubbles burst. Money Morning Executive Editor Bill Patalon has written extensively about the eerie similarities between that collapse and the potential lost decade that could be faced in the United States.

The H.4.1 report – the Federal Reserve’s weekly report on changes to its balance sheet, set for release Thursday – will reveal how much capital was withdrawn from the Fed’s new commercial paper facility in the first three days of this week.

Source: Fed to Cut Rates at Next FOMC Meeting as U.S. Recession Appears Likely

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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Using the “Off Switch” to Shut Down Alzheimer’s and Huntington’s Diseases, Too

It turns out the “off switch” discovery could have lots of uses beyond radically improving a patient’s chances of beating cancer.

For instance, take Alzheimer’s. Right now, there’s no cure.

But imagine the implications — for both victims and medical investors — if this same breakthrough could be used to reverse Alzheimer’s symptoms in just weeks.

Check it out here…

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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

But don’t despair. Because a trend that has long been talked about – economic decoupling – is finally starting to manifest itself as other world economies, particularly the so-called “BRIC” markets of Brazil, Russia, China and India, have continued to grow even as the U.S. economy has slowed. That means profit opportunities abound for U.S. investors, despite myriad messes on the home front that include a collapsed housing market, a mortgage crisis that turned into a five-alarm credit conflagration, and a plunging greenback that seems to have left its parachute on the airplane that it jumped from.

Some of the profit pathways to play:

• Investors can eschew the U.S. market completely, and pursue profits abroad.
• They can latch onto the U.S.-based members of the “Global Titans” club, companies with their headquarters in America that derive a hefty chunk of their profits from overseas markets.
• Or investors can ferret out U.S. investments that are either immune to some of this country’s current economic afflictions, or that are problem-plagued now, but a good bet for a turnaround later.

A Year to Forget?

Like a Dickens’ novel, 2007 was a definite “Best of Times/Worst of Times” combination for the U.S. economy. Volatility and crisis were the watchwords for much of the year. After key stock indices reached record highs in the middle of the year, the explosive emergence of the subprime mortgage debacle and related credit crunch pushed share prices into a nosedive that steepened as the year progressed.

With a 0.6% increase in gross domestic product (GDP) for the fourth quarter of 2007 and a first quarter that’s supposed to be flat at best, it’s clear that we’re not out of the woods, yet. Many fear that 2008 will find the United States in a recession. Other investors believe we have already experienced the first elements of a recessionary contraction.

“If I had to be bold, I’d say we began a recession in December,” Bill Gross, manager of the PIMCO Total Return Fund (PTTAX), told the Financial Times in a recent interview.

The Homeowner Blues

As 2007 progressed, many Americans experienced a growing despair as they watched their largest asset – the family home – experience a significant value decline. The United States is experiencing its worst housing recession in more than 15 years. And that domicile downturn is far from over. Consumers are being forced to watch as the housing slump siphons off the equity they’ve built up, even as it shaves the market value of their homes. Consumers with marginal credit who’d signed up for adjustable-rate loans have seen their mortgage rates “reset,” and then had to watch as their monthly mortgage payment ballooned to the point that they could no longer afford those payments.

For many, unfortunately, refinancing hasn’t been an option. The vanishing homeowners’ equity made such deals unfavorable to lenders. And with the burgeoning credit crisis that quickly became global in nature, banks and mortgage firms have slashed the available amount of refinancing loans that homeowners needed to escape their soaring mortgage payments.

Soon, the banks that had made the questionable calls on subprime loans were in trouble, too. With the housing market cooling, the homeowners who couldn’t refinance also discovered that they couldn’t sell. Homeowner defaults – loans that are 30 days or more past due – soared and started a firestorm that has swept through the global financial-services sector, singing such stalwarts as Citigroup Inc. (C), Fannie Mae (FNM), UBS AG (UBS), and others.

“It will take most of the year to work out of the housing slowdown. Currently, the inventory of unsold homes is at an eight to nine-month level. We have to get this down to a more normal level of four to five months. In order to get to this level, housing starts will remain low,” Dr. Robert Sweet, an economist at MTB Investment Advisors, the investment-advisory subsidiary of M&T Bank Corp. (MTB), said in an interview with Money Morning.

And we might be getting closer to the bottom. In fact, existing home sales rose in February, the first such increase in the past seven months. But it’s probably too soon to get excited about a full housing recovery.

“It looks like this may be a temporary pause,” Nigel Gault, chief U.S. economist at Global Insight Inc. in Lexington, Mass., told Bloomberg News after the existing homes sales report was released. “The price declines have helped, and people are still getting financing, though not on the good terms they could before.”

“We’re still a long way from a recovery in housing,” Gault said.

The Fed to the Rescue?

U.S. Federal Reserve policymakers cut the benchmark interest rate by less-than-expected three-quarters of a percentage point at their last meeting, a move that was designed to energize a badly flagging economy without causing inflation to spike or exacerbating the greenback’s decline.

When central bank policymakers reduced the key Federal Funds rate from 3% to 2.25% on March 18, it was the sixth time in seven months the closely watched benchmark had been reduced. Many analysts had been expecting a reduction of a percentage point – or even more – as such recent events as the near-collapse and subsequent Fed-led bailout of U.S. investment bank The Bear Stearns Cos. Inc. (BSC) stoked fears that the U.S. financial system was ready to seize up.

The policymaking Federal Open Market Committee (FOMC) has now cut the Fed Funds rate six times and slashed the Discount Rate for direct loans to banks eight times since August, when the subprime mortgage market collapsed and created a global credit crisis.

While the FOMC made it clear that inflation has grown as a concern, it still says that economic worries remain the biggest problem and emphasized that it was ready to act again if need be.

“Today’s policy action, combined with those taken earlier, including measures to bolster market liquidity, should help to promote moderate growth over time and to mitigate the risks to economic activity,” the FOMC said in its March 18th statement. “However, downside risks to growth remain. The committee will act in a timely manner as need to promote sustainable economic growth and price stability.”

Good day… And a Wonderful Wednesday to you! The landscape is very different this morning than when I signed off yesterday. The dollar has fought back and found a new person to back U.S. Treasury Secretary Paulson’s claim that he supports a strong dollar. That person is Fed Chairman Ben Bernanke, which is quite strange for a Fed Head to be talking about the dollar.

So… Here it is folks… I’m going to get on the soapbox now and give you my Pfennig’s worth of what I think of Big Ben Bernanke and his words yesterday, along with some general thoughts on reforming the Fed. If that’s not your bag, baby, then skip ahead to the section marked “***”… There I’ll take up an explanation of my thoughts yesterday toward China… So… If you’re ready, I am…

OK… Now I’ve heard just about everything when it comes to central bankers! Big Ben Bernanke threw a cat among the pigeons yesterday when he broke the long standing tradition of relative silence (for a Fed Chairman) on the dollar… (This is the U.S. Treasury’s baby!) But I guess since Big Ben has been so instrumental in the weakness of the dollar, he probably thought he was “qualified” to talk about it!

Big Ben signaled to the markets that he was “uncomfortable” with the weakness of the dollar, and the ramifications that a weak dollar has on inflation. He actually blamed the weak dollar on inflation! Whoa there partner! You’re barking up the wrong tree!

You see… Inflation as I’ve explained to you for a couple of years now is rising, even though the stupid CPI data doesn’t reflect what you and I feel has been going on with our cash. Well… Big Ben finally has admitted that there are rising inflation fears… (Sorry Ben, but inflation is eating us alive… These aren’t just inflation fears!)

Anyway… Big Ben sees inflation (good for him!), but wait… Blame inflation on the weak dollar? That’s putting the horse, and another horse, before the cart, Big Ben!

Now, I’m not saying that a weak dollar doesn’t play well with inflation… But I would think – and unfortunately the markets don’t see the trees in the forest on this one – that everyone would call this for what it is… Big Ben is blaming something else!

Inflation is more associated with low interest rates… And money supply… Things HE CONTROLS! So… Having low interest rates and money supply running at 16% isn’t causing inflation, Big Ben? I say… This has gone on long enough! Someone on Capitol Hill needs to stand up and call him out on this one! I’m seething with anger toward this right now! And anyone getting caught up in his attempt to scare the markets into thinking that the Fed is going to intervene to shore up the dollar, should be grabbing their pitch forks, rakes and shovels and heading to Capitol Hill!

Big Ben has now gone on record with jawboning the dollar higher… And placing blame on something other than himself for this inflation mess. Oh great! I shake my head in disgust… Pardon me, I’m going to go yell at the walls, I’ll be back in a minute!

OK, I’m back! But still angrier than a wet hen! The gall of this guy to try to deflect blame that should be directed at him… And what’s even worse is that the markets bought it all, hook, line, and sinker!

So… After two days of risk aversion, and dollar selling… It all went down the drain. The markets are so assured that the Fed will intervene (and long ago I learned that the markets are never wrong… But in this case, I’ll make an exception… And say, they’ve got it all wrong)… The Fed doesn’t even need to intervene – they just did so verbally!

First we had Big Al Greenspan making one BAD decision after another for 18 years! Now this! Something has to be done here folks… It’s time there was some reform of the Federal Reserve! Let’s review this… One man appoints another… The man that does the appointing has a term limit, but the new appointee does not… There’s no age limit… And – now this is the part that really needs to be reformed – no review of the appointee’s work. In other words… The Fed Chairman can send the economy into the abyss, and he has no one to answer to! It’s time voters told their elected officials that this has to stop!

And if you don’t believe me that Greenspan has a track record that’s longer than a country mile on bad decisions, then you need to pick up either William Rutherford’s book, Who Shot Goldilocks? or William Fleckenstein’s book, Greenspan’s Bubbles – The Age of Ignorance at the Federal Reserve…

***

OK… Enough of that… We saw the euro (EUR) lose one and a half cents yesterday after Big Ben threw the cat among the pigeons. Now, it will be interesting to see how long it takes to recover – or if it will. My guess is that it will because there will be someone out there besides little ole me (HA!) that will call Big Ben out on this.

Yesterday, I told you about China’s FX reserves and how they just set a new record in April… I said something that confused a few people, so let me try to explain… First and foremost, I truly believe that a strong currency helps fight inflation. I’m on record for many years saying that, and many times saying that about the Chinese renminbi (CNY)… Yesterday, I said that the Chinese officials might have to slow down the appreciation of the currency to fight inflation… Now, I know that’s counterintuitive to what I said earlier… But let me explain what I’m talking about…

The amount of Hot Money coming into China is fueling inflation faster than the Chinese can combat it. They could allow the currency to float and its increase would go a long way toward shutting down inflation from Hot Money… However, that’s NOT GOING TO HAPPEN! So… The Chinese have to think of a way to shut down the HOT MONEY, and if they make the renminbi have the appearance that it will be slow to appreciate, the thought here would be that the Hot Money would grow impatient and leave. I never said that China should STOP the appreciation of the renminbi… Just make it appear to slow down, to have the Hot Money leave.

So… It’s been a tumultuous 24 hours in the currencies… Stocks took one on the chin yesterday too, but for different reasons. Earnings reports and the report by Tyson Foods that said it is working with the U.S. Department of Agriculture to manage a flock of breeder hens exposed to a low-pathogen strain of avian influenza. Tyson says no chickens are affected, but the report was out there already.

That’s Bird Flu… Nothing is confirmed so I’m not trying to say anything about it except that the report threw stocks into a loop.