Search results matching tag 'China'

We Won't Get Fooled Again!

ChuckButler — Tue, 17 Nov 2009 16:26:36 GMT

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In This Issue..

* Bernanke digs out some old words...
* Risk on, Risk off...
* Brazil to have a different meeting outcome?
* Winter Olympics are in Canada...

And Now... Today's Pfennig!

We Won't Get Fooled Again!

Good day... And a Terrific Tuesday to you! What a ride on Mr. Toad (Bernanke's) Wild Ride yesterday for the currencies! Gold? Well, at one point in the day, Gold had shot up $24 on the day! It topped out at $1,142... The shiny metal then gave some back on profit taking, but Whew! Gold holders have got to love it! Those that keep waiting for a pull-back... Well, they might be still waiting when the cows come home...

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

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

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

You could see the V-8 moments on traders' faces when they realized, yesterday, that all this had been said before, and nothing came of it, so... Meet the new boss... Same as the old boss... We Won't Get Fooled Again! No No!

So, then traders reversed their buying of the dollar and sent the dollar to the woodshed... You should have seen the reversal... It was amazing... The Big Dog, euro, went from 1.4970 to 1.4860, and then turned around to rise to 1.50! ... Now, overnight, there has been some renewed selling of the non-dollar currencies, and the euro is back to 1.4910... Crazy... But not as crazy as Big Ben spouting off about "monitoring the currencies"... Yeah, right... And what are you going to do about them when they get out of line, Big Ben? Get the ruler out? I'll tell you what he'll do... Nothing... Absolutely nothing!

Memo to Big Ben... Ahem... Am I on? Ok, long time listener, first time caller... Big Ben... Just what policies are you talking about that will keep the dollar strong? In the future, you might want to list them, so that people like that Chuck Butler, doesn't rip your comments to shreds for their lack of truth, and facts...

Non-voting Fed Head, Fisher, had this to say yesterday... "Our job is to maintain the purchasing power of the dollar, while fostering the conditions that enable the economy to grow without fanning inflation." Hmmm I would say that he's got that right... But, apparently, somewhere along the way, the part about "maintaining the purchasing power of the dollar" got lost, eh? I mean, since the Fed / cartel was formed in 1913, the dollar has lost 95% of its purchasing power... YIKES! Most people that did their jobs that badly would be fired/ let go... These guys have had almost 100 years to figure this out, and have failed miserably... And hey! Before I get accused of something (I'm always accused of something, with everything I say), Fed Head Fisher was the one that described the Fed Heads' job, not me!

OK... While I'm on this subject of being accused... I have been beating on the U.S. administration for 9 years, folks... I know I've really stepped it up with the step up of deficit spending by this administration, but, I chastised the previous administration beginning with their protectionism measures in 2000, and never let up, with their deficit spending... Someone even said I never talked about Cheney and his "Deficits Don't Matter"... WHAT? I've even repeated the same joke several times about the Deficits don't Matter crowd, and that they remind me of a guy standing on the Empire State Building, he decides to jump off, and as he passes the 56th floor, he says... "So far, so good!"

Yes, so far, so good, because he hadn't hit the concrete to go splat yet... And neither had the deficits crowd... But they will, and in fact, they are getting awfully close to the concrete right now!

Well... Enough of that... I just get so ticked off sometimes... I write, and write, and people say I didn't say this or that... Don't know what else to say... So, I'll go on...

The U.S. economy got a boost yesterday when Retail Sales grew at a faster rate than forecast, growing 1.4% in October, above the 0.9% rise projected by Wall Street. The jump came on rebounding demand for cars, a sign the economy kept recovering despite climbing unemployment. Aside from automobiles in October, other sales rose just 0.2%.

But... Are these numbers suspicious? Well, when you look at the previous month's revision, you have to question these numbers as well... September Retail Sales, which were reported as -1.5%, actually fell -2.3%... I wonder what this number's revision next month has in store...

Today, the data cupboard is stocked to the brim with data prints... Producer Price Index (PPI) prints along with two of my faves, Industrial Production and Capacity Utilization... And then the Big Kahuna of the day... The TIC's data... For those of you new to class, The TIC's data stands for Treasury International Capital... Or... Easier to understand... It's the fancy, schmancy name for Net Security Purchases by Foreigners... This is how we track, how well we're doing as a county at financing our ever expanding deficit...

I made a mistake yesterday when talking about the Reserve Bank of Australia (RBA) and saying that if they didn't hike rates in December, that they would most likely come back in January at hike them... A reader pointed out to me that the RBA doesn't meet in January... OK... So, I guess I should have said that the RBA would hike at their next scheduled meeting!

Speaking of the RBA... They issued their latest meeting minutes, in which they sounded less hawkish than one would expect, since they raised rates at the same meeting... But this less hawkish tone, set off a round of Risk Aversion once again in the currency markets overnight... Risk on, Risk off, is reminding me of a Wayne and Garth street hockey game...

For, it's Risk on, one day, and Risk off the next day... So, while I find that the RBA minutes did set off this round of Risk off for the currencies, I don't see it having lasting power... Look for this all to fade, especially if we get a rogue data print in the U.S. today...

Late last week, I came across a story on the dollar that I totally forgot to talk about yesterday... So, here you go... Oh, by the way, strap yourself in for this one, and keep your arms and legs inside during the ride...

The German government's 5-person council of economic advisers issued a report that said, "After the massive global increase in U.S. dollar reserves in the past years, an "uncontrolled exit", especially in emerging economies from the U.S. dollar as a reserve currency is a possible trigger of instability in currency markets." The went on to say...

"Countries holding "high" dollar reserves should consider committing to selling their dollar holdings in a coordinated way over a longer period of time."

The folks over at the Royal Bank of Scotland (RBS) think that Bernanke's speech yesterday, basically gave the green light for a further, slow, gradual decline of the dollar... And, quite frankly, that's what traders would prefer to see too, given that they don't like getting whipsawed day in and day out by the Risk on, Risk off game... When assets go to fast one way or the other, it just causes strong corrections, and people get hurt by the movements... But a slow, gradual decline I would think would be the preference of the U.S. Gov't... That way, no one notices... It's not like a bubble that grows and everyone notices it...

Speaking of bubbles... And if you're like me, when I type, or say bubbles, I immediately think of Big Al Greenspan... Well, you'll love this Fed Head statement about bubbles... Here's Fed Head Kohn... "Asset price bubbles can be spotted when they become extreme, efforts to spot bubbles may result in seeing more than there is."

Now that statement plays well with Big Al Greenspan, who always claimed that bubbles could not be spotted before they got out of hand... Basically, what these two are saying in different ways is that the Fed could spot them, but probably wouldn't like it, and wouldn't have much at their disposal to do about it, so they just turn away...

And speaking of such... Fed Head Yellen said last night that the "U.S. stock market is not overvalued"... That's all I'll say about that!

OK... Hopefully, you are still with me here, and reading... And you will recall me going on and on about China and their FX currency swap agreements and how that was a baby step toward gaining a wider use of the renminbi... Well... Yesterday, there was a story, that I think Ty told me about, that talks about China preparing to float the renminbi, testing it in Hong Kong... The Chinese government has been moving to allow banks in Hong Kong to issue bonds, hold deposits, and settle trade with the mainland -- all in renminbi.

However, don't look for this conversion to a floating currency to happen soon... Financial analysts believe it will not happen before 2020... It may come sooner... But I wouldn't get all lathered up that it happens in the next year!

One of the best performing currencies VS the dollar this year, has been the Brazilian real, with a greater than 30% gain, so far... There's been a shakeup at the Brazilian Central Bank, and there will be a few new members, with voting power at the next meeting on December 9th... I still don't think the Brazilian real interest rate will be moved at this meeting, but with the new members, they might want to make a "statement" about how hawkish they are... And on December 10th, Brazil will print their 3rd QTR GDP, which I would think would be quite strong... You would have to think that the Central Bank will have privy to this report before they meet on the 9th... And with the new members possibly wanting to make a statement, there's a whole new outlook for the Central Bank meeting...

You know... As we draw closer to the end of the year, the closer we get to the winter Olympics which will be held in Vancouver, B.C. (and Whistler!) Going back to the early days of the World Markets Division at the old Mark Twain Bank, here in St. Louis, we tracked currencies from countries that were holding the Olympics, noticing that there was always a rise in the host country's currency... If that were to hold it would benefit the Canadian dollar / loonie... Will it hold true for the Vancouver Olympics? We'll have to wait-n-see, eh? But really... Wouldn't it be worth a flyer, a shekel or two to see if it did hold true?

And then there was this... Were you confused by the GM announcements yesterday? I was... First there was an announcement that GM would be paying back some of the bailout money to the Government... But then later it was announced that GM posted a $1.5 Billion loss... Kind of difficult to pay someone back, when you're booking losses, eh? Strange announcements for sure...

OK, to recap, which I forgot to do yesterday! UGH! The currencies were whipsawed yesterday by comments by Big Ben Bernanke, that we've heard before! The RBA issued a not-so-hawkish minutes report that spooked the markets and it's Risk off today... Brazil might have a different outlook for their next meeting in December, and the winter Olympics are ready for Vancouver, will that mean a boost for the loonie?

Currencies today 11/17/09: American style: A$ .9270, kiwi .7440, C$ .9450, euro 1.49, sterling 1.6775, Swiss .9840, European style: rand 7.4660, krone 5.62, SEK 6.8775, forint 179, zloty 2.76, koruna 17.1450, RUB 28.77, yen 89.30, sing 1.3870, HKD 7.75, INR 46.30, China 6.8266, pesos 13.01, BRL 1.7160, dollar index 75.38, Oil $78.24, 10-year 3.35%, Silver $18.16, and Gold... $1,030

That's it for today... Well, the college basketball season began last night... My beloved Missouri Tigers start tonight. The Tigers basketball team surprised quite a few people with their run last spring, hopefully they can repeat that! Our little Christine's husband is a high school basketball coach. Christine says that once the season starts, she rarely sees husband, Matt... She loves basketball season! HA! My little, adorable granddaughter, Delaney Grace, was at the house when I came home yesterday, and she ran out of the house to jump in my arms to hug me! WOW! Sure is great to have a little one around! OK... Late again today, UGH! Better get going... I hope your Tuesday is Terrific!

Chuck Butler
President
EverBank World Markets
1-800-926-4922
1-314-647-3837

Eclectica November Fund Commentary

JohnMauldin — Mon, 16 Nov 2009 20:55:00 GMT

Today's Outside the Box comes to us from England. My European partner Niels Jensen from time to time sends me some of the best letters he reads from the hedge fund world. He is an excellent filter for me, and this week's Outside the Box offering is no exception. Below is the November commentary from Eclectica fund manager Hugh Hendry. He challenges the current preoccupation with the falling dollar and China, and posits what would happen if that thinking is wrong? It offers some very thought-provoking ideas. You can contact them for more information at info@eclectica-am.com or visit their website: http://www.eclectica-am.com

Your wondering if we are all turning Japanese analyst,

John Mauldin, Editor
Outside the Box

Eclectica November Fund Commentary

by Hugh Hendry
Eclectica Fund Manager

"The power to become habituated to his surroundings is a marked characteristic of mankind."

John Maynard Keynes
The Economic Consequences of the Peace, 1921

This month I will attempt to answer the entrance examination for the Chinese civil service. That is to say, I will attempt to tell you everything that I know. In doing so, I will argue that this year's rally in inflationary assets, from emerging stock markets to industrial commodities to the fall in the US dollar, could be a FAKE. Let me explain why.

But first, I am indebted to Scott Sumner, professor of economics at the University of Bentley, and his essay on the economic lessons that can be drawn from timelessness in art (see http://blogsandwikis.bentley.edu/themoneyillusion/?p=2542). It is a theme that I will constantly revisit in my arguments below.

Sumner is able to take us from the Flemish forger, Van Meegeren, and his horrendous reproductions of the Dutch painter, Vermeer, to the notion that every recession seems unique and special to its protagonists. So just how did Van Meegeren fool the Nazis with paintings that today look so awful, so un-Vermeer? Jonathan Lopez, the noted art historian, argues that a FAKE succeeds owing to its power to sway the contemporary mind. Or in other words, the best forgeries tend to pay homage to the tastes and prejudices of their time. The present is so seductive.

However, forget the art world. Controlling the psyche of this generation of investor is the indelible mark of the falling dollar and the associated fear of inflation. Monetary inflation has been the distinguishing feature of the last ten years, and it is now firmly embedded in the contemporary mind. I am sure I need not remind you that gold, along with just about every other commodity, has at least quadrupled in price since 1999. You already know my explanation for why this has happened.

The spectacular rise in the Chinese trade surplus, predominantly with America, to $320bn per annum at its peak in 2007, and the mercantilist desire to prevent currency appreciation drove the Asians and the sheiks to buy Treasuries and print their own currencies. The ability of fractional reserve banking to leverage this liquidity many times over provided the monetary mo-jo to instigate ever higher commodity prices. In other words, quantitative easing, masquerading as a cheap but fixed currency regime, has succeeded where Japan's orthodox version has failed. The QE succeeded because, amongst other features, it raised the velocity of monetary circulation.

However, it was not always like this. As an example, ten years ago it was unthinkable that the dollar would prove so fragile. Recall that back then, when the euro was first launched in 1999, it promptly lost 31% of its value against the greenback. The subsequent reconstruction of modern China, though, intervened. In order to finance the emergence of a new economic superpower, an abundance of dollars was needed. Have no doubt that had we not had the dollar as a reserve currency, the rise of China would not have been as swift nor as decisive.

The Yellow Brick Road

Consider another economy needing to be rebuilt: that of the United States in 1865, the post Civil War era. The rebirth of the American economy was funded from the monetary rectitude of the gold standard, not from the generosity of a foreign and infinitely expandable paper currency. However, all of this occurred before the discovery of cyanide for heap-leaching and the opening up of the huge South African gold fields. In other words, hard money was in tight supply and the recovery was neither swift nor decisive. Indeed, 30 years later, during the presidential election campaign of 1896, Williams Jennings Bryan was still hotly contesting its merits. He railed against the persistent price deflation and argued that the economy was burdened by a "cross of gold" (see The Eclectica Fund Report, December 2005).

Perhaps I Should Stick to the Twenty-First Century?

My previous investment letter attempted to explain the subtleties of the Triffen dilemma and the dollar's pre-eminent role in regenerating modern day economies. Let me repeat once more: lots of dollars were required, and duly delivered, to build modern China. They did not have to wait on the vagaries of a gold discovery to promote and sustain their economic engine. Instead, they required the willingness of their trade partners to run trade deficits. The US delivered and, partly as a consequence, the Fed's broader trade weighted dollar index has now fallen 20% since its peak in 2002 (the narrower DXY index compiled by the Intercontinental Exchange has fallen more, but excludes the renminbi and overstates the role of the euro). In return, the world has a new $4trn trading partner: China.

Heady stuff, but not without precedent: recall the Marshall Plan, a watershed American aid program that assisted the reconstruction of the Western European economy during the 1950s and 60s. This was further augmented by America's willingness to run trade deficits, the modern day equivalent to a gold discovery, which became necessary to sustain the emergence of the new economic trading bloc. This resulted in the dollar's huge devaluation versus gold in the 1970s. However, back then, the broad trade weighted index kept rising. This time it has fallen sharply.

What an Ungrateful Lot We Are?

The dollar's role as the world's sole reserve currency has both assisted and accelerated the development of world trade. America's trading partners have come to rely upon the bounty of dollars necessary to recycle their trade surpluses and thus finance their growing prosperity. This was done even at the expense of domestic American job losses. Replace the dollar with IMF special drawing rights; I hear your retort. Sure, but have you ever bought a cup of coffee with an accounting identity? And, fundamentally that argument still suffers from the dearth of any other major economy showing any willingness to sacrifice its short term economic standing for the longer-term mutual benefit of having enriched trading partners.

Do not forget that the Chinese could replicate equivalent currency baskets to SDRs at any moment. Instead, they continue to recycle almost three quarters of their trade surplus back into dollars. This is not coercion but simple commercial pragmatism. They know full well that neither Europe nor Japan nor Britain nor Switzerland nor the rest of Asia are willing to sacrifice the implicit loss of manufacturing jobs. They understand that it is only the US that is willing to embrace the benefits of comparative advantage that arise from international trade. Have you ever asked yourself why car prices in America are so low compared with those in Europe? This is my point.

I keep hearing that a dollar devaluation would help matters. I agree; it has. Let me say it again; we have already had the devaluation. That is what the last five years were all about. Now with China rebuilt, and the trade deficit in full retreat (note the -47% contribution from net exports to China's GDP growth in the first 9 months of this year), there are less dollar bills being exported overseas to ungrateful recipients. Is it not time we drop our fascination with the present and consider the future? Is it really inconceivable that the dollar could now strengthen?

Women in Love, Investors in Love. What's the Difference?

Of course this is a minority view. Investors have reacted to last year's deflationary traumas by insisting that it is business as usual. They behave like D.H. Lawrence's coal miner Gerald from the novel Women in Love, who, just days after his father's funeral, steals into his former lover's bedroom and, "...into her he poured all his pent-up darkness and corrosive heat, and he was whole again." Or was he? The trouble is that we are so anchored to the recent past. Investors are fearful of what now seems so familiar and recognisable; at what they perceive as the reckless behaviour of our monetary authorities. "Inflation is a monetary phenomenon" is their Friedmanite dogma. Their salvation can only be found in the safe sanctuary of gold and the embrace of risky assets, but are they truly safe?

This is my home. Don't be so sure about anything, Big Horace. Not about anything in this world.

The Orphan's Home Cycle
Horton Foote

And so, just as the Church of England commissioners became convinced by the cult of equity way back in the whimsical days of 1999 and went 100% long the stock market, investors today recant a new mantra of, "anything but the dollar (A-B-D)". Inflation bets are all the rage. Some would insist that it is their fiduciary duty to protect their clients' capital; I say tell that to the Church of England pension fund, whose assets today are just £461m against liabilities of £813m. Austerity beckons for the clergymen; heaven will have to pay their stipend.

But the spell cast by a contemporary cult is hard to resist. Take another august body, the Harvard Endowment Fund. Not typically renowned as a hotbed of reactionary fervour, the fund is nevertheless radical in its construction and has come to typify the A-B-D stance.

Harvard's position could well be construed as a one-way bet. Almost half of the fund is invested in emerging market equities, commodities, real-estate, private equity and junk bonds. It is as though the rap artist 50 Cent has taken over the advisory board. The fund is going to, "get rich or die tryin'".

We, on the other hand, approach risk by considering the worst possible outcome. For a current pension scheme the greatest torment would be a repeat of last year's final quarter when 30 year Treasuries yielded just 2.5%. This would require a CAGR of 20% or more from the fund's riskier assets at precisely the time that their future returns would seem most questionable; insolvency would beckon. And yet, they blithely run the risk of ruination.

Of course, they are not alone. Another popular argument is that the emerging economies have to urgently diversify their immense dollar reserves. And so the Chinese are colonising the African continent in the pursuit of commodities and the Indian government has just agreed to buy 200 tons of the IMF's gold hoard.

Is this not a reincarnation of the 1980 trade of the brothers Hunt? It is hardly an exaggeration to suggest that China, for all intents and purposes, is already the commodity market. For despite providing less than 8% of global GDP, China accounts for more than half of the world's steel production and more than half of global seaborne iron ore freight. Indeed, this peculiarity is circular in nature. Consider that a modern aluminium plant requires 25% of the project's cost to be spent on buying aluminium in the first place. And remember that investments in fixed capital formation (think new aluminium plants et al.) have made up 95% of Chinese GDP growth this year. China Inc. is Commodities Inc.

Accordingly, China shares the same risk as the world's largest pension schemes. An over- leveraged American consumer does not return to his/her manic buying of old. As William White, former chief economist of the BIS, has argued:

Many countries that relied heavily on exports as a growth strategy are now geared up to provide goods and services to heavily indebted countries that no longer have the will or the means to buy them.

Surely, the Chinese stash of Treasuries is a prudent elimination of the fat tail risk that private sector deleveraging in the west ends up killing the golden goose of the trade surplus. But instead, in exercising good ol' Texan tradition, they have opted, like the Hunt brothers did, to double up. It is the old dice game, Mort Subite, played by the employees of the National Bank of Belgium in the busy lunch time cafes of Brussels in 1910. If the players didn't have time to complete their business, they played a final round with a sudden ending where the loser would be pronounced dead.

Much is made of the comparison between today's balance sheet recession and Japan's demise back in 1989. Despite their bubble never coming close to matching China's prominence in industrial commodities, the loss of Japanese economic growth in the 1990s was nevertheless a major factor in the waterfall crash in commodities. This plunge ultimately saw oil trade for as little as $10 per barrel in the next decade. Just consider how much more devastating the experience would have been had they gone very long the commodity market in 1989 rather than golf courses and Rockefeller Centre. At least the Harvard endowment scheme did not share their enthusiasm for golf. But, this time around, I fear a Mort Subite beckons for the losers in Asia and the pension market.

Last Orders: Inflation or Deflation?

If a poet knows more about a horse than he does about heaven,
he might better stick to the horse... the horse might carry him to heaven.

Charles Ives

I am now going to return to the torturous and binary debate concerning inflation. As you know, I am in the deflation camp for now, and we own a modest amount of government bonds and a series of asymmetric bets which would receive a boost from a return to some form of risk aversion. You could say that I am sticking to my horse.

My intellectual foes, on the other hand, are adamant that long duration government bonds are a short. I even hear that some Wall Street legends are so convinced of the argument made by the likes of Niall Ferguson that they personally own Treasury put options and are actively counselling others to do the same. The argument can be condensed into just two fears.

First, they will suggest that 4.5% is not an adequate return for lending your money to the profligate United States for 30 years. I agree wholeheartedly. Again, I fear it is my accent, but let me stress once more that I do not propose that anyone adopt a buy-and-hold policy for the next thirty years in bonds. However, a nominal rate of 4.5% might prove very profitable over the coming year should breakeven inflation expectations head south again.

Second, the bears contend, a lower Chinese trade surplus will eliminate a very large source of Treasury buyers at a time of burgeoning supply. Again, we find ourselves agreeing vigorously. However, it is our contention that US savings are heading north over the months and years to come. And an America that saves is an America that does not run a current account deficit. It is an American that can finance its own spending domestically. The US produced a small surplus back in the 1990-91 recession, so why not again?

As a consequence the Chinese surplus is set to fall further and, with fewer dollars needing to be recycled to maintain the currency peg, their demand for Treasuries will continue to shrink. Now this is potentially a huge headache owing to the massive projected American budget deficits for this year and next, and the Treasury's desire to extend the maturity of the existing stock of government bonds which is becoming perilously short dated. Some estimate new issuance of around $2.5trn for the upcoming year. Perhaps, it is better that we buy those Treasury put options after all?

American Gothic

Or is it? I have quoted Don Coxe's definition of a bull market before and I intend to do so again. "The most exciting returns are to be had from an asset class where those who know it best, love it least." On this point, America has fallen out of love with its own currency and bond market. Foreigners own over half of the outstanding Treasury stock. But, like I said, I think events could reignite some of the natives' old amour.

It is almost like declaring an enthusiasm for Say's Law. Think of it this way, a greater supply of Treasuries would be a very obvious by-product of weaker than anticipated economic growth. And in this environment risk aversion stimulates the investment desire for risk free assets. So, in a round about way, there are circumstances when supply and demand can match in the bond market. But weaker economic growth? Surely the governments' interventions this year have remedied the economy?

The surprise might concern the role that rising leverage has played in boosting GDP and in anchoring investors' expectations to an unrealistic level of nominal GDP. Over the last decade, each marginal dollar of debt has generated less and less marginal income. We knew that there would be a "zero-hour" for the economy when the creation of new debt would not contribute to GDP growth. The government's reaction to last year's demand shock has been to increase its own leverage. But, with the economy operating at its zero-hour, we believe this incremental leverage will actually have a negative impact. That is to say, the public sector will fail in its attempt to bring the economy back to its previous level of nominal GDP. In this scenario, the outcome will disappoint the market's expectations, which are rampantly bullish as evidenced by this year's dramatic re-pricing of risk assets.

This zero-hour for America has perhaps arrived sooner than many had anticipated. It was heralded by the Japanese experience. Japan is the bogeyman that confronts all academic thinkers, regardless of creed, from Krugman to Ferguson, as well as all who would choose to intervene in the workings of the economy. In a debate I had with Mr. Ferguson in London last month, he claimed that Japan was an extreme outlier and could be ignored. Really?

No sex, no drugs, no wine, no woman, no fun, no sin, no wonder it's dark
Everyone around me is a total stranger.
Everyone avoids me like a psyched loan-ranger
That's why I'm turning Japanese,
I think I'm turning Japanese,
I really think so

The Vapors, 1980

Japan has championed both Friedman and Keynes. They have built bridges to nowhere and dropped Yen notes from helicopters for twenty years and still they have nothing to show for it. Clearly the additional return from Yen debt in Japan is close to zero and it exposes the nightmare of interventionists everywhere: it may just be that there are no policy remedies for a debt deflation. So to elaborate further, our chances of financial success are greatest under conditions where investors believe government spending will succeed but in reality it fails.

However, where will the demand for all of this additional government debt come from? Let us review the Fed's Z1 numbers. The US has household wealth of some $67trn. Of that, $20trn is accounted for by real estate and is perhaps out of bounds for our purposes. But $8trn is held in the form of private pensions and insurance funds. And yet, remarkably, these institutions presently allocate just $630bn to Treasuries et al. Households have a further $22trn in time deposits and other financial assets. But again they own just $500bn of Treasuries, and commercial banks own a tiny $130bn or, 1% of their total asset base of $12trn.

Consider that in 1952, at the very end of the supernova bond bull market formed from the ashes of the Great Depression and the Liberty Bonds that financed the Second World War, US banks held 40% of their gross assets in Treasuries. That is a potential $5trn of demand from this one source alone, albeit spread out over a number of years. And again, the Japan experience lends support. Japanese financial institutions have quadrupled the percentage of their assets held in JGBs. Furthermore, their households have lifted their government bond weightings five-fold over the last ten years. Should the same pattern repeat itself stateside, American households would need to buy another $2.5trn, but again, over ten years.

And let us not forget that a trend of rising prices allied to the most basic human emotion of avarice encouraged commercial banks and other financial institutions to buy $3.2trn of questionable mortgage backed securities in 2004, $1.9trn in 2005, $2.2trn in 2006 and $2.1trn in 2007. So it is not inconceivable, at least in my mind, that financial institutions, and notable amongst them the nation's pension and endowment schemes, could be motivated by another basic human emotion, namely fear for their own survival, to snap up all these new government bonds. Perhaps in the end supply will create its own demand.

Again, it all really comes down to your take on the ratio of total debt-to-GDP. If you believe, like I do, that it peaked in 2007 then the repercussions are enormous. The leverage does not necessarily have to come down (after peaking in 1932 at 300% it troughed 20 years later at 150%). Rather, it may well be that low interest rates allow the mountain of debt to continue to be serviced. This has been the Japanese experience to date. However, everything in our economic life exists at the margin, and the consequences of just maintaining the leverage constant would be a very low delta in nominal GDP growth. Consider that the Japanese, under these very circumstances, have managed to grow nominal GDP at just 1% compound since 1990.

In Bernie We Trust?

This is why China's mad dash for commodities and its investment splurge this year is so worrying. In my marketing presentations I show a picture of Madoff superimposed on a dollar bill and ask, "...in Bernie we trust?" My point is that if the hedge fund fraudster had been given the responsibility for US GDP accounting, he would surely have overstated the figure. And in a similar way, the rise in leverage has probably misrepresented the truly recurring nature of nominal GDP. Now, if we repeat the Japanese experience then it is possible that nominal US GDP will rise from $14trn today to perhaps just $16trn in ten years time. Along similar lines, the German government does not anticipate its economy exceeding its previous GDP high until 2014. And yet it is as though the other surplus countries are behaving like Bernie's former investors who, believing in the stated NAV and its promise of more of the same (i.e., predictable and attractive compound growth rates), were happy to spend lavishly. The Chinese are building capacity to meet a world where US nominal GDP is $25trn in ten years time. I fear they could be in for a nasty shock.

What Do I Mean?

Consider the steel market. The homogeneous nature of steel, as well as other factors such as its price-to-density, allows for the export of the finished good across trade boundaries. Now with China having been on such an expansionary tear, it may not surprise you to hear that finished Chinese steel prices today trade below their production cost. Furthermore, import license applications to sell steel in the US, the world's largest export market, rose 24% last month. Now, mostly this comes from Mexican and Korean producers, but clearly there is the implicit threat that their Chinese competitors might also be tempted.

But the Economy is Growing?

Clearly it would be inappropriate to annualise the production of the US steel industry in the fourth quarter of last year when capacity utilisation plummeted to just 32%. So consider, instead, the annual run rate this year from January to August. This was a period of stabilisation in tandem with the cash-for-clunkers program, which boosted the industry's largest customer, the car sector. It is quite chilling to note that steel production in America is on a par with output back in 1938, when GDP was a mere 7% of its current size. The industry's run rate dropped to a paltry 13% during the Great Depression. However, output only troughed at its 1908 level; a twenty year retracement that is a far cry from our 70 year retracement. So the physical developments in the western steel markets should raise some concern. However, with an active steel futures market in China turning over $15bn a day (consult the Bloomberg page <RBTA CMDY CT>), speculative fears concerning the dollar have overcome the paucity of industrial demand in the west.

Of course, it is not just steel. Consider the aluminium market. We recently had a very bearish meeting with the Norwegian company Norsk Hydro. Admittedly, their strong petro-currency does not help and you have to discount the solace I seek in finding people even more miserable than myself. Even so, the aluminium situation mimics that of steel, but with an even mightier inventory overhang. Four and a half million tons reside at the London Metal Exchange, perhaps 20% of world ex-China annual capacity. It is probable that 75% of this surplus stock is accounted for by financial players exploiting a contango.

Does Life Imitate Art?

The advocates of Prechter's socio-economics would not be surprised to hear that the Romanian writer Herta Mueller has been awarded this year's Nobel Prize for literature for her work depicting "the landscape of the dispossessed". In a Los Angeles Times review of her book, The Appointment, they noted,

"...it is sometimes difficult to tell whether we are reading about people driven mad by a mad regime or people who may not have had all their marbles in the first place."

My partner, Mr. Lee, reflected on this as he sat in the chilly offices of Norsk Hydro last week watching the snow fall outside. The Norwegians continued with their tale of woe: a couple of million tonnes of inventory remains unaccounted for on the world stage and are believed to be hidden in cheaper warehouses in Russia. The rationale behind this is the same as the rationale used by LME speculators. Furthermore, the big Russian players like Rusal are under intense pressure from Putin not to cut capacity (check out 'Putin bitch slaps Deripaska' on http://www.youtube.com/watch?v=PprlM5R3Hbg), and are rumoured to be surviving only by not paying their electricity bills.

To make matters even worse, the Chinese have stopped importing and are eager to ramp up domestic aluminium production. They havethe capacity to produce another 13mt annually, which is equivalent to 52% of global production. Lastly, there is the fact that Rio Tinto bought Alcan right at the very top of the cycle, though they dare not admit it is a terrible business.

Poor Old Norsk Hydro?

Who would want to share a stage with so many mad villains? The Norwegians noted that construction demand had just taken another leg down as buildings started pre-crisis are now finished whilst no further pipeline exists outside of China. Even Ryanair are talking about suspending their aggressive growth plans and may delay the purchase of more planes.

The Norwegians suffer the most pain at present, but if the dollar were to strengthen Alcoa could conceivably go bust. Their dollar cost is the company's only competitive advantage. Let us not forget Alcoa has the most exposure to aircraft construction and still has $10bn of gross debt lording over an almost equivalent market cap. Imagine that we have not even considered their pension liabilities. Yet the Alcoa CDS trades at 200 basis points, down from its high of 1200 earlier this year. Why?!

"May sorrow break these chains of my sufferings, for pity's sake"

Lascia ch'io pianga
Handel

Now remember I have been describing a positive macro scenario: a world in which low interest rates make the debt load manageable and that we muddle through with lower growth rates in nominal GDP. But clearly the consequences for corporate profitability are very poor. The alarming thing is that my opponents (see Ferguson et al.) believe that government bond yields are going much higher. Effectively, the world's bond vigilantes are going to punish the Fed and tighten monetary policy. It is almost as if the world's greatest speculators are agitating for their own demise. It is my contention that the leverage of the economy is only tenable if interest rates stay low and yet, whilst I believe some of them agree, they still fervently expect a rise.

Je consens, ou plutôt j'aspire à ma ruine.

Pierre Corneille
Polyeucte, 1642

Do not forget that the US does not share the distinction of the British or Australian housing markets. According to FSA data, 55% of UK mortgages are fixed rate and 45% are floating. The latter have, of course, collapsed and have proven a boon for disposable income. We must remember, however, that British fixed rates are determined by two and three year swap rates; so effectively the entire stock of UK mortgages are determined by the central bank and could be thought of as floating. In the US, however, things are very different. Total single-family mortgages outstanding are $11trn but $9trn is fixed to the prevailing 30 year Treasury yield. Banks just do not offer variable rate or teaser mortgages anymore. You might say that the American housing market hangs by the tender threads of the bond market's generosity. Lose it, and let us say that the markets demand 6% yields on 30 year durations and mortgage rates would then shoot back up to 7%. And, I would argue, the economy would come to a crashing halt. Do speculators really want this to happen?

Perhaps I am describing a pressure cooker. The private sector's debt may be sustained by maintaining low nominal interest rates.But the pressure from so much issuance at a time of great reluctance from financial institutions to purchase bonds could break the stalemate. And with it the ominous precedent of 1931, outlined in our February report, when a back up in ten year Treasury yields from 3.1% to 4.4% undoubtedly accelerated the rate of deflation in the US economy.

Reader Response: Gold or Silver with a Weakened Dollar?

IanWyatt — Mon, 16 Nov 2009 18:10:00 GMT

Your Daily Profit

November 16, 2009

*****A Good Christmas

*****Obama in China

*****Gold vs Silver

Fellow Investor,

The headline retail sales number for October came in better than expected, up 1.4%. Of course, sales were down more than expected in September, so a bounce isn’t a complete surprise.

Interestingly, it was mostly auto sales that drove the decline in September and the increase in October. Remove auto sales from the numbers and retail sales were up 0.4% in September and 0.2% in October.

Those aren’t big numbers and it’s easy to imagine that they could reverse if there are any new shocks to the U.S. economy. But retail sales numbers are a better measure of consumer confidence than polls like the Michigan Sentiment Survey, especially when people are making long-term commitments like car purchases.

I suspect we can attribute much of the bullish bias in the stock market to rising expectations for holiday spending.

*****President Obama is in China this week. I’m sure you’ll read plenty in the media about how Obama is there simply to reassure the Chinese about the U.S. dollar and our deficit. But it’s critical to remember just how inter-dependent the U.S. and China are.

China is an export economy. Without the U.S. consumer, their economy collapses. China will continue to buy U.S. Treasuries because it’s in their interest to do so.

Also remember that China has been pegging its currency to the U.S. dollar since last year. China knows full well that the U.S. dollar is weak against the euro and the yen. China is deliberately piggy-backing on the U.S. dollar to keep their exports competitive.

So why all the lip service about the relative strength of the U.S. dollar? It seems to me it’s just good old fashioned politickin’. We complain about their human rights and slap tariffs on Chinese tires and steel, they gripe about our currency and deficits. It’s pretty standard stuff…

*****I received an excellent question on Friday from a Daily Profit reader. Lee M. asked “Ian, would you purchase Silver and/or Gold now with the Dollar tanking or wait?”

The first thing to understand here is that gold and silver are up because the dollar is tanking, not in spite of it. On the most basic level, when the dollar falls in value, it takes more of them to buy something. And that’s especially true for commodities.

Demand has an impact on commodity prices, of course. If nobody wants copper, for instance, its price will fall regardless of the dollar. There can be no doubt that the weak dollar is part of the reason that oil prices have been steady in the $70’s.

Silver and gold are a special situation because these metals are perceived as having implicit value that will exist no matter the dollar’s value. Plus, in gold’s case, there is also an economic aspect – gold is considered to be a store of value in hard economic times. In other words, investors believe gold will hold its value when all other asset classes decline.

It’s no coincidence that gold started moving higher in the Fall of 2007 – right about the time that Meredith Whitney was articulating the growing fear that banks were in danger. It’s also no coincidence that, with the exception of the brief spike lower when Lehman Bros. went bankrupt, gold prices have held firm above $800 an ounce. (And as I write this, it’s around $1,130.)

An important thing to notice is that gold has made a new high this year. Silver has not. To me, that says gold is trading higher because of ongoing economic fears as well as the weak U.S. dollar.

Silver, on the other hand, is the pure play on the U.S. dollar. Now, let’s have a look at that US Dollar Index chart again…

I selected a 2-year chart because it shows the dollar index’s 2008 lows around 72. If the dollar returns to those levels we will see a new high for silver and gold. Gold, however, can continue to move higher so long as the dollar stays where it is, because investors remain concerned about the U.S. economic recovery.

The bottom line is that gold may be the more reliable trade right now, but silver has more upside if the dollar continues lower.

Now, this gets to the heart of the matter as to why I’ve been recommending gold miners. Gold doesn’t have to move significantly higher from current prices for gold miners to post huge gains in profitability because their costs are essentially fixed, meaning that profit margins expand as the price of gold moves up. So long as gold remains fairly stable, miners will be locking in gold sales at attractive prices.

A dollar rally might knock silver miners much lower, but that’s not necessarily true for gold miners. For investment purposes, the risk/reward scenario is better for gold miners. For trading purposes, there is more upside for silver if the U.S. dollar heads lower.

To get my top gold mining recommendations, Click HERE.

Until tomorrow,

Ian Wyatt

Editor

Daily Profit

Japan Posts a 4.8% GDP!

ChuckButler — Mon, 16 Nov 2009 15:19:00 GMT

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In This Issue..

* Risk Aversion goes away mad...
* China just says "no" to currency flexibility...
* Maybe a return to fundamentals?
* Gold continues to soar!

And Now... Today's Pfennig!

Japan Posts a 4.8% GDP!

Good day... And a Marvelous Monday to you! It's raining here, so it's one of those Rainy Days and Mondays... But I won't let it get me down, as opposed to the song! I got a chance to check out our new digs in the building next door to us here... Very nice! And... A long way from that small office I sat in on Olive St. a decade ago, when we started EverBank... To think back 10 years ago, and where we are today... Simply amazing!

OK... As I told you Friday, the President was in China this past weekend, trying his best to get the Chinese to agree to a greater flexibility for the renminbi... Well... There were a few stories this past weekend that hinted about the Chinese agreeing to do such... But I prefer to go with this story that appeared on Reuters last night... "The Chinese government has sought to distance itself from speculation surrounding a central bank statement earlier this week that was interpreted as a shift in currency policy towards a stronger yuan. However, a report on Saturday by Xinhua, the state-controlled Chinese news agency said that the government would not allow the currency to gain against the dollar in the short term."

Wang Qing, chief Asia economist for Morgan Stanley in Hong Kong, said in a report to clients: "I consider this article an official effort by Chinese authorities to dismiss the renewed speculation of yuan appreciation in the near term."

So much for that visit to China, eh? Put that one down next to the visit to Copenhagen earlier this year... Ahem... 3 strikes and you're out in baseball... But, getting back to the trip to China... The Asia-Pacific members were pretty tough with their questions for the U.S. President, questioning his commitment to free trade... And then let him know that China is going to fight protectionism, and keep the renminbi on a leash...

On Friday, we had the currencies add a bit to their rally on Thursday, as the Risk Aversion campers were sent home without a ball... No need to go away mad... Just go away! There was a bit of interesting data reaction that happened on Friday, which only gave me some hope of returning to fundamentals... The U. of Michigan Consumer Confidence Index fell in October, which wasn't expected one iota... And... The dollar sold off! That's exactly what should happen when a country's economic data prints badly! So Hur-ray! YAHOO! But... Just like I always say... On swallow doesn't make a summer, and one reaction to a data print doesn't make for a shift in fundamentals... But could it be a start? Yes, it could... But we'll need to see more of this type of trading after data prints to indicate that the old "trading theme" has been put in our rear view mirrors, and that fundamentals have returned... But wouldn't that be a happy day? Oh happy day... Oh happy day...

I'm going to tell you this next bit, and you're not going to believe it at first... But stay with it... There was good news in Asia overnight, as the Japanese printed a 3rd QTR GDP report that showed an annualized rate of +4.8%! That was 2.9% higher than the "experts" forecast for Japan! So... Even Japan is joining the other Asian and pan-Asian countries (Australia) in posting strong economic growth!

The Asia-Pacific leaders pledged to keep stimulus measures in place until there's a "durable growth"... Hmmm... Here's hoping that the Asia-Pacific leaders let us know when that happens, for 4.8% annualized growth for Japan, sure seems like "durable growth" to me!

And... In keeping with our hopes that fundamentals return to currencies and commodities... The strong economic data for Japan, did not quash the yen! In fact, the yen has traded stronger VS the dollar overnight!

Speaking of trading stronger VS the dollar overnight... Have you seen the price of Gold? WOW! Gold has set, yet another, all-time record high overnight of $1,133! It has since given back some of that to trade at $1,127... But still... WOW!

You know... Just about 10 days ago, the dollar was looking as if it was going to make a comeback / correction... I even saw a cute little poem a trader wrote about it being the end of euro strength... But here we are 10 days later, and the dollar is looking quite weak again... The euro is back to pushing the envelope to 1.50 VS the dollar, and I just told you about Gold's run VS the dollar...

Of course this doesn't mean that a correction couldn't take place today, tomorrow, or the next day... I'm just pointing out something that I've told you all about for years now... And that is: short term forecasting for currencies is usually wrong! So, then, people ask me... Why then do you write a daily letter about currencies, Chuck? Ahhh, grasshopper, because, someone has to make sense of this daily noise, and... You never know when a "turn" might happen in the currencies...

The Aussie dollar (A$) spent the overnight sessions trying to get past .9350, but failed to do so, especially on the back of a note from a local bank analyst who went out on a limb and said the Reserve Bank of Australia (RBA) would be on hold at their next meeting on Dec. 1st... Well, that may be... But I still believe the RBA will hike rates in December! But if they don't, then we could look for an even larger hike when they come back in January! So, this keeping the A$ below .9350 won't last long, in my humble opinion!

We could get some traction from the euro and other Euro-type currencies this week, as the Euro Finance Week in Frankfurt will take place with top leaders speaking on the financial crisis and lessons to be learned from it... German Chancellor Angela Merkel, who's always good for some interesting quotes, will speak, as will European Central Bank (ECB) President, Jean-Claude Trichet...

Speaking of Euro-type currencies... The Norwegian krone, continues to follow the Big Dog, euro... But when the Big Dog, euro gets going, the krone normally out performs the euro... So... The Big Dog, euro is the key here...

OK... For some time now, I've been trying to point out to you that monetary inflation is going to sneak up on us and rip apart our investments... My good friend, David Galland, had this to say in his Friday letter... Here's David!

"Just because it's not readily apparent doesn't mean it's not there. Of course, I'm referring to the government's monetary inflation, which, thanks to a combination of factors, still hasn't jumped out of the closet to scare bond markets into cardiac arrest."

David then goes on to show his readers a table that had useful details on the progression from normal to very much not normal, leading up to the German Hyperinflation of the early 1900's... David then says, "As you can see, the situation in Germany was not so bad - until it was."

If you would like to see the "table" David refers to... Or read his excellent letter... Click here... http://www.caseyresearch.com/quick-guide/free-publications/

OK... You know, the soaring Gold price has been mostly tied to the weak dollar... But, you would have to think that "smart investors" with an eye on this monetary inflation is having some push to the price of Gold too... I know that's why I own Gold... The weak dollar thing is just icing on Gold's value in my opinion... The inflation hedge... The Deflation hedge... Or... As I call it... The "uncertainty hedge"...

And then there was this... The other night I was discussing the Health Care stuff, and told the person I was talking to that the stimulus bill, you know the one that was pushed through so fast last winter because we as a country were "near total collapse"? Well, the stimulus bill had hidden in it, part one of the Obama Health Care Plan... Hmmm didn't know that? Well, yes, grasshopper... It's the "death panels" that Sarah Palin coined them... They are called the rationing and enforcement board. And... The President has already funded them with $20.6 Billion of our taxpayer dollars!

Now... I'm not going to get into a discussion of the Health Care here... My point was simply to show that when bills are passed, it is important that they are read aloud to the people, to keep from "hiding" things in the bills... $20.6 Billion of money that the Gov't did not have!

Ok... Enough of that... My good friend, Dr. Dave Janda, was the first to expose this "hidden gem" And he's been on the speaking circuit trying to get anyone that will listen to him, and they should, to understand what's going on...

Currencies today 11/16/09: American Style: A$ .9340, kiwi .7445, C$ .9555, euro 1.4970, Sterling 1.6720, Swiss .9920, European Style: rand 7.3910, krone 5.5730, SEK 6.8060, forint 178.90, zloty 2.7375, koruna 17.0530, RUB 28.68, yen 89.50, sing 1.3850, HKD 7.75, INR 46.22, China 6.8269, pesos 13.01, BRL 1.7125, dollar index 75.03, Oil $77.19, 10-year 3.40%, Silver $17.85, and Gold... $1,130.30

That's it for today... Our resident TV personality, Ty Keough, was announcing the Missouri Valley Conference Soccer match yesterday on Fox Sports Midwest... Ty had a great line during the match, referring to one shot by a player as being a "venomous shot!" I made a drive to the country yesterday to visit my graves of my parents and oldest sister... It had been a couple of years since I made that drive, my bad... The little country town that our family farm sat outside of, hasn't changed... It's still the same quiet little country town in mid-Missouri... Went to dinner with good friends, Lisa and Kevin on Saturday night, they used to be our neighbors, and now we rarely see them... UGH! OK... Mike's here, so that means it's time to hit "send"! I hope you have a Marvelous Monday!

Chuck Butler
President
EverBank World Markets
1-800-926-4922
1-314-647-3837

Germany & France Post 3rd QTR Growth...

ChuckButler — Fri, 13 Nov 2009 15:31:01 GMT

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In This Issue..

* Risk Aversion fuels dollar rally yesterday...
* Eurozone growth may stop the Risk Aversion...
* Budget Deficit is a record $176.4 Billion!
* Euro, Swiss, Aussie, Norway, all cheaper today!

And Now... Today's Pfennig!

Germany & France Post 3rd QTR Growth...

Good day... And a Happy Friday to one and all! Let's try to make this a Fantastico Friday as well! The Risk Aversion that was creeping into the currency markets yesterday really took hold in the U.S. trading session, which meant the dollar was being bought once more, along with Japanese yen...

It just makes me laugh out loud, when I write that the "safe haven currencies" during Risk Aversion trading are the dollar and yen... These two countries have debt up to their eyeballs, pay no interest on their deposits, and have a leadership deficiency... (ok, before every begins to think that I'm ripping the president again, I'm not... I'm talking about the Central Bank, and lawmakers of each country)

There was good news out of the Eurozone this morning... Both Germany and France followed their previous quarter's growth, with stronger growth in the 3rd QTR... The Eurozone's two largest economies continued to recover from recession in the 3rd QTR, as exports boosted both German and French gross domestic products. I say that, and I want to spit out a raspberry to all those that claim the European Union will collapse because of the strong euro! Neener, neener, neener... The largest economies of the Eurozone can grow, with strong exports even with a strong euro!

OK Chuck, no need to be childish here, let's get back to the growth... Germany's GDP rose 0.7% in the three months to Sept. 30. In France, GDP also grew for the second consecutive quarter, rising 0.3%.

So... Of course this data from the Eurozone put a floor under the euro's decline from yesterday... It will be interesting to see how the U.S. guys look at these growth numbers... The European guys liked them... The U.S. traders though can be very fickle...

And more than that though, I think this might be the thing to put the Risk Aversion to bed... Recent history tells me that whenever Risk Aversion has crept into the markets, any sign that Global growth is back on track, and will lead investors to higher yielding assets, the Risk Aversion ends abruptly... Let's hope that's the case today with these two growth reports from the Eurozone!

Yesterday's data in the U.S. showed that the Weekly Initial Jobless Claims remain above 500,000 per week, and that the Budget Deficit was even worse than the forecast $160 Billion! The Budget Deficit for October totaled $176.4 Billion, which annualized puts us over $2.1 TRILLION! OMG! That awful folks! And you should be writing, calling, or making your way to your representative's next meeting and demanding that they STOP SPENDING MONEY THEY DON'T HAVE!

You know that letter that I said I was going to write to my darling granddaughter, Delaney Grace, apologizing for the lack of freedom and tax burdens that were left to her generation to deal with? Well, I started writing it the other night... What this and the previous administration is doing has no morals, when it comes to leaving the debt to be dealt with by future generations...

OK, it's a Friday, I need to try to remain calm here, and be upbeat! Hmmm... Usually, that means that I pull out a story on Gold... But yesterday was not a good day for the shiny metal, after reaching a new all-time record level of $1,118, it fell more than $10 in the aftermath of the Risk Aversion... See how stupid the Risk Aversion people are? I mean, if you wanted to avert risk, wouldn't you buy Gold?

Any way, colleague, Don Ries, sent me a story that he came across regarding Gold that I thought was quite interesting... The Telegraph in the U.K. printed a story about how Barrick Gold believes we may have reached "peak" Gold already... And by that "peak" I'm talking about the mining of the shiny metal!

"Aaron Regent, president of the Canadian gold giant, said that global output has been falling by roughly 1m ounces a year since the start of the decade. Total mine supply has dropped by 10% as ore quality erodes, implying that the roaring bull market of the last eight years may have further to run. There is a strong case to be made that we are already at 'peak gold'," he told The Daily Telegraph at the RBC's annual gold conference in London."

WOW! Did you get the one line that was in there about how this lack of mining implies that the roaring bull market of the last eight years may have further to run? I think that's putting it conservatively for sure! "may have further to run?" I would say it stronger... But I can't... Or I'm not supposed to! ( our legal beagles read the Pfennig each day!)

OK... That put me back on track to be more upbeat for this Fantastico Friday! Today's data cupboard will yield the Monthly Trade Deficit data, and the U. of Michigan Consumer Confidence index... The Trade Deficit overhang continues to be a problem for the U.S., obviously not as bad as a problem as it was during the go-go days for the consumer...

Traders have become "comfortably numb" with the deficit figures in the U.S. which is a bad thing folks... Traders need to make a stand, and not allow this stuff to just slip under the door, thus allowing larger and larger deficits in the future!

I see the President is in China... I bet he thinks his presence will be the thing that will move the Chinese to allow greater currency flexibility... I just don't see the Chinese getting caught up in the "show" to give in and allow flexibility in their currency, just because the President of the U.S. showed up...

The currencies are rallying this morning VS the dollar. Since I came in and began writing, the euro has climbed higher, albeit a small move higher, it's still moving higher, and thus has stopped the bleeding, that began yesterday morning...

I'm surprised the Aussie dollar isn't really hitting on all 8 this morning, considering the growth numbers in the Eurozone... But I think we might have to wait for the U.S. traders to come in to see the rally in the A$ this morning... It is Saturday in Australia!

The Swiss franc got caught up in the Risk Aversion trading yesterday, and has backed off its ascent to parity... The franc is trading around .9855 this morning, which is more than 1-cent lower than yesterday morning... Wink, wink...

And a country / currency that I drop the ball on all the time, when it comes to talking about it in the Pfennig, is the Norwegian krone... Long time readers know that I truly like Norway, for their fiscal and monetary surplus prowess... And most recently, for their absence from the rolls of those countries that got involved in sub-prime and bad lending practices. Earlier this month, Norway's central bank, the Norges Bank, hiked rates 25 BPS, and is expected to raise them again in a month or two... So, now we have a country that has a strong fiscal and monetary position, no bad banks or loans, and a strong positive interest rate differential to the U.S.... Hmmm...

And then there was this... Neil Barofsky, the special inspector general for the $700 Billion TARP bailout said the program will "almost certainly result in a loss to taxpayers"... "We need to temper or be realistic about our expectations, a dollar-for-dollar return is just highly unrealistic." Barofsky also said that he's conducting 65 investigations of possible fraud...

OH MY! You're telling me that with the $700 Billion TARP funds that there could have been some fraud involved? I wouldn't have believed it! .... NOT! I bet you thought I had gone softy on you! The whole TARP was fraud to begin with! So, with all the corruption and scandals that have gone in before, the thought that there could be some fraud, should have been a belief that there "would be fraud for sure" when the TARP was issued!

Currencies today 11/13/09: American Style: A$ .9285, kiwi .7370, C$ .9495, euro 1.4890, sterling 1.6685, Swiss .9860, European Style: rand 7.4410, krone 5.62, SEK 6.8660, forint 180.80, zloty 2.76, koruna 17.10, RUB 28.83, yen 89.70, sing 1.3860, HKD 7.75, INR 46.34, China 6.8263, pesos 13.16, BRL 1.73, dollar index 75.39, Oil $77.45, 10-year 3.44%, Silver $17.36, and Gold... $1,109.30

That's it for today... Yes, today is a Friday the 13th... I don't get into that stuff, but if you do, be careful today! We're supposed to have another nice weekend here in St. Louis, weather wise, so we have that going for us! No football game this weekend though for my little buddy, Alex. I saw Chris Gaffney and his son Brendan on TV at the Blues game last night. The Blues lost the game though. UGH! Another week, and well be talking about Thanksgiving getting here so fast! The radio station that plays Christmas music every year, began broadcasting the Christmas music a couple of weeks ago! They used to at least wait until Thanksgiving came and went! Well... Let's get working on having a Fantastico Friday! And a Wonderful Weekend!

Chuck Butler
President
EverBank World Markets
1-800-926-4922
1-314-647-3837

Risk Aversion Creeps Back Into The Currencies...

ChuckButler — Thu, 12 Nov 2009 15:32:59 GMT

..But First, A Word From Our Sponsor..
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* High upside potential
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Don't miss this unique opportunity. Deadline to buy the BRIC MarketSafe CD is Dec. 3rd, 2009. Apply today or learn more at http://www.everbank.com/001CertificatesMSBRIC.aspx?referId=11808
.

In This Issue..

* Comments spook currency traders...
* A$ hits 15-month high, this time going up!
* Geithner as the "joker"?
* China changes statement about the renminbi...

And Now... Today's Pfennig!

Risk Aversion Creeps Back Into The Currencies...

Good day... And a Tub Thumpin' Thursday to you! It's a Thursday, and it's not raining here! YAHOO! After a week of Indian Summer weather, we're slowly creeping back to the colder weather, but still, better than most Novembers of the past, so far!

That was a strange feeling yesterday, having a holiday in the middle of the week, but the day was nice, and I got to spend the day with my granddaughter, Delaney Grace, who sang me songs all day long!

So... Last night, I'm doing some writing, and before I put the laptop to bed for the night, I checked the currencies, and while they had drifted in the early Asian session, the Big Dog, euro was still trading above 1.50, and the Aussie dollar (A$) had set a 15 month high of .9368... But when I turned the currency screens on this morning after arriving to a pitch black office, which is the way I like it this early in the morning, the euro had given back about 1/2 cent, and so had the A$... So, it was my mission to find out what caused this slippage...

The only thing I could find was a comment by the Chinese Premier, Wen Jiabao, who said that "the world faces an uneven recovery"... This made traders think twice about leaving me behind, no wait... I mean they thought twice about the green light they thought they were under to have carte blanche with the dollar...

The dollar also received a bit of love from the comments by U.S. Treasury Sec. Geithner, a.k.a. the Cheater... Geithner was doing his best Robert Rubin, circa 1995, saying that he believes strongly in the need to maintain a strong dollar and said the United States was determined to get its budget deficit down. HAHAHAHAHAHAHAHAHAHA! That's a joke, right? OH! He wasn't joking? Are you sure? Because for a minute there, I really thought he was joking, for what, in the past, has he or this administration done to back up those words? But he wasn't joking... Hmmm... And I was all ready to give him a new nickname... The Joker...

Geithner did say that the U.S. was well aware it must work to keep investors' confidence in U.S. economic policymaking... Yeah, and that's exactly what you've done, right? NOT! Hey Timothy, you might want to check the scorecard on your performance so far... The dollar index has fallen 7.6% this year, and hit a 15-month low of 74.89 yesterday...

OK... I've got to go on to something else, otherwise I'll say something that will cause people to fill my email box with nasty emails! But... It sure looks like Risk Aversion has crept back into the currencies after all these statements... We seem to run into these Risk Aversion stints about every week... They come, they take away gains, and they go away, thus allowing the gains to be reinstated...

How about that 15-month high for the A$ yesterday of .9368? At least this time the currency is on the way up when it hit that 15-month figure... 15 months ago, it was on the way down! So, here's the skinny on this move by the A$... Australian employers added jobs in October... This was unexpected... But... Caused the immediate response of speculating that the Reserve Bank of Australia (RBA) would indeedly do, raise rates at their next meeting on Dec. 1st...

There was another "push" to the A$ yesterday... And it came from Gold! The shiny metal pushed to yet another new all-time high record level of $1,117 during the day... I might remind you here that Gold is Australia's third most-valuable raw material export... Oh! By the way, Australia's unemployment rate is now 6.5%, which is still too high, but falling... And doesn't that have a nice ring to it, versus saying an unemployment rate is rising past 10%?

The A$ pulled its kissin' cousin from across the Tasman, New Zealand dollar / kiwi along for the rally yesterday... Kiwi continues to be haunted by the ghost of deficits past... But, hiding in Australia's shadow suits kiwi just fine... And New Zealand Retail Sales just posted a nice, surprise, uptick... There are all kinds of reports going around that say the New Zealand 3rd QTR GDP will be strong... I'm from Missouri, so they'll have to show me!

There was further news out of China yesterday, from the People's Bank of China (PBOC)... The PBOC stated that "the exchange rate will be guided in a proactive, controlled and gradual manner and based on international capital flows and movements in major currencies." What's the news of this you might be asking? Ahhh grasshopper, sit... Here is the news... That statement is completely different toward the Chinese currency than previous statements that said that the PBOC would keep the currency "basically stable"...

This is Central Bank parlance folks, to say that the PBOC will continue to "gradually" move the renminbi... As previously they basically said they would keep it at current levels... The foreign newspapers are all over this statement like a cheap suit, folks... But I think they're going in the wrong direction... The foreign newspapers are thinking that the PBOC has given the "high sign" that they are ready to allow the renminbi to float... Buzzzzzzzzzz! I'm sorry, that's the wrong answer... We hate to see you leave, but Johnny, tell our contestant what they've won!

I just don't see it as that... The Chinese like to play these games with words, to get everyone all lathered up... And then pull the rug out from under them... No rug pulling from under me!

The Wall Street Journal (WSJ) is reporting this morning that Central Banks around the world, like the Russian Central Bank, are buying dollars to underpin the currency from a free fall... The WSJ also said the Asian Central Banks have all been buying dollars to keep their currencies from getting too strong... Hmmm... I wonder how that's been working out for them? Oh... Here's the skinny on that... "Quite clearly, all Asian central banks have found it necessary to intervene, and it's costing us," said Korn Chatikavanij, Thailand's finance minister.

So, it's kind of nice to see other Central Banks around the world throwing good money at bad money, like the Fed Reserve has done for 15 months now... At least they're not throwing money down the toilet, nononononononono! YES THEY ARE! They're buying dollars! What dolts!

OK... While I was browsing through the WSJ, I saw another story that caught my attention... Here was the headline... "Fannie Mae, Freddie Mac say more losses are possible"... According to the WSJ, the U.S. Treasury has already injected $112 Billion into Fannie Mae and Freddie Mac since the government took them over last year... And now, more losses are possible?

Let's see... The Government took them over, and more losses are possible? Sounds like the Post Office... Sounds like Amtrak... What else has the Government taken over, and the bleeding continues? I know, and you know where I'm going with this, so I'll stop there!

What some more depressing data? October saw 332,292 U.S. homes seized by lenders or listed in default or auction documents according to RealtyTrac... October was the 8th consecutive month of 300,000 or more.... There was a 3% decline in October from September, but I wouldn't get too lathered up about that, given the chart I saw and shared with the desk the other day regarding residential loan resets that are coming due in the next two years, with peaks in Sept of 2010, and Sept 2011...

Looking at this chart tells me that the cartel, I mean the Fed will have no other choice but to keep rates low, and to keep buying Treasuries to keep the yield from getting too high... Haven't we learned anything the past 10-years? You have to learn from previous mistakes or you'll make them all over again... And that, is what, I, believe, the Fed is doing! The tried like heck to keep the Tech Bubble from bursting, by keeping rates artificially low, and credit loose as a goose... What were the unintended consequences of those actions? And what will be the unintended consequences of these actions by the Fed? I don't have an answer to that, but I don't see how this works out nice for the U.S. economy and taxpayers...

Before I go on... A reader sent me a note that made me laugh... He said, "Hey Chuck, since you can't decide on whether or not call the Fed the Fed or the cartel... Why don't you just put them together and call them the Fartel"? HAHAHA HAHAHAHAHAHA!

The data cupboard finally gets restocked today, and we'll see the usual Thursday fare of Initial Weekly Jobless Claims, which remains above 500,000 every week, and something that Tim Geithner might want to pay attention to... The U.S. Monthly Budget Statement, which will be somewhere around $160 Billion for October... Annualized, that's almost a $2 Trillion deficit in the Budget! OUCH! Say it ain't so, Joe!

To recap... The non-dollar currencies rallied all day yesterday, but have given back those gains in the overnight sessions. Most of the slippage has been from words, not actions. The Chinese premier, and the U.S. Treasury Sec. So... Don't look for this to be any reversal of the weak dollar trend... The Aussie dollar hit a 15-month high last night on a strong employment data report, which has traders thinking another rate hike on Dec. 1st is coming, and the Asian countries have been buying dollars to keep their currencies weak, and according to them they are "paying the cost"!

Currencies today 11/12/09: American Style: A$ .9315, kiwi .7370, C$ .9315, euro 1.4950, sterling 1.6580, Swiss .99, European Style: rand 7.4380, krone 5.6050, SEK 6.8550, forint 180.50, zloty 2.7645, koruna 17.0490, RUB 28.79, yen 89.80, sing 1.3870, HKD 7.75, INR 46.65, China 6.8267, pesos 13.17, BRL 1.7150, dollar index 75.25, Oil $78.67, 10-year 3.44%, Silver $17.57, and Gold... $1,116

That's it for today... Isn't that something, the Gold move? My good friend, David Galland, said that Gold is "blowing a raspberry"! HA! Well... Now that my blood has been thinned out, and had the consistency of water, the swelling in my left leg has backed off just a bit... At least I don't have to continue with the shots! Next week I go back to the cancer doctor that has been treating my left eye that was taken over by cancer... I really don't know why I have to go back, he told me last time there "was nothing else he could do"... All these things, and still life goes on, right? Yep! Little Delaney Grace was really cute the other day, trying to pawn off her carrots to me, she kept telling us that the carrots were mine to eat, not hers! Well... I'm locked down in St. Louis until late January... But my annual Christmas vacation will break things up... I know, it's a month away, but I can't help starting to get geeked about it! OK... A little long here with the Big Finish, I had better get going on this Tub Thumpin Thursday!

Chuck Butler
President
EverBank World Markets
1-800-926-4922
1-314-647-3837

Consumer Spending Drives GDP?

ChuckButler — Mon, 02 Nov 2009 15:44:08 GMT

..But First, A Word From Our Sponsor..
Gain exposure to currencies of emerging BRIC countries-and don't lose a dime on market risk

* 4 BRIC currencies: Brazilian real, Russian ruble, Indian rupee, Chinese renminbi
* High upside potential
* No market risk to deposited principal
* Low $1,500 minimum deposit

Don't miss this unique opportunity. Deadline to buy the BRIC MarketSafe CD is Dec. 3rd, 2009. Apply today or learn more at http://www.everbank.com/001CertificatesMSBRIC.aspx?referId=11808
.

In This Issue..

* Dollar rebounds after spending fades...
* Chinese Manufacturing rises...
* Eurozone Manufacturing rises...
* Australia as the proxy for global growth...

And Now... Today's Pfennig!

Consumer Spending Drives GDP?

Good day... And a Marvelous Monday to you! And Welcome to November! My least liked month! But that's a story for another time! I hope your Halloween was fun! The rain stopped here, there was a near full moon shining in the sky, and the little kids had a blast! And Hey! The Rams won a football game! WOW!

OK... Well... Friday was a blur to me, as I went to the doctor's office for a test, and then on my way to work, they called my cell and asked me to turn around and go to a lab for more tests... UGH! So, by the time I got to work, Jennifer had set everything up and begun trading for me... Then it was time to go home! So, I'm sitting here this morning, scratching my bald head trying to recall the currency prices on Friday... And Oh yeah! Now I remember! Do you recall the Thursday action after the GDP report showed such strength (whether you believe it or not) and the dollar got sold like pet rocks?

Well the Gov't had made such a big deal out of the fact that a good portion of the GDP report was consumer spending during the quarter... In fact 1.6% of the 3.5% increase was the Cash for Clunkers program! Well... That was a bad thing to do, for on Friday, Personal Spending and Income printed, and the Spending piece had fallen in September... So much for the euphoria of Consumer Spending bringing the economy out of the recession! Oh, and like I said last week, this plays right into my thoughts from long ago, that we would see some growth near the end of this year, but would slip right back into recession, thus a double-dip... So, the first two parts are in the books...

So... The currencies slid VS the dollar on Friday, and haven't really rebounded overnight from what I can see here at home, as I write the Pfennig at my kitchen table! The Aussie dollar (A$) seems to be champing at the bit to move higher VS the U.S. dollar, but just can't get the Big Dog, euro, to get off the porch this morning!

The reason the A$ is champing at the bit to move higher, is the news from China this past weekend that their Manufacturing data from October showed the fastest gain in 18 months! So, in keeping the Manufacturing Index here in the U.S. in mind, the Chinese Manufacturing Index moved to 55.4 in October, from the 55 in September, and the Chinese say that exports were strong... Ok... We have to apply the "believe 1/2 of what the Chinese tell us about their economy... If that's so, then the Manufacturing Index still is above the expansion line of 50... And that's a good thing for the global economies!

I would think that news like this from China would be a springboard for Commodities, and the Commodity Currencies of Australia, Brazil, Norway, New Zealand, and Canada...

Speaking of strong manufacturing... The Eurozone printed a strong Manufacturing Index report this morning too! Manufacturing in Europe expanded for the first time in 17 months, in October, increasing to 50.7 VS 49.3 in September!

The dollar index is beginning to show some weakness as I write this morning... And one would certainly think that news like this from China and the Eurozone, would push the dollar down... But, there's that stinkin' Trading Theme hanging over us like the Sword of Damocles! And with the news this past weekend that CIT Group was going to have to file bankruptcy, if things hold true, it would be good for the dollar... The flight to safety, and all that!

Hey! Doesn't this news about CIT Group tick you off a bit? It does me... And I'll tell you why! CIT Group had received $2.33 Billion of taxpayer money in an attempt to bail them out last year, but they failed any way! Again! Wouldn't it have been far better to just let them fail when they first showed signs of not being able to compete, and survive? I know that in the whole scheme of things $2.33 Billion doesn't sound like that much... Considering the Trillions that have been spend, allocated or guaranteed! But... $2.33 Billion here, and $2.33 Billion there, and pretty soon you're talking about a nice sized pile of cash, that would not have been wasted!

The Business Section of our local paper had an article this past weekend on what I was referring to last week regarding GMAC and Ally Bank... Here's David Nicklaus saying what I wanted to last week... "That clever Ally Bank ad, the one where a boy is denied a toy truck because of a "limited-time offer," omits a fact that would interest most viewers.

You, the taxpayer, are propping up Ally, the bank that's so good at making fun of other banks. And it looks like Ally's parent, GMAC Financial Services, will ask for more money soon."

So... The Gov't is in competition with private sector banks... And they can pay interest rates that are higher than other banks, because... If they lose money, they can just go back to the well and get more bailout money!

This is all just becoming one Big Mess folks... You've got to see what's going on here! It's called Big Gov't... And when you have Big Gov't, you have Big Deficits! The Gov't does not have any money to spend unless they steal it, I mean take it from taxpayers first! And they're spending what they don't have! Tax receipts are falling, and the Gov't's expenditures are rising! That's a bad formula folks...

And one that makes you so aware of the need to be diversified with a portion of your investments out of the dollar!

OK... I've got to stop there, I have to go to the doctor's office this morning, and I don't need my blood pressure boiling!

Hey! I was reading an article on Friday about Australia in which the Australian Treasurer, Wayne Swan, told reporters that he truly believes that the Australian economy is going to outpace most of the world in 2010... This plays well with my thought that I've held for so long, and have told you dear readers about for some time now, and that is... That Australia is the proxy for global growth... And if the "insiders" in Australia think their economy will outpace most of the world, that's a good sign for the global growth! And one that I think traders should be taking notice of!

I think that Brazil has a long way to go to catch up with Australia but, Brazil has made great leaps in the past 5 years, and has really taken the steps to be in the same conversation when talking about Australia... The country is still an Emerging Market though, and with that, you get wild swings in the currency... Just so you know!

I want to get back to the GDP report in the U.S. from last week... Recall that above, I told you that the Gov't made a Big Deal out of the fact that a large portion of the rise in GDP was consumer spending... But you have to ask yourself this question... "how are consumers propping up GDP with spending in the face of over 16% unemployment? Personal Consumption climbed while Personal Income fell in the quarter, as documented in the Pfennig each time they printed... So, the only way that works is if, you don't think, nah, we've had to have learned our lesson, right? Oh well, I'll throw it out there... The only way that works is if the money is borrowed... Credit cards, etc. OH NO! Tell me we're not going down this road again! Ahhh grasshopper, but Christmas is just around the corner... With 16% unemployment going on, this should be a very "plastic" Christmas shopping season!

Ok... The week ahead is chock-full-o-data and events... Like... The FOMC meeting tomorrow, that carries over to Wednesday... You know what I say about those two-day FOMC meetings! Got any Aces? Go Fish!

We'll see our own version of Manufacturing Index the ISM as it prints this morning... We'll also see Pending Home Sales. Tomorrow is the Auto Sales, and Factory Orders. Wednesday we'll get the Treasury Refunding Announcement, and Thursday is weekly initial Jobless Claims, and the stupid Productivity reports, and then Friday is the Jobs Jamboree!

So... We've got a lot to talk about his week... I'm supposed to be leaving for Cabo tomorrow, but I doubt the doctor is going to let me travel, so I'll probably be here all week. So, Chris gets off the hook this week most likely...

To recap... The euphoria that was all over the markets after the GDP report was wiped out by a very weak Consumer Spending report for September. The dollar rebounded on the "bad news for the economy" thus confirming that the "trading theme" is still in place. CIT Group filed for bankruptcy this weekend, thus wasting the $2.33 Billion, that was given to them by the Gov't from taxpayers! And both China and the Eurozone's manufacturing indexes were strong last month, which should be a good thing for the global economies, commodities, and so on...

I'm going to try something different this morning... I still get emails from people that question why I quote currencies in two different ways... Well, there are two pricing conventions in currencies, and so I try to keep currencies in the form they are quoted... But to make things easier... We'll break out the American Style, and the European Style...

Currencies today 11/2/09: American Style: A$ .9045, kiwi .72, C$ .9255, euro 1.4780, sterling 1.6360, Swiss .9790, European Style: rand 7.9175, krone 5.70, SEK 7.0315, forint 186.05, zloty 2.8740, koruna 17.88, RUB 29.20, yen 89.90, sing 1.3990, HKD 7.75, INR 46.97, China 6.8279, pesos 13.22, BRL 1.7635, dollar index 76.15, Oil $78.17, 10-year 3.62%, Silver $16.62, and Gold... $1,054.30

That's it for today... Well.. For once, it was a good football weekend here in St. Louis, as our Rams stopped a 17-game losing streak, and my beloved Missouri Tigers posted a Big 12 win. Little Buddy Alex's team remained undefeated, but tied. Two absolutely glorious sunny, blue sky days here after the what seemed to be 40 days of rain finally ended! November is off to a good start weather wise, but I know all too well what it has in store for us! Well, I'm off to see the Wizard! Speaking of which, my little granddaughter, Delaney Grace was the cutest Dorothy you've ever seen! She came by the office on Friday to show every here just how darn cute she is! OK... Time to go, this time for real... I hope you have a Marvelous Monday, and a good start to the week and month!

Chuck Butler
President
EverBank World Markets
1-800-926-4922
1-314-647-3837

Jobless recovery?? Not going to happen....

ChuckButler — Fri, 23 Oct 2009 14:56:00 GMT

..But First, A Word From Our Sponsor..
Gain exposure to currencies of emerging BRIC countries-and don't lose a dime on market risk

* 4 BRIC currencies: Brazilian real, Russian ruble, Indian rupee, Chinese renminbi
* High upside potential
* No market risk to deposited principal
* Low $1,500 minimum deposit

Don't miss this unique opportunity. Deadline to buy the BRIC MarketSafe CD is Dec. 3rd, 2009. Apply today or learn more at http://www.everbank.com/001CertificatesMSBRIC.aspx?referId=11808
.
In This Issue..

* Leading indicators up, but employment down...
* 11 million new jobs in China...
* Pound sterling gets pounded...
* A Great Day for EverBank...

And Now... Today's Pfennig!

Jobless recovery?? Not going to happen....

Good day...and happy Friday! It has been a fairly busy week here at EverBank, with the issuance of another big BRIC MarketSafe CD, the maturity of another MarketSafe, and a big acquisition (more on that later). While things were a bit crazy at EverBank, the currency markets were fairly uneventful. The dollar started the day off with a move up after a positive report on US leading indicators, but it gave back most of the gains as the trading day wore on. At the end of the day, only one currency moved more than 1% vs. the greenback, with the pound sterling dropping almost 1.5%.

As just mentioned, the leading indicators for the US rose in September for a sixth straight month, giving confidence to those calling for continued expansion in 2010. The gauge which attempts to predict the economic outlook for the next 3 to 6 months climbed 1%, beating most economists forecasts. But much of the good news on the US economy is due to the government stimulus programs, and two other reports indicated future growth for the US is still a question mark.

Offsetting this positive report was the weekly jobless claims which rose, and a report which showed home prices fell. So apparently the leading indicators are predicting a recovery without jobs, and without a strong housing market. You can see why Chuck and I question reports of a 2010 recovery. The US economy will not be able to post strong growth with near double digit unemployment and with both residential and commercial real estate in the dumps.

One of the Fed heads agrees. Federal Reserve Bank of Boston President Eric Rosengren said the US economy is at risk of relapsing into recession after expanding in the second half of 2009. "It's certainly a risk," Rosengren said in an interview with CNBC. "That is why we don't want to take away the stimulus too quickly." I don't look for the Fed to move interest rates higher anytime soon; the leaders of our Fed realize a full US recovery is still a ways off.

Here is a question which needs to be asked: Can the world grow without a robust US consumer? I believe the answer is yes! Growth in Asia and Europe can propel the world out of the global recession without the help of the US consumer; and I think that there is a very good chance that is what is going to happen. Chuck has compared the current state of the US to what happened in Japan after its stock and real estate markets crashed in 1990. Japan plunged into a 10 year period of stagnant growth while the rest of the global economy prospered. Many will question how the global economy can grow without the help of its largest contributor, but Japan was the second largest economy during the 90's, and the rest of the world barely skipped a beat during their malaise.

With the emergence of the consumer in both China and India, the global economy can and will continue to grow even if the US is stagnant. I read a report this morning which stated China will create over 11 million jobs this year, 2 million more than the government had earlier predicted. These new jobs will continue to increase the standard of living in China, and create 11 million 'new' consumers.

While the current administration may talk about reversing the stimulus and government spending as the rest of the world starts to recover, their actions won't match their talk. I believe we will see interest rates stay low in the US for an extended period of time. We will also probably see additional stimulus proposals as US unemployment continues to rise and US consumers continue to tighten their purse strings.

As the rest of the world continues to recover, and central banks begin to increase rates in order to fight rising inflation; the US dollar will continue its slide. A strong dollar just isn't in the interest of the US if we have any plan to try and pay down the tremendous debts and stimulate growth through increased exports. The dollar will fall victim to policies which will be designed to try and push the US economy up to keep pace with the global recovery occurring in Asia and Europe. Despite all of the rhetoric about a 'strong dollar policy', the administration is willing to sacrifice the dollar in order to keep the US from slipping further into recession.

I don't think this is the right course to take for the US, but I firmly believe this is what is going to happen. The future is too far off for politicians to worry about; they focus on the short two year election cycle. They will continue to leverage the future of America with borrow and spend policies designed to keep the US economy on life support until it magically recovers. Their policies will cause a dramatic fall in the value of the US$ which will eventually make our exports competitive and finally spur growth in the manufacturing sector. This drop in the value of the US$ will also enable us to pay down our debts to foreign holders with cheaper US dollars.

I am not suggesting that the US will slip into a 'great depression', but I believe we will see an extended period of stagnant growth. Certain well run companies (like EverBank) will still be able to make a good profit, and the falling dollar will create opportunities for companies with a strong international presence. As an investor, you should look to hedge your portfolio against the inevitable fall in the value of the US$ by investing in non-dollar assets such as our WorldCurrency and MetalSelect accounts.

One major problem the sliding dollar causes for the rest of the world is that the price of oil is inversely related to the value of the dollar. As the dollar has steadily declined this year, the price of oil which is price in $, has risen. In fact, a study released yesterday showed oil is relatively cheap at $80 per barrel. The study showed the price of oil should be $88 per barrel with the euro trading at $1.50. As the dollar continues to slide, there will be further calls for oil to be priced and traded in some other currency besides the dollar, as countries try to de-link it to the falling greenback. If this would occur, it would be a major blow to the reserve status of the US$.

And the folks at PIMCO, the global bond giant based in California seem to agree. Richard Clarida, a strategic adviser at Pimco wrote a note to clients yesterday pointing to "an orderly dollar decline" as the "most likely scenario". He added "a disorderly decline, while unlikely, cannot be ruled out." In the note, he states that a collapse in the value of the dollar would jeopardize its status as the world's reserve currency. Not a rosy picture for the greenback.

Both the central bank of Sweden and South Africa announced they would be keeping rates unchanged yesterday, but the announcements have very different effects on the values of their currencies. The Riksbank of Sweden stated that they would keep their benchmark interest rates at .25% and said that level would be maintained until 'autumn' of next year. The Swedish krona slid against the dollar after the announcement. But later the

South Africa also left their rate unchanged at 7%, but the rand rallied as some had expected a 50 basis point cut. South Africa's central bank leaders said rising energy costs had added to inflationary pressures, and therefore rates would have to be maintained at their relatively high levels. The rand rallied after the announcement.

As mentioned earlier, the big loser overnight was the pound sterling, which fell over 1.5% vs. the dollar. A report this morning showed UK gross domestic product unexpectedly dropped in the third quarter, falling .4% from the previous three months. The British economy has now shrunk over six consecutive quarters, the most since records began in 1955. The report confirms the BOE will continue to keep the 'quantitative easing' policies of low interest rates and government purchases of debt in place. Both Chuck and I have railed against these policies, as they largely untested, and will likely lead to a spike in inflation down the road. Unfortunately the US has been following the UK in their attempts to borrow and spend their way out of recession. I don't think the future is too bright for either the pound sterling or the dollar.

Before leaving work yesterday, Chuck wrote me the following to add to today's Pfennig:

OK... I sure stirred up a bee's nest with my rant yesterday... It's always interesting when I do that, for the people that agree with me will far outweigh those that don't. But that's not the point... The point is that I got people to think about what's going on in the U.S. whether they agree or not!

So, with that, I'm going to talk about... GOTCHA! No opinions just facts...

Canada posted a stronger than expected Retail Sales in August printing at +.8% (forecast at +.4%)... Then that report was followed by the Bank of Canada's (BOC) Monetary Policy Report for this month, in which the BOC admitted that "Canada's economy is recovery due to monetary and fiscal stimulus, increased household wealth, improving financial conditions, higher commodity prices, and stronger business and consumer confidence."

Hmmm... Seems to be the same exact things I've been saying about Canada!

There is an important point in on the items the BOC talked about... And that is the stimulus... Once in a while I get notes from people telling my I bang on the U.S. for stimulus when every other country in the world did the same thing... Well, not quite... While every other country might have implemented stimulus... They were in a fiscal position of strength to do so, while we merely raised the national debt to levels that now place more than $38,000 of debt on each civilian in this country! So... There was a difference, folks... And that leads me to the point I've tried to make for years now, and that is why it is so important for a country to be a Surplus Country!

Colleague Aaron Stevenson brought this to my attention yesterday regarding the price of Gold... The charts show that the price of Gold basically traded back and forth for a flat result for 6 months prior to August 25, 2009...

From August 25th of 2009, Gold has gained 12%! So... Guess what was announced on August 25th that probably has a ton to do with this gain in Gold? Give up? August 25th was the day that the President announced that Ben Bernanke would be reappointed Fed Chairman...

Coinquidink? I don't think so!

I really appreciate it when Chuck gives me these notes to get me going when I am pfilling in for him. It gets the juices flowing instead of staring at a blank sheet of paper!

Both the high flying Australian and New Zealand dollars fell a bit vs. the US$ yesterday as investors worried about China pulling back there stimulus. The currencies, which were trading near their 14 month highs, were ripe for profit takers after China announced accelerated growth in the third quarter. With China clearly back on the growth path, some investors feared they would reverse some of the stimulus programs put into place over the past year. China will certainly start to pull back some of their expansionary policies, but I think this was just a good opportunity for 'traders' to book some nice profits. The Chinese economy will continue to grow, and their demand for raw materials will keep the exporters of Australia and New Zealand busy. As Chuck stated the other day, this isn't a crying opportunity but is rather a buying opportunity! We still feel the Aussie dollar is a solid currency to own.

Before moving on to the currency wrap-up, we had some great news from headquarters yesterday. It was announced that we reached an agreement to purchase Tygris Commercial Finance Group, Inc. Tygris is a private company that specializes in providing lease financing to small and mid-sized companies in specific industries such as healthcare and technology. In addition to diversifying our assets and earnings stream, the acquisition will provide more than $500 million of growth capital. You can read all of the details in the press release at http://www.tygriscf.com/press-releases.aspx#ctrlDeailsDiv It truly is another Great Day at EverBank!!

Currencies today 10/23/09: A$ .9252, kiwi .7555, C$ .9509, euro 1.5022, sterling 1.6386, Swiss .9929, rand 7.4514, krone 5.5395, SEK 6.81, forint 177.05, zloty 2.7790, koruna 17.2425, RUB 28.9797, yen 91.94, sing 1.3928, INR 46.52, China 6.8285, pesos 12.8944, BRL 1.7156, dollar index 75.323, Oil $81.12, 10-year 3.47%, Silver $17.70, and Gold... $1,060.95

That's it for today, by now Chuck is at the doctors for a full day of poking and prodding. I'm not sure how he keeps so calm going to the doctor for his checkups after all he has been through; and then to have to wait a few days before finding out the results! I'm sure he would appreciate all of your prayers for another round of good results! I spent the evening last night celebrating my father's 72nd birthday. He is in the advanced stages of Parkinson's, so we brought cake and ice cream to the nursing home and enjoyed a night with all of his 'housemates'. While he has probably already forgotten the celebration, he flashed us all a huge smile when we showed up with his presents. Hope everyone has a fantastic Friday and a wonderful weekend!!

Chris Gaffney, CFA
Vice President
EverBank World Markets
1-800-926-4922
1-314-647-3837

China Grows at +8.9%!

ChuckButler — Thu, 22 Oct 2009 18:08:51 GMT

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In This Issue..

* Currency rally is reversed overnight!
* Pay Czar dreams...
* Brazil may reverse capital inflow tax...
* An Asian Union?

And Now... Today's Pfennig!

China Grows at +8.9%!

Good day... And a Thunderin' Thursday to you! It's raining outside, so... It must be a Thursday! Amazing how many Thursdays have seen rain this fall! The ground isn't the only thing that's getting watered down this morning...

Front and Center this morning, the euro traded well past 1.50 yesterday afternoon, and drug all the other non-dollar currencies higher as the day went on. But overnight, all that giddiness with seeing the euro over 1.50 for the first time since August of 2008 (and then it was on the way down, instead of this time on the way up!), has been watered down...

Here's the skinny... China printed a very strong 3rd QTR GDP number overnight of +8.9%, and instead of basking in the glow of that report, currency traders took a different route, and decided that if: China is growing that strongly, then stimulus in China will be removed soon, and other countries will follow suit... No one in the markets believes that the U.S. economy can withstand a removal of stimulus... Big Ben Bernanke might believe so, but the markets say "ain't no way!"

So, here we are once again with this stupid trading theme of "what's bad for the U.S. is bad for the world, and thus a flight to the dollar and Treasuries is required"... I just love how these guys "decide this is what's going to happen and the rest of the trading world follows them"... The non-dollar currencies got all caught up in this, and thus were sold off almost throughout the Asian and European sessions... I have seen the euro pop back up since I came in though, so maybe this will be short-lived...

There was news out of Brazil yesterday that was interesting... Yesterday I told you about the "tax" on capital inflows to slow down the stock market, and the real... Well, there were rumors yesterday that the Brazilian Gov't would change this from "Capital inflows" to "Capital outflows"... This would apply to balances that were in the country for less than 2 months... So... This removes the albatross from the real's neck, in my opinion that is...

I came across some news yesterday that just kind of hit me right between the eyes, and the light bulb went on, and so on... The news about the "Pay Czar", just got me thinking. ( I know that's a dangerous thing!)

Well... Too bad the new "Pay Czar" (man I hate that term "Czar"! I mean really, when did we become the Soviet Union?) any way... Too bad the new "pay czar" doesn't work for us in Congress! The new "pay czar" slashed compensation at 25 of the financial institutions that took Gov't. funds, lowering compensation by 50%!

But, he doesn't, and nor would his colleagues on "the Hill" like it very much if he started slashing their compensation! But wait! That's a great idea! When he's finished with the financial institutions, he can go to "the Hill" and start slashing compensation there Freddie Krueger style!

Because... Today, every dollar of growth comes with about 4 dollars of debt.

Again, the same dude sent me another email yesterday, telling me that I need to stop banging on the current administration, for deficit spending, it wasn't their fault the annual deficit went from $450 Billion in 2008, to $1.42 Trillion in 2009! AGAIN! I DON'T CARE WHO SPENT IT, WE DIDN'T HAVE IT TO SPEND! And once again, let me be perfectly clear about this... When the first $150 Billion of checks were sent to kick start the economy, I ranted and kicked and screamed... When the first TARP was introduced, I screamed to the heavens! I stated then, that I would NOT have bailed out anyone! I would not have spent the money we didn't have! I would have let those that could not stand on their own, fail... Think about that... The Big Ben's and Summers' of the world are telling you that "they saved the world"... Saved us from what? Financial ruin? We're freakin' broke now, what difference would it have made on that front? Job losses? Oh! And 10% (really 16%) unemployment is "saving us"? Or how about collapsing the markets? Well, I personally doubt that would have happened, folks... That's just a scare tactic they use...

Think about this for a minute... If we had done nothing... Like Ronald Reagan did after the stock market collapse of 1987, we would have suffered some great losses... But we would be past it by now... Instead, the same firms that took Billions from the Gov't, are still hurting... Did you see that Bank of America (BOA) booked a $2.2 Billion loss for the 3rd QTR! Even the Fed's Beige Book revealed that the Fed's regular report found that the overall economy is still plagued by weakness in banking and increasing unemployment.

Ok, I'm sorry... But once I get on a roll about this stuff, I can't stop! Just ask my kids... Their eyes begin to glaze over, they stare at the ceiling, and you can almost hear them thinking..."here he goes again with that deficit speech, when will he ever figure out that we heard it and understood it the first 50 times he's gone through this with us"! HA!

OK, back to the currencies... One currency you would have thought would have gone through the roof on the news that China's 3rd QTR economic growth was +8.9%, is the Aussie dollar (A$)... But NOOOOOOOOO! That didn't happen... Once again the thought here is that economies around the world can not withstand the removal of stimulus.... Starting right here in the U.S., but traveling around the world to China too... The thought process (strange as it might seem, and I do believe it's strange) is that if China grew this fast with stimulus the Chinese Gov't might see this as an opportunity to remove the stimulus, and when they do... All hell breaks loose!

While I don't disagree that stimulus removal in the U.S. would send our economy spiraling down the slippery slope of a double dip, I don't agree that it would be the same in China...

So... The A$ is about 1-cent cheaper than it was yesterday afternoon... Looks like, smells like, walks like, and talks like a cheaper buying level opportunity!

Remember when I thought that Sweden's Central Bank, the Riksbank, was prudent? Well, that all changed a few months ago, when the Riksbank joined the Bank of Canada in saying that they would not raise rates until the 2nd half of 2010... Well, the Riksbank repeated that line this morning after they left rates unchanged... I just don't get it... What the heck are these Central Banks thinking? I guess they just don't have a brain... The need to go visit the Wizard of Oz, I heard he's giving out brains! In fact, they're probably singing this right now!
I could wile away the hours
Conferrin' with the flowers
Consultin' with the rain
And my head I'd be scratchin'
While my thoughts were busy hatchin'
If I only had a brain

Oil is back to $80 this morning... Gold is $1,055... And that means the Canadian dollar / loonie is back on the rally tracks heading toward parity against the dollar once more!

And for those of you that like to take a walk on the wild side... The South African rand has really taken a blow to the mid-section in the past couple of days... You see, there was a rumor floating around that the South African Reserve Bank (SARB) was going "freeze" the rand, to keep it from getting too strong VS the dollar. It was rumored that the Economic Development minister, Patel, was going to propose that the rand be "frozen"... Both the ministry and the Central Bank have denied ever discussing this proposal...

Let's hope that they haven't! That would be awful! Just look at the damage the rand has suffered on the rumor! So... If the leaders in South Africa can calm down the markets, we'll see a rebound in the rand, and it will have been a case of "sell the rumor, buy the fact"...

Our office coordinator extraordinaire, Danielle Goodman, gave me one of those fake $1,000,000 bills yesterday and wanted to know if that was enough to buy a BRIC MarketSafe CD! She just wanted to hear me do Dr. Evil from Austin Power, and say with my little finger aside the corner of my mouth... One Mill-ion dollars... HA!

But that got me thinking about the hyper-inflation story I told you about the other day... Let's hope that we never have inflation that bad that $1,000,000 bills are floating around like $100 bills, c-notes, Benjamins...

The new Japanese PM is beginning to take some direction for his new Japan... For instance, this caught my eye... Prime Minister Yukio Hatoyama has advocated creation of an East Asian Community, modeled after the European Union, with China at its heart and the U.S. left outside. Hmmmm... The Big Boss, Frank Trotter and I did a report about 6 years ago for the Daily Reckoning, where we outlined this Asian Union, and called the new currency there the "Pan"... That would be truly amazing if that Asian Union came to reality!

But like we said then... The wounds run pretty deep between China and Japan, and it will take quite a lot of love and tenderness to get past that! Which country has the love and which one has the tenderness? HA!

Well... The euro has continued to push back against the dollar since I came in this morning... So, maybe it can get back to 1.50, which sure looks like a nice crooked number to me!

As I said above, Gold is $1,055 this morning having lost $5 this morning. Don't you just "love" all those commercials on TV these days with guys telling you to buy Gold? Where were they when Gold was $250, or $500, or $750? They were afraid that Gold's rise was not on terra firma, and they rolled up in a ball in the basement of their buildings, shaking with fear! HAHAHAHAHAHAHAHA! Nah... Just kidding... But I do find it weird that these guys are coming out of the woodwork like bugs now... Guys like Casey, Bonner, me, and the Mogambo Guru, have been here all along with the same message about buying Gold...

Speaking of the Mogambo Guru... I had the honor of exchanging emails with him the other day... He absolutely cracks me up!

The Data Cupboard finally yields some data worth looking at this morning, as the Weekly Initial Jobless Claims prints along with Leading Indicators... We're still seeing +500K new jobless claims every week folks... When will this stop? I contend that the U.S. economy can not sufficiently recover until the unemployment situation is addressed... Why is our Gov't trying to shove this, that and the other thing down our throats these days, and not addressing the unemployment situation? I mean, a tax cut for businesses would be a great move there don't you think? The other thing the Gov't is ignoring is the deficit... Instead they're thinking of new expenditures! I've written my congress people until my fingers won't write any longer about this... What have you done? Come on people! This is immoral what they're doing to our grandkids, and we just let them?

OK, I've got to get off that subject!

Let's go the recap and Big Finish now, as I feel myself getting all lathered up to scream at the walls about this stuff!

To recap... The euro traded past 1.50 yesterday for the first time since August 2008, then, however, it was going down, this time it was going up! The non-dollar currencies have given back yesterday's gains after China announced a +8.9% GDP for the 3rd QTR, thus making the traders think that stimulus worldwide will be removed and that would be bad for the U.S. and thus, we return to the stupid trading theme of rewarding the dollar when things are bad! UGH!

Currencies today 10/22/09: A$ .9235, kiwi .7545, C$ .9525, euro 1.4975, sterling 1.6550, Swiss .9915, rand 7.47, krone 5.5650, SEK 6.90, forint 177.30, zloty 2.2770, koruna 17.3250, RUB 29.0845, yen 91.30, sing 1.3970, INR 7.7497, China 6.8290, pesos 12.96, BRL 1.7320, dollar index 75.34, Oil $80.17, 10-year 3.39%, Silver $17.55, and Gold... $1,056.20

That's it for today, and this week for yours truly. I will be at the hospital most of tomorrow, for annual tests, scans, needles, etc. Let's keep our fingers crossed that all's well, eh? I don't get the results until Monday afternoon, so I'll have to find something to keep my mind off what's in the results this weekend! It's Homecoming at the University of Missouri this weekend. When our older kids were there, we used to go down to look at the house decorations on Friday night, and then stay for the football game on Saturday. I won't make it there this weekend, but I hear that the game has been picked as the location for the Tailgate Tour 2009! So, if you're going, stop by and check that out! My poor beloved Missouri Tigers are having a rough go of it this year... And they picked #3 Texas as their homecoming opponent! UGH! My little buddy, Alex has a football game Saturday too! OK... Let's say our goodbyes for the week... Goodbye... And get this out the door! I hope your Thursday is Thunderin' (good that is!) Thanks for reading the Pfennig...

Chuck Butler
President
EverBank World Markets
1-800-926-4922
1-314-647-3837

Will the US Dollar Lose "Reserve Currency" Status?

GaryHalbert — Tue, 20 Oct 2009 20:33:00 GMT

IN THIS ISSUE:

Most Americans Are Dollar Indifferent/Oblivious
How the Dollar Became the Reserve Currency
Long-term Swings in the US Dollar's Value
Global Calls for Reserve Currency Replacement
Editorial: The "Dump-the-Dollar" Conspiracy
Conclusions – No Change Likely Anytime Soon

Introduction

The US dollar became the global "reserve currency" in 1944 near the end of World War II and continues as such. There have been numerous reserve currencies over the centuries, but none more widely accepted than the US dollar since 1944. While the US dollar has fluctuated widely in value over the 65 years since its designation as the reserve currency, its credibility has come under the most intense scrutiny ever in the last few years.

The US dollar peaked in value in 2000-2001 and has been in a significant decline ever since. There was a relatively brief period in 2008 when the dollar rebounded quite sharply due to the worldwide financial crisis and economic meltdown, when there was a global rush to the safety of US Treasury securities. But since then, the dollar has resumed its long-term downtrend.

With President Obama's most unprecedented spending plans in history, with trillion-dollar budget deficits as far as the eye can see, and the potential to more than double the US national debt in the next 5-10 years, there is now widespread speculation that the dollar is headed for new all-time lows and a possible collapse.

As a result, we are seeing and hearing calls around the world to end the dollar's status as the world's reserve currency and replace it with something else. The question is, replace it with what? The US dollar is by far the largest currency in the world; many commodities around the world are priced in dollars; and most international transactions are settled in dollars.

This week, we will look at the debate regarding what to do about the US dollar as the world's reserve currency. I will start by explaining how the US dollar became the global reserve currency. Next, we will look at some of the difficulties the global community will face if the dollar is to be replaced as the reserve currency. And finally, we will explore what may happen if the US doubles the national debt over the next 5-10 years. It should make for an interesting letter.

Most Americans Are Dollar Indifferent/Oblivious

The financial media keeps us constantly aware of what's happening with the US dollar, as it should. But let's face it, most Americans pay little attention to the financial media, much less the value of the US dollar. And why should they? The dollar goes up in value and goes down in value, most often with few obvious effects on the lives of everyday Americans.

In extreme cases, a sharply falling dollar can result in significantly higher inflation and higher prices for the goods and services we consume. The late 1970s, when we had what some called 'hyperinflation,' is one such example. But Americans have come to accept that inflation rises every year, and few correlate rising consumer prices to fluctuations in the US dollar.

Likewise, a falling dollar can make US exports more competitively priced in foreign countries, and this can be a positive factor for the economy and job creation here at home. Yet a falling dollar can also make foreign imports more expensive to US consumers. But the point is, when it comes to a rising or falling dollar, most Americans are indifferent if not oblivious.

Most Americans, as far as I can tell, are likewise indifferent or oblivious as to the significance of the US dollar being the world's reserve currency. I would similarly suggest that most Americans don't even know what it means to be the world's reserve currency. Yet that may be about to change in a big way, what with increasing calls for the replacement of the US dollar as the world's reserve currency.

Sophisticated investors need to understand the importance of these issues as the future of the US dollar can significantly affect the value of our investments, as well as the prices we pay for the goods and services we all consume. In that regard, let's start with a brief discussion of how the US dollar came to be the world's reserve currency and what that means.

Gary D. Halbert, ProFutures, Inc. and Halbert Wealth Management, Inc.
are not affiliated with nor do they endorse, sponsor or recommend the following product or service.

How the Dollar Became the Reserve Currency

In July 1944, with World War II still raging and the international economic and financial systems in near shambles, delegates from all 44 Allied nations gathered in Bretton Woods, New Hampshire for the 'United Nations Monetary and Financial Conference.' The goal was to set up a system of rules, procedures and institutions to regulate the international monetary system. After three weeks of deliberating, the delegates agreed upon and signed the Bretton Woods Agreements.

The planners at Bretton Woods established the International Monetary Fund (IMF) and the International Bank for Reconstruction and Development (IBRD), which today is part of the World Bank Group. These organizations became operational in 1945 after a sufficient number of countries had ratified the Bretton Woods Agreements.

One of the chief features of the Bretton Woods system was an obligation for each country to adopt monetary policies that maintained the exchange rate of its currency within a fixed value (plus or minus 1%). The US dollar was established as the world's "reserve currency," which is typically defined as theforeign currency held by central banks and other major financial institutions as a means to pay off international debt obligations, and/or to influence their domestic currency exchange rates.

At the same time, the US agreed separately to link the dollar to gold at the price of $35 per ounce, with the added promise that Allied nations could convert their dollar holdings to gold if they so preferred. This was collectively known as the new "gold standard."

Ultimately, the other Allied nations agreed to "peg" their currencies to the US dollar, and agreed to buy and sell dollars to keep market exchange rates within plus or minus 1% of parity. Thus, the US dollar took over the role that gold had played in the previous international financial system. As the world's reserve currency, most international transactions came to be denominated in US dollars. The US dollar was the currency with the most purchasing power, partly because it was the only currency that was backed by gold. This led to the phrase that "the US dollar is as good as gold."

The gold standard for the US dollar, as the global reserve currency, continued until August 15, 1971 when President Richard Nixon unilaterally closed the so-called "gold window" and ended the option of converting US dollars into gold. Despite that, the US dollar has continued to be the global reserve currency to this day. But that may be changing… or maybe not.

Long-term Swings in US Dollar Value

The decoupling of the US dollar from gold in 1971 meant that the greenback became a "fiat" currency that was supported by nothing more than the full faith and credit of the US government, and thus subject to the whims of the market. The US Dollar Index (as measured in relation to six major foreign currencies) actually fell for several years after Nixon closed the gold window.

Then from 1980 to 1985, the US dollar skyrocketed on the upside, nearly doubling in value by 1985. But then in late 1985, the dollar began a virtual collapse which saw its value cut almost in half by late 1987. From late 1987 to 1995, the dollar moved in a broad sideways trading range.

From 1996 to 2001, the dollar staged another strong rally which moved the Index up to 120 as you can see in the chart below. From 2001 to the present, the Dollar Index fell sharply, reaching a new low in early 2008. Yet as the recession and the credit crisis unfolded in earnest in 2008, the dollar saw a fairly significant bounce, which was driven almost entirely by the global rush to safety in US Treasuries.

As you can clearly see, the credit crisis rally in the dollar ended early this year, and the long-term downtrend has resumed. The question now is whether or not the US dollar is headed for new all-time lows. With Obama's plans to run trillion-dollar annual budget deficits as far as the eye can see, and double the national debt in the next 5-10 years, it would seem almost certain that the dollar is headed for new lows.

This is precisely why we are hearing calls from around the world to replace the US dollar as the global reserve currency. But again, the question is with what?

Global Calls for Reserve Currency Replacement

As the US dollar has resumed its long-term downtrend this year, a growing international chorus is suggesting that the dollar be replaced as the world's reserve currency, a move that could theoretically end the greenback's six decades of global dominance.

China was the first major power to call in March for the dollar to be replaced as the world's reserve currency. China holds more US debt than any other country - about $800 billion - and the further the dollar drops, the less the value of the US debt owed to China. Never mind that China has been roundly criticized for its handling of its own currency, the yuan, which I might add is pegged to the US dollar.

Reportedly, there were informal talks on the dollar continuing as the reserve currency at the G-20 summit in London in early April. Since then other nations such as Russia, France and Brazil have suggested that the US dollar should be "supplemented" by other major currencies as a shared reserve currency.

The US was again criticized at the latest G-20 summit in Pittsburgh at the end of September, to the point that Treasury Secretary Geithner felt obligated to say the following at the opening of the conference: "A strong dollar is very important to the United States." Given the massive spending by the Obama administration, and plans to double the national debt in 5-10 years, it is no wonder that no one believed Geithner's remarks.

Regardless of whether the dollar would be replaced or supplemented, it would be a very complicated matter. The technical and political hurdles are enormous. For one thing, central banks around the world hold far more US dollars and dollar-denominated securities than they do assets denominated in any other individual foreign currency. Such reserves are frequently used to stabilize the value of the central banks' domestic currencies.

Most finance ministers around the world, including China's, know this and their comments in regard to replacing or supplementing the dollar as the world's reserve currency are just so much lip-service, which is really aimed at threatening the Obama administration over its out-of-control spending.

China says, for example, that it would prefer to hold its apprx. $2 trillion in reserves in something other than US dollars, but the fact is that Beijing has few alternatives. With more US dollars continuing to pour into China from trade and investment, Beijing has no realistic option other than storing them in US debt.

Some Argue "SDRs" are the Solution

So-called "Special Drawing Rights" (SDRs) are a synthetic currency created by the International Monetary Fund (IMF) in 1969 in an effort to stabilize the international foreign exchange system. The IMF defines SDRs as follows: The SDR is an international reserve asset, created by the IMF in 1969 to supplement its member countries' official reserves. Its value is based on a basket of four key international currencies..."

Basically, SDRs are a combination of four currencies - US dollar, the Euro, the Yen and the British Pound. The US dollar alone makes up almost half of the value of a SDR. The amounts of each currency making up SDRs are determined by the IMF Executive Board in accordance with the relative importance of the currency in international trade and finance every five years.

SDRs were originally created to replace gold and silver in large international transactions. Since the quantity of gold and silver worldwide is finite, and the economies of all participating IMF members as an aggregate are growing, a purported need arose to increase the supply of international reserves. Thus, SDRs (also called "paper gold") are credits that nations with balance of trade surpluses can 'draw' upon from nations with balance of trade deficits.

In short, SDRs are little more than an accounting transaction within a ledger of accounts, which eliminates the logistical and security problems of shipping gold back and forth across borders to settle national accounts.

When SDRs were created, the IMF also suggested that member nations could convert their US dollar holdings into SDRs to diversify away from the dollar without driving the value of the dollar down. However, since US dollars account for almost half the value of SDRs, this diversification argument never made very much sense.

Despite the IMF's initial desires, SDRs never became the currency of choice for any countries. Even today, SDRs are primarily used only to settle accounts between the IMF and its members' treasury departments/foreign exchange ministries. Frankly, this is a good thing, in my opinion.

Still, there are continued calls for the SDR to replace the US dollar as the world's reserve currency. There are even a few voices out there that seem to believe we should adopt the SDR as a single global currency. In either case, the logic is flawed because of the limited size of the SDR market. Plus, if SDRs were instated as the global currency, every country with its own currency would lose a significant measure of national sovereignty.

Other arguments against making SDRs the world's reserve currency include the fact that the US dollar, the Euro and the Pound – which make up the large majority of SDRs – have all lost value since late 2007 when the recession began. Why replace a falling dollar by an index which so heavily includes the dollar? Also, SDRs do not contain the Chinese Yuan, Indian Rupee, Australian Dollar or Canadian Dollar, all of which are important benchmark or secondary global reserve currencies.

These are just some of the reasons that the SDR is not likely to become the global reserve currency.

EDITORIAL REPRINT

What follows is one of the more interesting analyses on the US dollar that I have read in some time about the so-called "Dump the Dollar" conspiracy. The piece is written by Dean Baker, a senior correspondent for Foreign Policy magazine (www.foreignpolicy.com), a leading non-partisan foreign policy think-tank in Washington.

QUOTE:

Debunking the "Dumping-the-Dollar" Conspiracy

For at least the last decade, a persistent, recurring conspiracy theory has held that major oil exporters will stop pricing oil in dollars, which will then lead to a collapse in the U.S. economy as the dollar becomes worthless. According to some accounts, Iraq's decision to price its oil in euros rather than dollars precipitated the U.S. overthrow of Saddam Hussein, and Iran's threats to move away from the dollar is the real reason the U.S. government is raising the alarm over the country's nuclear program.

The latest item in this tradition was an article by Robert Fisk, a longtime Middle East correspondent, in the London-based Independent. The article warns of a grand conspiracy between the Arab oil states, China, Japan, Russia, and France to stop pricing oil in dollars by 2018. When this happens, Fisk says, the dollar will suffer a severe blow to its international standing and the United States might struggle to pay for its oil. The article apparently caused a shudder in the currency markets yesterday [October 6], as panicked investors unloaded dollars in reaction to the terrifying prospect of this alleged international oil conspiracy.

But they really shouldn't be concerned. Fisk's theory would make a good plot for a Hollywood movie, but it doesn't make much sense as economics. It is true that oil is priced in dollars and that most oil is traded in dollars, but these facts make relatively little difference for the status of the dollar as an international currency or the economic well-being of the United States.

With the United States' ascendancy as the pre-eminent economic power after World War II, the dollar became the world's reserve currency: Most countries held dollars in reserve in the event that they suddenly needed an asset other than their own currency to pay for imports, or to support their own currency. Much international trade, including trade not involving the United States, was carried through in dollars. In addition, most internationally traded commodities became priced in dollars on exchanges. However, the dollar was never universally used to carry through trade (even trade in oil), and the pricing of commodities in dollars is primarily just a convention.

Any market -- a stock market, a wheat market, or the oil market -- requires a unit of measure. The importance of the U.S. economy made the dollar the obvious choice for most markets. But there would be no real difference if the euro, the yen, or even bushels of wheat were selected as the unit of account for the oil market. It's simply an accounting issue.

Suppose that prices in the oil market were quoted in yen or bushels of wheat. Currently, oil is priced at about $70 a barrel. A dollar today is worth about 90 yen. A bushel of wheat sells for about $3.50. If oil were priced in yen, then the current price of a barrel of oil in yen would [be] 6,300 yen. If oil were priced in wheat, then the price of a barrel of oil would be 20 bushels. If oil were priced in either yen or wheat it would have no direct consequence for the dollar. If the dollar were still the preferred asset among oil sellers, then they would ask for the dollar equivalents of the yen or wheat price of oil. The calculation would take a billionth of a second on modern computers, and business would proceed exactly as it does today.

It does matter slightly that the trade typically takes place in dollars. This means that those wishing to buy oil must acquire dollars to buy the oil, which increases the demand for dollars in world financial markets. However, the impact of the oil trade is likely to be a very small factor affecting the value of the dollar. Even today, not all oil is sold for dollars. Oil producers are free to construct whatever terms they wish for selling their oil, and many often agree to payment in other currencies. There is absolutely nothing to prevent Saudi Arabia, Venezuela, or any other oil producer -- whether a member of OPEC or not -- from signing contracts selling their oil for whatever currency is convenient for them to acquire.

Even if all oil were sold for dollars, it would be a very small factor in the international demand for dollars, as can be seen with a bit of simple arithmetic. World oil production is a bit under 90 million barrels a day. If two-thirds of this oil is sold across national borders, then it implies a daily oil trade of 60 million barrels. If all of this oil is sold in dollars, then it means that oil consumers would have to collectively hold $4.2 billion to cover their daily oil tab.

By comparison, China alone holds more than $1 trillion in currency reserves, more than 200 times the transaction demand for oil. In other words, if China reduced its holdings of dollars by just 0.5 percent, it would have more impact on the demand for dollars than if all oil exporters suddenly stopped accepting dollars for their oil.

This raises a more serious issue affecting the demand for dollars, which is the dollar's status as an international reserve currency. Currently the dollar is by far the preferred currency, but others, notably the euro, are gaining ground. A switch away from the dollar will lower its value, but this is hardly anything to fear: In actuality, it was and is an official policy goal of both the George W. Bush and Barack Obama administrations [to have a weaker dollar].

Both administrations are on record complaining about China's 'manipulation' of its currency. China does this by buying up vast amounts of dollars to hold as foreign reserves, suppressing the value of the yuan against the dollar. This, in turn, makes Chinese goods cheaper in the United States and bolsters China's exports.

If China stopped buying up huge amounts of dollars, as the United States wishes, then the dollar would fall in value against the yuan, thereby making Chinese imports more expensive. The result would be that the United States would buy fewer imports from China, improving its trade balance. Not too many people would be frightened by this prospect.

To summarize, the dollars needed to finance the international oil trade are trivial compared with other sources of demand for dollars. The currency chosen for foreign reserve holdings can have an impact on demand for dollars, but this has nothing to do with the currency chosen to conduct the oil trade. If Saudi Arabia wanted to hold euros rather than dollars, it could almost instantly offload as many dollars as it desired. Plus, the White House wants the dollar to decline anyway because it would improve the United States' trade balance.

Thus, the conspiracy theory Fisk resurrected might have spooked the markets, but the reality is that there is nothing to fear. The dollar's value will likely fall over time (as it has been doing against the euro for the last nine years). But there is nothing in the cards to suggest a collapse, even if Saudi Arabia starts selling its oil for euros or yuan.
END QUOTE

Gary D. Halbert, ProFutures, Inc. and Halbert Wealth Management, Inc.
are not affiliated with nor do they endorse, sponsor or recommend the following product or service.

Conclusions

The US dollar is not likely to lose it reserve currency status anytime soon, unless it were to collapse for some unexpected reason. As illustrated in the chart above, the dollar has been losing value for almost a decade, yet no major countries have switched to some other currency to settle international transactions. As discussed earlier, there is no other currency that is large enough to replace the dollar as the world currency.

Longer-term, however, the prospects don't look very bright. With President Obama's plans to run trillion-dollar annual budget deficits for at least the next five years (and possibly longer) and double the national debt in 5-10 years, the dollar could find itself in real trouble as the reserve currency. The dollar could fall so low that foreign nations decide to dump their dollars in favor of euros, yen or whatever. If that day comes, I (and many others) believe we will see an even greater financial crisis and another depression.

Very best regards,

Gary D. Halbert

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