Saturday, May 20, 2006

Ten days that shook the world's markets

Great Article: Sunday May 21, 2006 The Observer

From Stockholm to Tokyo, New York to Istanbul, market mayhem swept across the world last week, unleashing violent movements on stock markets and foreign exchanges everywhere, and hammering down the price of commodities such as copper and gold.

In London, the FTSE 100 suffered its worst day for more than three years on Wednesday, before ending the week at 5,672, more than 4 per cent down in five days' trading. After a febrile fortnight, analysts are asking themselves if the turmoil is over - or whether the sell-off marked the end of the three-year bull market and the dawn of a much more volatile era.

Stephen Lewis, of bankers Insinger de Beaufort, says it's too early to write off the risk that the events of the past few days could be the trigger for a full-blown financial crisis. 'Volatility rises, to the extent that it has in equity and commodity markets in recent days, when emotions take over; when actions in the markets are forced; when survival is at stake. In such circumstances, there can be no reliable forecasts of how far markets will move,' he warned.

The worldwide wobble started with the dollar. A warning from G7 finance ministers last month about imbalances in the global economy, and a hint from Federal Reserve chairman Ben Bernanke that he might halt the rise in interest rates, brought the greenback bears out of hiding, and triggered a frenzy of selling.

But over the past few tumultuous days alarm has spread far beyond the currency markets. 'The equity markets were standing rather naively on the sidelines, and suddenly they've woken up,' says David Bloom, currency strategist at HSBC, who has long predicted a dollar shake-out.
'Markets have been looking very vulnerable,' said Julian Jessop, international economist at Capital Economics. 'There have been some bubbles developing, particularly in commodities.'
All investors are waking up to an alarming new world. After five years in which credit has been plentiful as central banks kept the cash taps on, the cost of borrowing has gradually begun to grind upwards. In the US, the Federal Reserve has raised interest rates 16 times, to 5 per cent, from 1 per cent two years ago. The European Central Bank has also raised borrowing costs, and even Japan, the home of the zero interest rate for many years, has responded to a stronger economy by promising to start tightening monetary policy.

In this new climate, with money rapidly becoming more expensive, investors will be less keen to take enormous bets using borrowed cash. The unwinding of some of these risky positions was responsible for some of last week's upheaval.

'Everyone and his dog has leveraged up to the eyeballs buying everything they can get their hands on,' said Charles Dumas, of Lombard Street Research. 'Now liquidity's drying up because interest rates are high; bond yields are high; everyone's finding their funding drying up.'

One extreme example of this is what analysts call the 'yen carry trade': investors have been taking advantage of zero interest rates in Japan, borrowing the money to take bets in other markets. With rates in Japan on the way up, they have been hurriedly extricating themselves: and that has hit risky but high-yielding assets, such as emerging market bonds. Turkey took a pounding last week, for example, as nervous investors pulled their cash back home.

'We think that there's been a very big shake-out in some of the asset classes where people had become very extended, especially emerging markets and commodities,' said Peter Oppenheimer, European head of portfolio strategy at Goldman Sachs.

As if this 'liquidity drain,' as Lewis calls it, wasn't enough to spook the markets, it is happening at a time when the Federal Reserve, the world's most important central bank, is in the hands of a new boy - former Princeton academic Bernanke.

He has to win the confidence of the markets at the same time as deciding on the right time to stop increasing US interest rates. If he pushes borrowing costs too high, the US economy could be plunged into recession; if he stops too soon, the markets will fear that inflation is about to get out of control.

'He's between a rock and a hard place,' said Dresdner currency analyst Sonja Marten. 'It's a very tricky situation. There is going to be that risk of a hard landing, and that's what the markets are not sure about.'

Goldman Sachs analysts call this the 'Bernanke bind' and, at the margins, it could increase the anxiety in the markets over the months ahead. 'They're going to pressure Bernanke, which could be bad,' says Dumas.

Through the fog of market panic last week, analysts said it was important not to forget the underlying economic causes of the upheaval. For several years now, economists have been watching with growing alarm as the US spent more than it earned, running up a record current account deficit with the rest of the world - worth almost 7 per cent of GDP last year.

Funding all that surplus spending has been easy, because foreign investors - notably governments in Asia and the Middle East - have been happy to gobble up American assets, including US Treasury bonds. But, just like an overdraft, the current account deficit can't go on growing indefinitely: something has to give.

Most experts have believed for some time that a devaluation in the dollar would be the best way of helping to bring America's income and expenditure back into line. It should make US goods cheaper, helping American exporters while slowing down imports, which will become more expensive for Americans to buy. The weakening in the dollar over the past couple of weeks could be seen as the first step towards this 'rebalancing'.

All this might sound like the concern of academic number-crunchers. But the US current account deficit has a more homely analogue in the finances of the small-town American household. Buoyed by low interest rates and a property boom, consumers have, quite simply, been spending more than they earn. The savings ratio - the proportion of the average worker's take-home pay that is squirrelled away for a rainy day - has slipped below zero.

With interest rates rising, and signs emerging that the frothy property market is on the turn, American homeowners may respond by acting to put their finances back in order. That could mean a downturn, or at worse a recession, in the US economy.

'If the housing market in the US slows sharply, then that will drag down the economy as a whole,' says Jessop. And when America sneezes, the rest of the world catches a cold: European Union politicians have already started to sound the alarm about the impact of a stronger euro on exporters, for example, and China would be hit hard if US demand for its products plummeted.
For the UK, too, if the rise in sterling against the dollar is sustained, the economic consequences could be painful, particularly when combined with an American slowdown. At the beginning of last week, economists were betting on an early rise in interest rates; but the Bank could find the stronger pound does the same job.

This economic story will play out over months, not at the breakneck speed of the financial markets, and it is hard to predict how its ramifications will ripple across the world. 'There's no new trend established yet,' said HSBC's Bloom. 'It's an unsettled time.' But Bernanke, whose hands are on the world's most important economic lever, will have to hope he isn't forced to win the confidence of the markets the way his predecessor, Alan Greenspan, did - by stepping in to stop the stock market crash of 1987 turning into a global financial crisis.

Monday, May 15, 2006

Dollar's Loss of Favor Stokes Inflation, Global-Growth Concerns

May 15 (Bloomberg) -- Central bankers from Stockholm to Dubai, seeking shelter from the falling dollar, may help weaken it further, creating a new inflation headache for the Federal Reserve and threatening growth in Europe and Japan.

Sweden's Riksbank said last month it had almost halved its dollar holdings in favor of the euro, and central banks in Kuwait, Qatar and United Arab Emirates said they were buying Europe's common currency. Russian Finance Minister Alexei Kudrin complained about the dollar's ``instability.''

The reshuffling of reserves adds to pressure on the dollar, already near its lowest in a decade in trade-weighted terms. The slumping currency may push up the price of imports, which account for 17 percent of the purchases Americans make, just as the Fed considers a pause in its two-year war on inflation. A cheaper dollar could also hinder the European Central Bank and Bank of Japan as they aim for sustainable recoveries.

``Central banks are trying to avoid large capital losses that could result from a drop in the dollar,'' says Barry Eichengren, an economic historian at the University of California, Berkeley and former adviser to the International Monetary Fund. ``Likely impacts include an additional fillip to inflation and more pressure on the Federal Reserve to raise interest rates.''

The dollar has been weakening against the euro since the common European currency replaced national bills and coins in 2002. The dollar has declined 28 percent since January 2002 against a trade-weighted basket of seven currencies tracked by the Fed, and is just 1 percent above its 1995 low.

Reserve Currency

A decade ago, the dollar was protected by its role as the world's sole ``reserve currency,'' dominating international accounts and used in pricing oil and gold. The dollar rallied from its 1995 lows, gaining 40 percent in seven years, after a switch in U.S. policy under Treasury Secretary Robert Rubin in favor of a ``strong dollar.''

Now, the euro provides a possible alternative reserve currency and may become more attractive as the advantage of higher-yielding dollar assets is eroded by the U.S. currency's decline. Currently, 10-year U.S. government debt yields 5.19 percent, compared with 4.07 percent for the German 10-year bund and 1.97 percent for comparable Japanese government debt.

``We're seeing an erosion in international conviction about the dollar as a reserve currency and that negative psychology is overwhelming the advantage of holding U.S. assets,'' says Lara Rhame, currency strategist at Credit Suisse in New York and a former Fed economist.

Buying Euros

Almost 60 percent of central banks that changed their reserves last year boosted euro holdings, and almost four in 10 shed dollars, according to a survey by Central Banking Publications Ltd. and Royal Bank of Scotland Plc.

``For central banks, growing dollar reserves also mean a growing risk of losses should the U.S. dollar depreciate,'' says Hermann Remsperger, chief economist of Germany's Bundesbank. ``Their incentive to give more consideration to other currencies in the portfolio may become stronger.''

By making U.S. exports cheaper and imports more expensive, a softer dollar can fan higher growth and inflation. That may keep the Fed raising interest rates even after 16 straight increases since June 2004.


A weaker dollar also ``creates a headwind'' for expansions taking shape in Europe and Japan, says Nariman Behravesh, chief economist at Global Insight Inc. in Lexington, Massachusetts.

Heidelberg, Germany-based Heidelberger Druckmaschinen AG, the world's largest printing machine maker, said May 3 that exchange rates remained a risk to earnings. Hiroshi Okuda, chairman of Toyota Motor Corp., the world's second-largest carmaker, said last week that ``measures may have to be taken'' if the dollar doesn't rise.

One plus for the U.S. economy from a falling dollar would be a narrowing of the current account deficit, which last year topped $800 billion for the first time and is one cause of the dollar's drop. Harvard University's Kenneth Rogoff, a former IMF chief economist, says the dollar might need to fall 40 percent for the gap to shrink. Finance ministers and central bankers from the Group of Seven nations last month said ``vigorous action'' was needed to address such imbalances, compounding pressure on the dollar.

Developing countries, whose reserves are the fastest growing, are also shedding dollars most rapidly. Foreign currency reserves in developing countries have almost tripled since 1999, reaching $2.9 trillion last year, while industrial nations' holdings rose 78 percent, according to the IMF. Meanwhile, the share of developing nations' reserves held in dollars dropped to 60.5 percent from 71.1 percent.

The dollar's share of reserves held globally dropped to 66.5 percent at the end of 2005 from 71.1 percent in 1999, while the euro's share increased to 24.4 percent from 18.1 percent, the IMF says.

No Sell-Off

That doesn't necessarily mean the dollar's status is threatened, says Stephen Jen, global head of currency strategy at Morgan Stanley in London. ``Whether there is diversification in the future remains to be seen, but so far there has been zero,'' he says.
The U.S. Treasury, which is responsible for dollar policy, says there is ``little evidence'' either that the dollar share of foreign central-bank holdings is declining or that banks might sell off dollar holdings in the future. IMF figures show the dollar's share of foreign exchange reserves ``has remained constant for the last few years at around two-thirds,'' the Treasury said May 10 in its semiannual report on international exchange rate policies.

Central banks with the largest dollar holdings and economies that rely on exports, such as China's, have no interest in triggering a dollar sell-off, so any reserve adjustment they make will be minimal, says Dick McCormack, a senior adviser at the Center for Strategic & International Studies in Washington and former U.S. undersecretary of state for economic affairs.

China's Holdings

People's Bank of China Governor Zhou Xiaochuan said March 5 China won't reduce its dollar holdings as it changes the composition of its reserves. China in February overtook Japan as the world's largest holder of currencies with reserves at $853.7 billion versus Japan's $831.6 billion.

Still, shifts in central bank reserves may mark ``the beginning of a trend questioning the dollar's currently undisputed status as the major reserve currency,'' says Thomas Stolper, global markets economist at Goldman Sachs Group Inc. in London.

Even speculation that central banks are mulling sales may harm the dollar. The currency dropped last November, after Russian Central Bank First Deputy Chairman Alexei Ulyukayev said Russia may lift the amount of euros in its reserves.

``Psychology is pretty important in these markets,'' says John Williamson, an economist at the Institute for International Economics in Washington and former adviser to the IMF. ``People can get pretty excited about even small moves by central banks.''

Sunday, May 14, 2006

Dollar Crisis--World Markets Braced for the worst

Global markets are bracing for turmoil today after an ominous slide in the US dollar and a slump in equity and bond prices late last week sent tremors through the global financial system, evoking memories of the 1987 crash.

Emerging economies have led the sell-off as investors recoil from risky assets, pummelling stocks and bonds in Turkey, Hungary, Iceland and much of Latin America.

The currencies of Brazil, Mexico and South Africa all suffered their sharpest falls in two years as foreign funds rushed for the exits.

In New York, the Dow Jones industrial index fell 262 points over Thursday and Friday to 11381, setting off contagion in Japan and Europe. The FTSE 100 had its worst drop in three years on Friday, falling 129.9 points, or 2.2pc, to 5912.1.

Analysts said there were now clear signs that monetary tightening by the world's central banks was starting to crimp growth. Lombard Street Research warned the US was now heading into outright recession, with China also facing a hard landing.

"Stock markets in the middle of 2006 are confronting a tight Federal Reserve and European Central Bank, sharply higher bond yields, and a downswing in potential profits," it said.

It raised the risk of "an impending financial crisis" caused by excess credit and leverage across the global economy. The group advised investors to liquidate stocks and move into cash yen until the storm has blown over.

The dollar has slumped 6pc against the euro and 8pc against the yen this year as the markets anticipate an end to interest-rate rises by the US Federal Reserve, switching attention back to America's debt mountain and current account deficit of 7pc of GDP.

Volkmar Hable, chairman of Samarium Technology, said the world was now on the brink of a dollar crisis.

"The crash in the autumn of 1987 started with a massive dollar and bond decline in the spring. We are experiencing exactly the same now," he said.

Ominously, bonds are no longer viewed as a safe haven, a sign of fear that inflation is gaining a foothold in the major economies.

Interest rates on 10-year Treasury bonds have jumped from 4.36pc to 5.19pc since February, in part because Asian investors are demanding a higher premium for holding risky dollar investments. The 10-year bond is the benchmark for economic activity in the US, setting corporate borrowing rates and the cost of most mortgages.

The bond slide is exacting a toll on the US property market, where the price of new homes has fallen for five consecutive months. A half-year inventory of unsold houses now hangs over the market.

Goldman Sachs, however, is sticking to its optimistic forecast, banking on a seamless "hand-over" from a slowing US economy to a re-awakening Europe and Japan, while China will continue to be an engine of global growth. The IMF is also bullish, forecasting roaring growth of 4.9pc in 2006, one of the highest rates in half a century.

Monday, May 08, 2006


I found this interesting article, describing events common to a currency collapse, over at FMNN.

Monday, May 08, 2006
When a currency loses the confidence of its people, its fall becomes exponential, as has happened to the Zimbabwe $, where in 1982 one U.S.$ equalled 1 Zimbabwe $. Today around Z$200,000 buys one U.S. $ if you can find someone idiot enough to sell one for the Z$.

In day-to-day terms, the smallest note in Zimbabwe a Z$500 is the size of a U.S.$. The price of a single-ply sheet of toilet paper is more expensive at around Z$867

The U.S.$ is nowhere near there, but clearly the U.S. Administration has no plan or even desire to rectify the U.S. Trade deficit. Consequently, we are seeing a growing number of Central Banks turning to the Euro for its reserves and away from the U.S.$.

Whilst most observers and particularly U.S. observers like to have tangible facts and numbers with which to mathematically gauge the present and the different possible futures, a collapsing currency situation is not as neatly gaugeable. Indeed it is driven in stages of 'confidence', which are rarely measurable in advance.

For instance we see today the move of the Pension and other long-term funds into the gold E.T.F.' one finds there are no mathematically measurable factors with which to measure the pace of change to these funds. Yes, the number of 'Road-shows' the World Gold Council does affects this move to some extent, but how do you measure the spread of that knowledge and resulting investment in the E.T.F.'s outside of that? How does one measure the forces causing uncertainty and falling 'confidence'.

It is an emotional progression, one that moves in lurches as particular incidents destroy confidence limb by limb. In such a climate a steady degeneration of confidence lead to an effect we shall call a "plateau - cliff" process.
  • As confidence is whittled away the currency appears relatively stable.
  • Then a particular event will occur that triggers a breakdown and the currency drops suddenly, like falling off a cliff, until it finds a short-term bottom and it holds that level for a period as though on a plateau. The process then repeats itself.
  • The degeneration then accelerates, so the fall from the cliff to the next stable plateau happens more quickly.
  • Then the height of the cliff [the fall] extends until it grows at an exponential basis.
  • The final collapse will occur when the currency is completely discredited and used only by those unfortunate to have no other choice. Alternatively the currency is changed to a new one, one whose issue is backed by assets [Such as land - after the Weimar republic] and limited to a fixed relationship to those assets until confidence is restored by a healthy economy and a balanced Balance of Payments. This provides a basis in which to be confident about currency.

However, were the $ heading for a collapse, the U.S. $, a global reserve asset, nothing in the U.S. such as land or any other fixed U.S. asset would suffice. The asset would have to be accessible by its creditors, outside the States who would have to have a willingness to accept that asset in the case of a default by the U.S. The use of the $ domestically and internationally brings such problems that in the final extreme conditions the $ is inadequate as a global reserve currency.

But for the market to whittle away confidence in the $ would take some time. But we believe that it will happen.

  • Look back a couple of years and we saw the $ reigning supreme.
  • Then warnings were given against it as the Trade deficit began to grow.
  • The Fed or the Administration then allied itself to the euro, giving it the respite it has enjoyed over the last year.
  • Now there seems to be a breaking down of the $ of late and some Central Banks switching to the Euro out of the $. These were three distinct stages.
  • The next stage is for the $ to fall heavily against the Euro and Euro oriented currencies.
  • Next will come the defence of the $ until the weight of selling pressure exhausts the $ against other currencies [please note the U.S. has few foreign currencies left in its hands with which to defend the $, but the Fed put in place measures to allow it intervene in the international foreign exchanges.]
  • This could delay the fall for some time, but history has shown that when a Central Bank defends a rate in the market, it gives in periodically and devalues. If insufficient it has to defend again and again.
  • I have no doubt that Central Banks will use this defence to unload their dollars back to the States.
  • At some stage the U.S. will have to impose Controls to prevent foreign capital from exiting the States and rejecting dollars coming home. These are called Exchange Controls.
  • When this happens many currencies will begin facing the same problems as their reserves become suspect too and they cannot defend their own Balance of Payments deficits.
  • At this point for the global economy to function adequately, a new "Global Currency" will have to be established and be supplied sufficient so as to regain global confidence. We cannot see this happening without gold in there to a greater or lesser extent. Of course this will have to be at prices believed by all nations, not just individuals!

During this process confidence in the currency will be the measuring factor, a nebulous, unstable element in itself. The process of the decay of confidence is described above. But confidence could well go down dramatically from the point we are at now with the $ in the monetary system. Soon the cliffs will extend until the defence of the currency comes, then a long plateau while the dollar is defended, until the heavy falls begin.

The international trading power of the States will dominate just how far the dollar will fall. Of course if the States manages to show it is in the process of balancing the Balance of Payments beforehand [which may not mean the complete elimination of the Trade deficit] the demand for dollars will probably overcome the supply. But inevitably that action will mean a huge recession for the States, which could prove an internal nightmare and cause a global recession of its own.

It is probable that the Administration would isolate the U.S.A. from the rest of the world by severe Exchange Control measures, which will create its own internal boom, sooner or later. We will produce an article, or series thereof, at the right time, on this subject.

Sunday, May 07, 2006

Finding Balance

Finding balance in life is always difficult. I work > 50 hours a week, yet try to find time for my family, find time to exercise, time to take a class here & there, time to find enjoyment in life (riding motorcycles, relaxing, etc), time to manage investments, time for friends, time to Blog, etc. The problem is: there is only so much time in a day and difficult choices & sacrifices must always be made in the attempt to find this elusive balance… There is never really enough time, so the areas of importance today come at the expense (neglect) of other areas in life.

So why am I discussing this? Well, this Blog site (which I truly enjoy) has taken quite a bit of my spare time--at the detriment & expense of many other areas in my life. Therefore, I hope to refocus my efforts and find a new balance point—something that will allow me to spend more time in these other areas (identified above).

With that said, I do plan to update my site with articles of interest when possible, but will probably put far less time/effort into it. I hope all of you can understand.

Anyway, here are a few articles that I thought were interesting this week:

Asia Is Getting Ready to Dump the Dollar Peg
All The Ducks Are Lining Up
Warren Buffett Predicts A Housing Bubble Burst At Annual Meeting
Iran sees oil bourse in two months
More Drivers Feel Pinch at the Pump
The Great Depression, Part II?

Asia Is Getting Ready to Dump the Dollar Peg

May 8 (Bloomberg) -- Li Yong, China's vice minister for finance, said he had heard a ``rumor'' that the U.S. dollar was headed for a 25 percent drop. If the gossip was true, the consequences would be ``shocking,'' he said.

Li's comment, which he made at a discussion on global financial imbalances last week at the annual meeting of the Asian Development Bank in the Indian city of Hyderabad, was aimed directly at fellow panelist Tim Adams, the U.S. Treasury undersecretary of international affairs.

The unspoken message was: ``Don't try to talk the dollar down.'' And Adams knew better than to ask, ``Well, what are you going to do about it?'' The answer to that question has already begun taking shape: Asia may be getting ready to fix its currencies to a local anchor, dumping the region's unofficial dollar peg.

Even as they continue to pile up U.S. debt in their foreign- exchange reserves to keep their currencies stable against the dollar, Asian nations, China among them, are preparing for a scenario where the dollar does indeed collapse under the weight of a record U.S. current account deficit.

At the Hyderabad meeting, finance ministers of China, Japan and South Korea got together with their counterparts from the Association of Southeast Asian Nations, or Asean. The 13-nation group said it would sponsor a research project, titled ``Toward greater financial stability in the Asian region: Exploring steps to create regional monetary units.''

Asian Currency Unit

This is no innocuous academic exercise. Regional monetary units are a euphemism for a parallel Asian currency, an idea that has been around since the 1997-98 financial crisis and is now, for the first time, entering the realm of policy making.

Both Japan and China are extremely serious about it and are vying to take ownership of the project.

An Asian Currency Unit, or ACU, will be an index that seeks to capture the value of a hypothetical Asian currency by taking a weighted average of several of them. The weight for a particular currency in the index may be determined by the size of the economy and the quantity of its total trade.

What's the big deal with the ACU? Given the data, anyone can set up an index. It isn't that Asia is talking about replacing its national currencies with the ACU. A European-style single currency in Asia is at least decades away. The ACU is an accounting unit; it won't change hands in the physical world.

The ACU will start making a difference when it becomes the fulcrum of exchange-rate management in Asia. There is some sign that Asian nations want to do just that.

A New Peg
Korea, Japan and China agreed in Hyderabad to ``immediately launch discussions on the road map for a system to coordinate foreign exchange policy.''

The ACU can help a lot in such coordination. It can become a basket peg against which any Asian nation can fix the value of its currency within a band. The ACU, itself, will float.

Why might the ACU work when the now-defunct European Currency Unit, on which the concept is modeled, didn't? One good reason, as noted by economist Barry Eichengreen of the University of California, Berkeley, is that Europe's need for a parallel currency was satisfied by the dollar.

The ACU may well emerge as a viable currency for denominating export invoices, bank loans and bond issuances if the dollar is no longer perceived as a safe storage of value.

So far, Japan has been driving the ACU concept. Haruhiko Kuroda, a former Japanese vice minister of finance and currently the president of the Asian Development Bank, was vigorously pursuing it. The ADB was going to start computing and publishing several ACUs sometime this year.

China in Control

One such ACU would have comprised 13 members, including the Japanese yen, the Chinese yuan, the Korean won and the currencies of Singapore, Malaysia, Thailand, Indonesia, Brunei, Vietnam, Cambodia, Laos, Myanmar and the Philippines. Another ACU would have included both the yuan and the Taiwan dollar -- and that would have been anathema to China. Nor would China have liked to peg the yuan to an ACU that was overly dominated by the yen.

Now China has taken control. While the research will still be conducted in Japan, Asean will take the decision on the composition of the ACU. While Japan is a member of this club, its influence is in decline. The association is now firmly under China's thumb.

While China continues to exhort the U.S. not to follow weak- dollar policies, it, like everyone else, can only guess about the longevity of the present global imbalances.

If there is a sudden collapse in the dollar, the U.S. appetite for imported goods may vanish. The Chinese export engine may seize up and its fragile banking system may collapse under a spate of new bad loans. The idea behind the ACU is to buy some insurance, however inadequate, against all of this.


With its ``my currency is your problem'' attitude, the U.S. has made a negotiated settlement of global imbalances a diplomatic non-starter. China isn't willing to consider the U.S. argument that quicker appreciation of the yuan may prevent a costly adjustment later.

Once again in Hyderabad, Undersecretary Adams tried valiantly to get this message across to Chinese Vice Finance Minister Li. He was wasting his breath. Li, as Adams noted wryly, ``knows all my talking points.''

All The Ducks Are Lining Up (by Peter Schiff)

In case you were otherwise distracted by a spectacular springtime, April also offered some foreboding signs in the economic skies. During the month, turbulent action in the dollar, precious metals, oil, and bonds market offered clear indications that the supports holding up the US economy have become increasingly unstable. The good news is that since the dangers have been largely unappreciated, wise investors have been granted more time to take appropriate action before the situation deteriorates further.

Gold & Silver

Just two weeks after breaking through $600 barrier for the first time in twenty-five years, gold settled at more than $650 per ounce by month's end. Silver traded as high as $14.50, fell sharply, then finished last week with its largest one day gain since the 1980's, settling at about $13.80 per ounce. Friday also marked the much anticipated debut of Barclays' silver ETF (symbol SLV.NYSE.), which join similar gold ETFs already on the market. Similar ETFs will soon begin trading on other major exchanges throughout the world.

The ease with which physical gold and silver can be bought by retail investors through ETFs will reintroduce an entire generation to an asset class recently thought to be as dead as disco. This soaring demand, when combined with decades of under-investment by mining companies, divestments by central banks, and price hedging by gold producers, will create an explosive environment for metal price appreciation.

Despite the fact that this bull market has been steadily building for the past six years, only recently has the surge caught the media's attention. As a result, cries of "bubble" or "blow-off" have reverberated. One self-professed metals expert was so convinced that a silver "blow-off" was imminent that he publicly promised to "eat his hat" were that not the case. When silver did see a sharp one-day pull back, the same "expert," who has consistently underestimated gold's strength since late 2004, advised investors to sell, declaring that a significant correction in both gold and silver had begun. In reality, the anticipated "correction" ended before the ink had dried on his quotation marks.

As a reminder of just how large bubbles can grow before popping, during the 1990s the NASDQ rose from 300 to 5,000. If the NASDAQ could do it, why can't gold? Sure gold does not pay any dividends, but than neither did the NASQAQ. Plus during the entire NASDAQ rally new shares of stock were constantly being issued, either as a result of IPOs, secondary offerings and option grants. However, the growth in the supply of gold and silver will be far more constrained, creating the potential for far greater appreciation.

It seems fitting that on the first day of trading for the silver ETF, shares of Microsoft, once the quintessential "new era" stock, plunged by 11%. Trading as high as $60 per share in December of 1999, Microsoft shares now trade at about $24. During that same time the price of gold has risen from $290 to $650. Imagine conducting a survey on New Year's Eve 1999 that asked typical investors to predict whether Microsoft or gold would outperform over the next decade. Would even one in one hundred have chosen gold? How many would choose gold today or even realize the extent of its out performance?

For a more in-depth analysis of why the recent action in precious metals is not akin to the technology bubble in the 1990's or real estate today, read my recent commentary entitled "The Top Ten Signs of a Precious Metals Bubble."


After consolidating price gains below its recently established $70 resistance level, oil broke-out in the second half of April. With prices now surging above $75 per barrel, we have likely entered a new phase in this ongoing bull market. So much for Wall Street's consensus that oil prices had finally topped out, and that relief at the pumps was just around the corner. Higher energy prices will further impair over-leveraged American consumers, and will exacerbate an already enormous current account deficit.

Though many of our favorite energy plays have rallied off their recent lows, I still believe that share prices do not accurately reflect current, not to mention future, oil prices. As a result, if you failed to buy as a result of my "buy the dip" recommendation in the last edition of this newsletter, do not make the same mistake twice. Speak with a Euro Pacific broker to discuss my favorite picks in this sector and to learn which in particular are most appropriate.


As the conundrum that wasn't continues to unwind, long-term interest rates have risen to their highest levels in over four years, with ten-year yields rising to about 5.1% and thirty-year yields above 5.2%. The technicals suggest rates could rise to 5.4 and 5.5 respectively before consolidating in preparation for an even more substantial rise later in the year. The jump has severe ramifications for over-leveraged consumers/borrowers, the stock market, the dollar, and the housing bubble; in other words, America's entire unbalanced economy.

The Dollar

Last week the Canadian dollar surged above 89 cents rising to its highest level in twenty-eight years, the Australian dollar rose above 76 cents, also closing in on new multi-year highs, the euro surged above 1.26 and the British Pound above 1.82.

The U.S. dollar Index broke thought major support, closing below 86, suggesting another test of its historic lows near 80 is likely. A failure could send the dollar plunging, with dire repercussions across the entire spectrum of dollar denominated financial assets, the U.S. economy, and the American standard of living. Will the 80 level hold again? I for one certainly wouldn't want to bet on it. The stakes are far too high. Even if the dollar does gain one more reprieve, its fate has already been sealed. My guess is if that if the dollar rallies off the 80 level one more time it will be its final "dead cat" bounce.


The simultaneous break-down in bonds and the dollar, together with concurrent break-outs in precious metals and oil, suggests that the global imbalances could be approaching a key inflection point, one which might finally cause many to remove their rose colored glasses.

Readers of this letter are advised to take decisive action before reality sets in. Call Euro Pacific Capital today to find out how you can insulate yourself from the foul weather ahead.

Warren Buffett Predicts A Housing Bubble Burst At Annual Meeting

Omaha, NE (AHN) - Financial giant, Warren Buffett has given the world his economic predictions at the annual meeting of his company, Berkshire Hathaway.

Buffett and Berkshire Hathaway Vice Chairman Charles Munger held their traditional question and answer session with shareholders in Omaha, Nebraska.

According to Buffett, the U.S. housing market is coming upon a correction, saying, "What we see in our residential brokerage business [HomeServices of America, the nation's second-largest realtor] is a slowdown everyplace, most dramatically in the formerly hottest markets."

Munger adds, "There is a lot of ridiculous credit being extended in the U.S. housing sector."
Buffett says that Miami-Dade and Broward counties are seeing "a rise in unsold inventory and stagnation in price."

Buffett believes, "Dumb lending always has its consequences. It's like a disease that doesn't manifest itself for a few weeks, like an epidemic that doesn't show up until it's too late to stop it."

Iran sees oil bourse in two months

BAKU: Iran plans to launch an oil bourse on the Gulf island of Kish within the next two months, Iranian President Mahmoud Ahmadinejad said yesterday.

“Our specialists are currently working on the plan and the bourse will start working within the next two months,” he told a regional conference in the Azeri capital of Baku.

Iranian officials have previously said the bourse would be a small pilot operation trading only two or three petrochemical products and it would start before March 2007, a delay from previous plans.

Western media and think-tanks have speculated that Iran’s oil bourse could undermine the importance of the dollar by pricing the world’s fourth biggest exports of crude in euros.

Mohammad Javad Asemipour, adviser to Iran’s oil minister and head of the bourse project, has previously dismissed such suggestions as “propaganda” and rejected reports that the bourse was intended to rival exchanges being set up in Dubai and Qatar.

He has said switching to crude sales would have to be phased in gradually and depends on the success of the petrochemicals trading.

More Drivers Feel Pinch at the Pump

High pump prices are pinching the pocketbooks of seven in 10 Americans, a financial hardship that more middle- and higher-income drivers say they are beginning to feel, an AP-Ipsos poll found.

With gasoline prices topping $3 a gallon for regular unleaded in many areas, people say they are driving less, cutting short vacations and curtailing their use of heating and air conditioning.

The number of people who expect rising gas prices to cause financial problems in the months ahead has jumped from 51 percent a year ago to 70 percent now, according to AP polling. This increase has been dramatic among people who earn more than $50,000.

These concerns are reflected in consumer confidence polling this past week by Ipsos, an international polling firm. Confidence dropped sharply and was the lowest since October, when the country was recovering from the devastation of Hurricane Katrina.

The average price nationally of a gallon of regular unleaded gasoline was $2.92 on Friday, according to AAA, the motorists' club. The record high of $3.05 was set on Labor Day, according to AAA.

According to the poll, just over six in 10 of those who make between $50,000 and $75,000 a year say gas prices are a hardship, compared with four in 10 a year ago.

The Great Depression, Part II?

Learning the good news that, fueled by programs aiming to restore the ravages of Hurricanes Katrina and Rita, our economy grew by a magnificent 4.8 percent this year, we should be as happy as clams. Yet some of us are scared.

We can cheer that our exports, compared to last year, have grown to 12.1 percent. But crossing the page, we see imports -- mostly from China -- are up 13 percent. The symbol for the United States -- once a factory belching smoke -- now is an economy dominated by illegal immigrants living in a mall-dominated culture.

As gasoline prices remain high there is plenty of evidence that "oil shock" has spread throughout the country -- to farmers, construction companies, plastics manufacturers and, of course, delivery and trucking companies. So, in turn, look for higher prices from taxi cabs through school busing programs, trash removal, service calls and deliveries of your favorite pizza.

Farmers are vital to our lives. This year's harvest already is in serious trouble because of the heavy and long rains, flooding and high winds, interspersed by imminent drought. All of which equals price increases. Fuel prices for crop planting are much higher than in 2002, as are fertilizer costs.

Mortgage foreclosures on American homes jumped by 72 percent in the first quarter of 2006 compared with 2005. Easy financing of homes, "no down payment" and adjustable-rate mortgages are difficult to find and housing inventories are larger than they have been since the 1990s.

The middle classes is under attack. Last year, we used our homes as equity and withdrew $600 billion to take care of credit card bills and personal spending. Now, with increased gas prices, a tight housing market and personal debt in the stratosphere, the crunch is on.

Small wonder that the price of gold, around $270 per ounce in 2001, now is more than $660 and expected to move higher still.

The French connection

In July, the G8 will meet in St. Petersburg and there are signs that Alexei Kudrin, Russia's Finance minister, may seek to cause us still more problems.

Last month, he ranted that "the U.S. dollar is not the world's absolute reserve currency," fussed about our "unsustainable" trade deficit and, with the finesse of a suicide bomber, added, "The international community can hardly be satisfied with this instability."

If Kudrin is taken seriously -- and the Chinese certainly consider him a very serious player -- we may then be forced away from our economic underpinning. If Russia, China or the European Community started using euros, rubles or yen instead of greenbacks for oil transactions, the effect would equate to a nuclear bomb on New York City. And, if we stop buying oil, China and India will gulp each drop.

We would have to start paying back our $9 trillion national debt and that is impossible.

The illegals crisis

So that's how the money we don't have may be spent. But we also have an illegal immigration crisis.

Illegal immigrants have taken over agricultural industries from A to Z. They are responsible for cleaning the massive hog and poultry battery farms that provide us with inexpensive food. They work on turf farms, horticulture and lawn services in the suburbs. They are responsible for meat-packing plants, through herding cattle to mushroom farming.

Agriculture is permeated by Hispanic labor.

World Perspectives, a consulting firm, estimates that as many as 75 percent of our agricultural labor force is "fraudulently documented." Moreover, the American Farm Bureau Federation claims that a crackdown on illegals would cause production losses of $5 billion to $9 billion a year.

Adding to a sense of fear about the economy are the words of Ben Bernanke, the newly appointed chairman of the Federal Reserve: "If the dollar declined sharply, it would not necessarily disrupt markets."

With our dollar, that sounds like an invitation for China or perhaps Russia to start a sell-off that would drown us in red ink. In the past four years, the dollar has dropped 30 percent against the euro, consumer spending and housing prices are in retreat and energy prices are skyrocketing.
That's why we are scared.

Are we about to face the challenge of another Great Depression, coupled with the ever-increasing costs of the social safety net (health care and pensions), Social Security and education compounded by war and security issues? And are we willing to remain dependent on illegal immigrant labor filling what President George Bush calls "jobs Americans don't want"?