Dollar: Faltering Foundation of US Economic Strength

I wrote this article back in Jan of 2008 in an attempt to shed light on the past history and likely future of the US Dollar as the World's reserve... Bottom line, dollar hegemony will eventually end and when this happens our standard of living will fall precipitously.

Since the end of World War II, the central foundation of US Economic Strength has rested on the US Dollar. Many of our strategic plans, geopolitical strategies, past and future wars--the entire global chess board if you will, has been played out by trying to maintain our undisputed economic power, based primarily through ownership of the World’s Reserve Currency.

SOME HISTORY ON THE DOLLAR

Throughout the history of the world, there have always been strong currencies, usually held by the economic powerhouses of the day. Theses currencies were primarily called Reserve Currencies. The Pound Sterling was the primary reserve currency for much of the world in the 18th and 19th centuries. But perpetual account and fiscal deficits, financed by cheap credit and unsustainable monetary and fiscal policies used to finance wars and colonial ambitions eventually led to the pound sinking (sound familiar?).

Post World-War II, the US dollar took over the sterling’s dominant position and became the world’s newest reserve currency. The Bretton Woods Accord, the first major economic transformation toward the end of World War II, established the International Monetary Fund (IMF) and a way to value the various currencies of the world relative to each other. All foreign currencies would trade in relationship to the US Dollar and only the US dollar (as the reserve currency) would be tied to a gold standard (meaning the value of dollars circulating must be backed by gold reserves).

The gold standard caused major problems in the 1960’s when France (under the London Gold Pool) called America’s bluff and demanded gold for payment of debt, rather than US dollars (they understood that we were printing more money, to finance the Vietnam conflict and fund new social programs, than we had available in gold reserves).

Due to the rapid loss of US gold reserves, President Nixon had no choice but to abolish the Bretton Woods accord in August of 1971 and he took the US dollar off the gold standard (it was $35 per ounce then; today it is ~ $900).

This Nixon shock of August 1971 caused a swift devaluation of the US dollar (gold doubled in price by 1972) and numerous efforts followed (by U.S. leadership) to develop a new system of international monetary management. They felt they must find another way, as currencies around the world were in turmoil and were now floating among one another…

The year 1974 provided the much needed answer. In June of 1974, Secretary of State Henry Kissinger established the US-Saudi Arabian Joint Commission on Economic Cooperation. One of the major components of this commission stated that OPEC would officially agree to sell its oil only for dollars—meaning any country purchasing oil from OPEC had to pay in U.S. dollars. This agreement enormously increased the demand for the floating dollar, as oil importing countries now had to earn or borrow dollars to pay for their oil.

OPEC oil countries were soon overflowing with petrodollars and most of them ended up recycled through accounts in London and New York banks.

Bottom Line: this 1974 act reestablished the dollar as the global monetary instrument and oil now replaced gold as basis for a strong dollar. Countries competed for dollars and they accumulated huge dollar reserves to sustain their own currencies.

Please allow me to shift gears a bit—we’ll get back to the dollar in a moment:
Post WWII, the US was the world’s manufacturing powerhouse, as our continent was unscathed by the ravages of war and the military industrial machine was running at maximum efficiency.

That however has changed over time, as thousands of corporations succumbed to the pressures of improving their bottom lines. Entire sectors were outsourced: U.S. Manufacturing, Steel, Technical services, Administrative call centers, Research & Technology and numerous others are now gone. Heck, you can’t even find a pair of Levis (the American Trademark) made in the good ole USA anymore.

Why did this happen? It’s all related to profits… A U.S. company can pay a worker overseas $1-2 bucks an hour to do the same job requiring $15-30 hour in the US... Either they outsource or they end up like the rest of our troubled U.S. home bound corporations (below).

Many of the home-bound US companies still trying to compete in the Global marketplace are reeling from high labor costs, pension plans, union benefits, health care costs and the like. Delphi, General Motors and Ford are prime examples of the growing trend of companies feeling the pressures. I expect to see more US corporate and worker problems in the future…

Outsourcing however did have its benefits. For many years we Americans were able to export inflation through the import of cheap manufactured goods and recycled dollars. Foreign manufacturing allowed Americans to purchase many things that otherwise they could have never afforded had they been made in the USA (e.g. $20 Jeans, $29 DVD players, $50 Microwave ovens, $60 cell phones, $100 TV’s; $200 computers, the list goes on and on). Our standard of living rose, but we eventually became a service-based economy dependant upon 1) selling each other foreign made goods and 2) foreigners recycling their excess dollars back to the US.

This foreign recycling of dollars provided Americans with low interest rates, plenty of available credit and it allowed us to live far beyond our means through cheap debt.

On the negative side, foreign governments built up huge dollar denominated holdings that they could use to secure long-term energy agreements, purchase Global assets/corporations, etc and these massive holdings realistically (it will never be admitted) tied our hands geo-politically, as foreign governments could now threaten to dump dollars into the world market as retribution for disliked policy.

Back to the dollar:

Once removed from the gold standard in 1971, the US dollar became a fiat currency (tied to nothing tangible and it was backed only by the word of the US government). The Fed Reserve Banking System could now print money at will -- and they did. Take a look at the chart below and the growth in M3 money supply since 1971. This chart ends in 2006, but (in case your wondering) today’s figure is ~ $12.5 Trillion.




As the world’s reserve currency, the US has been able to, year after year, import goods from the rest of the world (for consumption) and pay for it with dollars that were created from nothing. These dollars are then used by foreign central banks to purchase US assets (corporations, land, properties, etc) or debt instruments from the Fed, or they amass these excess dollars to keep inflation tame within their borders, as many have their own currencies pegged to the exchange rate of the US Dollar.

It is currently estimated that foreign governments (OPEC Nations, China, Japan, India, Great Britain, Korea, Russia, etc) have amassed ~ $4 Trillion of US dollar holdings. China alone is sitting on ~ $1 Trillion (Pretty scary stuff).

Over the last several years, foreign Central banks have started to become leery with the huge debt levels, massive trade deficits and unsustainable fiscal policy of the US and they are quietly working to diversify their dollar holdings.

Additionally, for decades now, many foreign countries have pegged their currencies to the US Dollar, but recent inflation increases, internal to their domestic economies, has become far too severe for them to handle (with the dollar peg, they have to print money as fast as we do, and it is stoking domestic inflation), therefore several countries have started a new trend of depegging. Recently, Vietnam, Qatar and Kuwait have all depegged while a host of others (Russia, and other OPEC Nations) are questioning whether or not they should do the same… When this currency de-peg happens on a larger scale (not if, but when) inflation within our borders will SCREAM. Why? Well, as they de-link from the dollar, their currencies become stronger causing our import costs to increase commensurately (e.g. Oil, consumer goods, etc)

Lastly, governments such as IRAN no longer want to accept dollars for oil. This was also the case with IRAQ back in Saddam Hussein’s day, but we all know what happened there. Anyway, the point is: There is wide-scale pressure afloat to price oil in currencies other than the depreciating US Dollar. If that happens on a larger scale, the artificial foundation for the World’s Reserve currency will be removed and all hell could break loose.

Bernanke: Rather than try to shore up foreign confidence in the dollar, Helicopter Ben Bernanke has made matters worse by officially sacrificing the dollar to save our faltering, sub-prime like, US banking/financial systems… By lowering rates at a time when the dollar is already at its weakest point in history, there is no other explanation to his actions.

Bottom line: Demand for the World’s Reserve Currency (dollar) has been kept artificially high for many years through oil pricing agreements and US inflation was held in check by importing cheaper goods. These were both net benefits for the US in times past, but are quickly moving towards being detriments.


Closing:

The US was once an economic powerhouse who earned the right to own/maintain the World’s Reserve currency, but we’ve squandered this luxury through massive debt loads, poor foreign policy decisions, excessive monetary printing, outsourcing our industrial base, making too many future promises and by living way beyond our means.

Foreign Governments are now growing tired of subsidizing our opulent lifestyles, and the recent fact that we put the world financial system in peril by offloading our toxic securitized garbage was (I believe) one of the final straws to break the dollar’s back. In another ~ 10 years, dollar hegemony will probably be a thing of the past. Our central foundation of US Economic Strength (dollar) is faltering and there is little we can do about it.

With that said, I think the Fed and our government officials are already aware of this and without any viable solutions to our current financial problems (baring raising interest rates and initiating a massive depression) they have made the best choice they can (cut rates and inflate).

I believe it has now become a matter of (unwritten) policy to try to hyper-inflate our financial system out of its current and future insolvency crisis. In their attempt to inflate, the world will experience significant dollar devaluations which will (over time) allow the United States to 1) eliminate much of its foreign debt and 2) pay for future (currently un-funded) obligations through devalued payouts.

As our standard of living drops more in-line with the rest of the world due to loss of purchasing power and a massive economic slowdown, it will (over time) become much cheaper to employ American workers again and this will slowly bring jobs back into our borders. Eventually, 20-30 years from now, our country will become competitive in the world again and we will do more than just sell each other cheaply made foreign goods--we will actually manufacture them again. BUT, we will (most likely) no longer own the World's Reserve Currency nor will we be the World's main economic power.

Ultimately, I believe massive currency devaluation and a much lower US standard of living is our country's only way out of this financial predicament...

The only wildcard I can think of is Oil. How in the world do we survive without cheap oil?
Guess we'll need to work out some new strategic plans and geopolitical strategies -- and I'll bet they lead to:

WAR!

Regards

Randy

Central Bankers: Unlimited Free Money!

Today, the Fed made a statement regarding new central bank liquidity measures and boldly proclaimed that the sky is the limit on how much money banks can borrow - other central banks are following suit in their quest to give money away.




Fed statement

"Counterparties in these operations will be able to borrow any amount they wish against the appropriate collateral (my take: toxic waste) in each jurisdiction. Accordingly, sizes of the reciprocal currency arrangements (swap lines) between the Federal Reserve and the BoE, the ECB, and the SNB will be increased to accommodate whatever quantity of U.S. dollar funding is demanded."

"Central banks will continue to work together and are prepared to take whatever measures are necessary to provide sufficient liquidity in short-term funding markets."


HA! Keep pouring that money down the black hole - ain't going to work. Today we saw a nice dead cat bounce - picking up 936 points on the DOW, but 7,200 (over the longer term) won't be denied.

Did you see the report on Europe? They are putting $2.3 trillion on line for banks

European governments overcame their differences to put $2.3 trillion on the line Monday in guarantees and other emergency measures to save the banking system in their most unified response yet to the global financial crisis.

The pledges by six countries that use the euro and Britain helped soothe stock markets, along with a promise by top central banks to provide unlimited short term dollar credits.

Meanwhile Monday, the British government injected another $63 billion into some of the country’s leading banks Monday to avoid a full-scale collapse of the sector.

Can you imagine: Central bankers are now handing out unlimited free money to all the guilty bastards (big banks) who got us into this mess by creating, packaging and selling AAA rated dog-shit. Don't tell me they didn't know the longer term implications of their deceptive actions.

As an aside, what do you think the ramifications will be of all this new liquidity on G7 purchasing power?

Hyperinflationary depression here we come!

Randy

Interesting day

Today is my wife's birthday and we just got back from a family dinner out (did our part to stimulate the downturning LV economy tonight), so I really don't have much time to post up.

On that note, it was quite an interesting day on Wallstreet. A significant equities downturn was led by the financials once again... And the bad news was exacerbated by Treasury Secretary (and PPT leader) Paulson who added to the glum mood with a downbeat statement, saying it will be months before the problems end.

Note: For him to say such things, I imagine the looming "credit crunch phase-2" is worse than feared and he's making an attempt to prime the masses...

US STOCKS-Wall St ends lower, hammered by bank woes

NEW YORK, June 2 (Reuters) - U.S. stocks ended lower on Monday as financial shares slid on fears of more fallout from the mortgage crisis after Standard & Poor's cut debt ratings of three big securities companies and Wachovia, the fourth-largest U.S. bank, ousted its chief executive.


Morgan Stanley, Merrill, Lehman Ratings Cut by S&P

Morgan Stanley, Merrill Lynch & Co. and Lehman Brothers Holdings Inc. declined in New York trading after Standard & Poor's lowered credit ratings for the investment banks, saying they may have to book more writedowns on devalued assets.

Morgan Stanley, the second-biggest U.S. securities firm by market value, was cut one level to A+ from AA-, S&P said today in a report. Merrill Lynch, the third-biggest, was also cut one level to A from A+, as was Lehman Brothers, the fourth-biggest. Goldman Sachs Group Inc., the largest of the group, was affirmed at AA-. The outlook on all four New York-based companies remains negative, S&P said.

The downgrades may make it harder for the banks to sell derivatives such as credit-default swaps that are tied to bonds or loans, said Brad Hintz, an analyst at Sanford C. Bernstein in New York. Single-A rated firms are less desirable as trading counterparties for fixed-income derivatives that extend longer than five years, he said.

``You'll see derivatives profitability drop off over a period of time,'' Hintz said of the three downgraded investment banks. ``We estimate somewhere around 1 percent to 1.5 percent of fixed- income revenues are at risk.''

The firms are also likely to have to post more collateral on the trades they've already made with other parties, raising their costs, Hintz said.

Collateral

In its last quarterly filing, Merrill said a one-notch downgrade of its credit rating would require it to post an additional $3.2 billion of collateral on over-the-counter derivative trades.

Morgan Stanley estimated in a regulatory filing that a single level downgrade would mean posting an extra $973 million. Lehman said a one level downgrade requires about $200 million of additional collateral.

Morgan Stanley spokeswoman Mary Claire Delaney declined to comment, as did Merrill spokeswoman Jessica Oppenheim and Lehman spokesman Mark Lane.

Morgan Stanley, Merrill and Lehman sank in New York Stock Exchange composite trading. The cost of insuring against a default on each of the companies' debt jumped initially and then retreated later in the day.

Lehman fell $2.98, or 8.1 percent, to $33.83 in NYSE composite trading, while Merrill lost $1.30, or 3 percent, to $42.62. Morgan Stanley dropped $1.13, or 2.6 percent, to $43.10. Goldman declined $4.07, or 2.3 percent, at $172.34.

Writedowns

The S&P rating ``actions reflect prospects of continued weakness in the investment banking business and the potential for more write-offs, though not of the magnitude of those of the past few quarters,'' Tanya Azarchs, an S&P analyst, said today.

S&P suggested the banks may have to sell more stock to help offset the charges, according to Hintz. The report said financial institutions have raised too much capital in the form of so-called hybrid securities, exceeding S&P's limits on such instruments.

``The risk of further equity dilution probably has gone up,'' Hintz said.

The biggest banks and securities firms have booked about $387 billion of writedowns and credit losses since the beginning of last year, as the collapse of the subprime mortgage market prompted a contraction in credit markets worldwide. So far, the firms have raised about $270 billion of capital.

`Negative Outlooks'

S&P revised its outlook on Bank of America Corp. and JPMorgan Chase & Co. to negative. Citigroup Inc. was taken off review for a downgrade and given a negative outlook, while Wachovia Corp. was placed on review for a downgrade.

Wachovia shares fell to the lowest level since July 1995 after the bank ousted Chief Executive Officer Kennedy Thompson today, signaling the company may report a second-quarter loss.

``The outlooks on the large financial institutions sector in the U.S. are now predominantly negative,'' S&P said in today's statement.

Best regards
Randy

More writedowns on the way?

Consumer Confidence and New home sales data will be released tomorrow (10:00 EST)... This data could make for a very interesting day, as consumer confidence is already at a 15 year low and new home sales (viewed as a leading indicator of the housing market) hit a 17 year low last month... I expect any lower indications tomorrow to possibly roil the financials once again.

Markets: Tough Days

US shares had their largest weekly fall in almost four months last week as investors rediscovered the real US economy and realised the credit crunch and housing slump had not somehow been vanquished by the rescue of Bear Stearns in March.

And that will be bad news for market sentiment here were a 1% fall has been tipped on the futures market.

Worryingly, the big drivers of Friday's 146 point fall on the Dow were the likes of Lehman Brothers, Morgan Stanley and Merrill Lynch; the big, troubled investment banks that had stabilised in the wake of the rescue of Bear Stearns by the US Federal Reserve. Goldman Sachs dropped for a ninth day in a row.


UBS warns of more losses

LONDON (MarketWatch) -- UBS on Monday warned that that it may have to record losses on non-U.S. real estate as it seeks nearly $16 billion from shareholders to repair a dented balance sheet.

UBS last week said it's going to sell $22 billion of subprime and Alt-A U.S. residential-mortgage-backed securities to BlackRock for $15 billion, with UBS providing the fund manager an $11.25 billion loan in the process.

But as the subprime troubles cool down, others have sprung up. UBS's exposure to auction-rate securities, used mostly in municipal financing, increased to 11 billion francs ($10.7 billion) from 6 billion francs during the first quarter.

UBS said its loss-making positions in real estate markets outside the U.S. "could increase," the Swiss bank said in the prospectus.

All told, UBS has taken about $19.2 billion in write-downs and losses to an $82.6 billion portfolio of securities tied mostly to the U.S. housing market.

UBS already has issued 13 billion francs of convertible notes to sovereign wealth funds in Singapore and a Middle Eastern country it hasn't named. It's now selling 16 billion francs of stock to existing shareholders at a 31% discount to Wednesday's close.

Shares of UBS, which on Tuesday will trade without subscription rights, dropped 5.8% in Swiss action and are down more than 60% over the past 12 months.


Writedown bug could bite Lehman

The brokerage firm's accounting is back under scrutiny.

Lehman Brothers has some explaining to do (My thought: The next Bear Stearns?).

Shares of the big brokerage firm have dropped 13% over the past three days amid renewed questions about the health of Lehman's balance sheet. The setback comes just over a month after finance chief Erin Callan led a public relations blitz that aimed to dispel worries about Lehman's financial standing following the collapse of rival Bear Stearns. Callan's efforts were aided by a surprisingly solid first quarter earnings report and a $4 billion preferred stock sale that was strongly oversubscribed.

But David Einhorn, the manager of the Greenlight Capital hedge fund, reopened the case against Lehman in a speech Wednesday. Einhorn, who along with any number of other value-oriented, long/short hedge fund managers is short Lehman, says the firm hasn't taken sufficient writedowns on its $6.5 billion collateralized debt obligation book to account for the sharp decline in the value of this sort of paper. Einhorn laid out his argument in a speech at the Ira Sohn Investment Research Conference.

A Lehman spokesman declined to comment, although the firm has made clear that it dismisses Einhorn's claims root and branch because of his short position.

But based on price-checks in the secondary market, Einhorn appears to have a good point. It seems highly unlikely that the $200 million in writedowns Lehman took in the first quarter - representing just 3% of the CDO portfolio's value - begins to account for the hit that this paper would take were it to come to market.

The CDOs Einhorn is scrutinizing include various asset-backed securities, primarily auto- and credit-card loans, with some small business and franchise loans. There is no mortgage-bond exposure in these CDOs, but that's not to say the bonds are pristine. About 25% of the portfolio, or $1.62 billion, is rated noninvestment grade, with ratings of BB-plus or below.

Not to put too fine a point on the matter, but merely finding a buyer for a $1.62 billion portfolio of sub-investment grade loan CDOs would be an achievement in this market. There is, in fact, an excellent chance that no buyers exist for these securities, given the apparent problems with the underlying collateral. Portfolio managers in contact with Lehman's own trading desks told Fortune that the firm appears to value such "scratch and dent" loans held by other firms at deeply discounted levels, with no guarantee that the Lehman desks would even bid on this paper themselves.

All that said, two dealers say a reasonable bid, could one be found, might be 10 cents on the dollar. That suggests Lehman could be looking at a writedown of more than $1 billion on this portion of its holdings alone.

To be fair to Lehman, the rest of the portfolio isn't nearly as problematic. Still, these CDOs - nearly $5 billion worth - could also be subject to discounts beyond the 3% Lehman seems to have decided on, and the discounts will only get deeper if the rating drops lower.

Of course, according to its 10-Q filing, at the end of the first quarter Lehman had $786 billion in total assets. So the decision of whether to write down a billion dollars or two could easily fall short of materiality. But it's nearly impossible to carry off an argument that the 3% haircut Lehman has taken so far on its $6.5 billion portfolio is remotely adequate. Were Lehman to seek a buyer for the entire portfolio at once, a bid of 50% of face-value might be generous. Whatever Einhorn's motivation, it appears clear that the firm's investors would do well to brace for at least one more round of asset writedowns.

Watch Out Below!

Very good Forbes article confirming much of what I've been saying: "We ain't anywhere near done yet."

Watch Out Below

Oil prices continue to surge to new records. Gold prices climb. Stocks retreat in the U.S., Europe and Asia. The dollar goes south. Housing prices continue to fall. Consumer confidence erodes. The banking crisis has not hit bottom. Fed action is not enough. Congressional intervention is necessary.

So says Thomas J. Barrack Jr., chairman and chief executive officer of Colony Capital, a California-based hedge fund, in his April letter to Colony partners.

It may come as a shock--but Croesus believes we are only a third of the way through the credit crisis, and investors should get ready to experience more pain. As Barrack put it to Croesus quite directly this week: "The denial is beyond belief--at every level."

No one wants to deal with the losses on Alt A mortgages, which are greater than subprime. Or the prime mortgages which in total dollar terms represent twice as many dollars as subprime. What about the regional banks wasted by lousy real estate loans? Then there's the unwillingness of European banks to lend to each other, or the vast amount of assets running from troubled institutions like UBS, not to mention the Swiss investors demanding delivery of gold bullion rather than gold certificates. Still, the recession deniers are everywhere.

Croesus has some advice for everyone. Buy yourself two recently published books that will explain how we got to this fragile place and what public policy steps have to be taken to make sure the financial system doesn't still implode--on a step-by-step basis.

Charles Morris' The Trillion Dollar Meltdown, Easy Money, High Rollers, and the Great Credit Crash explains in clear narrative style how the credit bubble developed and had to burst. We owe a debt to Morris for underscoring how the power of vastly deregulated financial markets--and the development of mortgage-backed securities markets was eventually going to lead to the "great unwinding" that is only partly over. For all of you who have been bewildered by reading about CMOs, CDOs, CLOs and the other toxic waste of 21st century finance, here's your handbook to comprehend the fallout.

Morris makes sense of the process by which the stock market crash of 1987 and the failure of hedge fund Long Term Capital, cured by the easy money policies of Alan Greenspan, led eventually to excess leverage and massive losses in the financial system. Listen up. Morris' prickly definition of the so-called "Greenspan put" explains the mystique that kept the markets from massively tumbling--"No matter what goes wrong, the Fed will rescue you by creating enough cheap money to buy you out of your troubles."

Morris calls all this folderol "the last gaspings of the raw-market Chicago school brand of financial capitalism that moved into the vacuum created by the 1970s collapse of the Keynesian liberal paradigm."

And fabled investor/speculator George Soros has neatly carried this theme forward in his brilliant analysis of the crisis, which he warns everyone and everywhere is deepening into a more serious matter. Soros' The New Paradigm for Financial Markets, The Credit Crisis of 2008 and What It Means is a clever explanation of why "financial markets are always wrong."

Soros made his fortune by understanding how to take advantage of how markets overshoot on the upside and then on the downside. He goes short when we're in bubble mode, bidding shares or commodities to unrealistic prices. And he buys when prices are unrealistically low. Investors, Soros proves, "base their decisions on incomplete, biased and misconceived interpretations of reality, not on knowledge."

Under the new paradigm, investors will have to base their decisions on less leverage. In fact, Soros, like others, is calling for the regulation of limits on the use of leverage by investment banks and hedge funds. Come the revolution, Croesus thinks this will only happen on a voluntary basis. But Soros is adamant that "credit creation has to be a regulated business. The financial industry was allowed to get far too profitable and far too big." Avoiding asset bubbles should be a priority, Soros suggests.

Croesus scoffs at this nonsense as Wall Street's political power and influence in Washington is too strong. Even if Obama gets in the White House, his hedge fund buddies will tell him the score. Don't mess with Wall Street.

Be clear, though. The asset bubble that is still bursting will be severe enough to cause a serious recession, Soros believes. He is negative about the economy and the stock market. He has more vision and understanding than your run of the mill Wall Street expert who thinks every capital raising is the turning point for the market to improve.

You may find Soros' public policy solutions to be anathema. But you can learn one invaluable investment lesson from this book. He proves that "reflexivity" is an intellectual insight that can be a framework for successful investing. All you have to know is when prices get too high (out of whack with reality) or when they get too low (out of whack with reality). Reflevity signaled Soros when to sell the conglomerates in the late 60s, when to sell the REITs in the 1980s--because they got up to crazy unrealistic levels. Soros knows how to take advantage of the crowd's wishful thinking. And let him be a philosophe about it. Why not.

This super bubble took 25 years to develop, Soros writes. It can't be over in one year. Expect home prices to drop another 20%. Expect credit contraction to continue. Expect new bubbles to develop like in the commodity area. Soros wants to bet gold, oil and other commodities will fall in price. It's just that his "reflexivity" button hasn't lit up.

Regards
Randy

Bailing out in flood of debt

Regardless of what the mainstream shills are saying, the credit crisis is far from over and a myriad of future economic troubles continue to brew on the horizon.

Home sales (and prices) are still falling, foreclosures are increasing, the Fed remains the sole buyer of toxic waste/securitized garbage, credit remains tight, the economy is shedding jobs, gas and food prices are rising, state tax revenues falling, and the consumer -- who is already starting to pull back on discretionary spending, is barely staying alive by charging daily necessities on credit cards, but this will soon change...

Up to around 12 months ago, millions were able to use the paper equity from rising home values to pay off old credit card/auto debt, but falling home values (in many cases) has now turned that once fat equity cushion into an upside-down household liability. Overall household debt levels are now higher (due to the refinance or HELOC), and the recent consumer inflation wave has now driven our payday-to-payday consumers back to the credit cards -- just to put food on the table and gas in the car.

With credit card delinquencies at a 16 year high, Oppenheimer analyst Meredith Whitney is warning that we should expect to see banks strip away 45 percent of the card credit now available — about $2 trillion, by 2010.



Bailing out in flood of debt

Credit card companies and banks are worried that people are drowning in debt and will fall behind on payments. With home values declining and banks wary of handing out loans, outlets for escaping overwhelming debt are limited.

Consumers are finding themselves caught. Card firms are getting tougher, sometimes canceling unused cards or raising rates seemingly for no reason. And 30 percent of banks said in a recent Federal Reserve survey that they had tightened standards on consumer loans.

People who depend on loans and credit cards are likely to feel increasingly strapped in the future. Oppenheimer & Co. analyst Meredith Whitney has estimated that by 2010, credit card issuers will be so pressured by financial concerns and regulation that they will strip away 45 percent of the credit now available—about $2 trillion.

Already, many credit card users are running into trouble. If they miss payments or are late even a few days, interest rates often go up for that card—and others. Some are running up balances without realizing that they are inadvertently damaging their credit scores and making it more difficult to get the best rates on a car or mortgage loan.

"The rules have changed," said Gerri Detweiler, author of the "Ultimate Credit Handbook" and analyst for Credit.com.

And delinquencies on consumer credit are rising. According to the American Bankers Association the level of delinquencies—or people behind on payments—for certain loans recently was the highest in almost 16 years.

Closing thoughts:

With increasing job losses, a higher cost of living and far less available credit, how will J6P and his family survive?

Our next Democrat President will be in office by then (McCain can't win it for the Republicrats), so expect to see far more monetary printing and taxpayer funded social programs instituted to help them out.


Regards

Randy

Is the Credit Crunch Over?

The recent stock market & dollar rally, coupled with the massive commodity/metals sell-off, has led many to believe that the Fed & Plunge Protection Team (PPT) were able to sucessfully restore liquid credit markets and the turmoil is now over.


My Thoughts:

Aside from unprecedented/wide-scale PPT market manipulation, and a mere slowing of the credit implosion helped by new Fed lending apparatuses, nothing has been resolved. Homes are still foreclosing in record numbers, legislators are now calling for new regulations to prevent future “similar” banking/credit issues, lending standards are getting tighter, financial institutions still have no market (aside from the Fed monetization window) for their gargantuan off-balance sheet/tier-III toxic waste piles, and American consumers (trying to cope with huge inflation waves, combined with a collapsing wealth-effect brought about by falling home values and lack of available “new” credit) are starting to pull back on discretionary spending. Note: 70% of the US economy is consumer spending

Bottom line: Recent sentiment change created by Financial Wizard market manipulation is all smoke and mirrors – the PPT is trying to re-establish faith and trust in markets (and a currency) that are ready to implode.


What manipulation am I talking about?

Let’s look at the recent precious metals sell-off: Gold and Silver took their worst beating in years during the recent commodities smack-down. How in the world could these metals get crushed so badly when dealers are overwhelmed with orders and can’t get or keep enough products on their shelves?

Must see this link (and pictures below) to understand what I’m talking about: Silver Shortage: 19 dealers reported "Sold Out"

Bullion Direct

Kitco

Additionally, I received this message via email from APMX just yesterday:

Due to the OVERWHELMING demand for precious metals, our online ordering system has been unable to keep up with our customers’ needs. We have had to disable the APMEX ordering system to allow us ample time to upgrade our site to accommodate the increased demand. We apologize for this temporary problem. In the mean time, we will be accepting telephone orders for the following items only as we have them available:1 ounce Gold American Eagles1 ounce Gold Canadian Maple Leafs1 Ounce Gold Krugerrands100 oz Silver BarsMisc Generic .999 Fine Silver90% Coin SilverDuring this time, we will have a minimum order of $5,000. We regret we have had to make this drastic change to our ordering process and rest assured, we are working expeditiously to correct the problem. As soon as we have our new site up and running, we will notify you via e-mail when you can again place orders online.

Or how about this one:

High Demand for 2008 Silver Maple Leafs: The Royal Canadian Mint has found itself unable to fully meet the unprecedented demand for silver Maple Leaf coins with its current supply, and has temporarily suspended shipments. This situation is temporary until more of this fine bullion product can be struck and shipped. Because many of our customers want to purchase this product at today's prices, Northwest Territorial Mint will accept orders now for shipment when the product becomes available, which we expect will exceed 30 days. If the wait for product proves too lengthy, we reserve the right to substitute a similar silver product.

OK, if there is such a supply shortage, why did PM prices crash this last week?

It was a PPT manipulated paper smack-down (through engineered margin call selling of futures, options, etc – to fry the longs, destroy prices and signal an end to the commodity boom) that has changed none of the underlying precious metals supply/demand/inflation-hedge/flight-to safety fundamentals.

But it did provide a great buying opportunity – could be a very good time to back up the truck and load up w/physical…

Take a look at who is taking advantage of this smack-down:

Asia jewellers on buying spree as price sinks-- It probably won’t be too long before PM prices regain their footing..

Jewellers across Asia rushed to buy gold on Thursday after prices tumbled more than $100 an ounce since spiking to a record above $1,000 an ounce this week, pushing up premiums in key bullion trading centres. Gold fell more than 2 percent to hit a 1-month low of $920.30 an ounce as funds sold bullion after pushing up the price to a lifetime high of $1,030.80 on Monday.


Superb comment from a reader at a PM blog I routinely visit -- summarizes the situation perfectly: Somebody took advantage of a short trading week to slam PMs - on options expiration week (saving the shorts' shorts!) - and by the same token make a "double-top" appear out of the blue - to signal "an end to the commodities bull" and "an end to the bearish dollar" - based on NO REAL PHYSICAL TRADING - just "PAPER"...

With our manipulation discussion out of the way, what about the credit crisis being resolved?

Bloomberg Today:

Goldman, Lehman Rating Outlook Cut to Negative by S&P (Update3)

March 21 (Bloomberg) -- Goldman Sachs Group Inc., the biggest U.S. securities firm, and smaller rival Lehman Brothers Holdings Inc. had their credit-rating outlook cut to negative by Standard & Poor's, which said Wall Street banks' profits may fall as much as 30 percent in the coming year.

``Our current expectation is that net revenue could decline'' at least 20 percent for independent securities firms, S&P said in a statement today.

Or this one:

Big U.S. finance company faces credit crisis, and shares fall

The crisis in the credit markets is threatening to engulf one of the largest commercial finance companies in the United States.

The CIT Group, a century-old company that lends money to small businesses and midsize corporations, drew on $7.3 billion of emergency bank credit lines on Thursday, causing its shares and bonds to plummet.

CIT, whose businesses range from making student loans to financing purchases of airplanes and railroad cars, announced that it would try to sell some assets or businesses to raise cash and repay its debts. Analysts said the tightening credit squeeze could drive the entire company into the arms of a bidder.

The developments at CIT suggest that the credit troubles that felled Bear Stearns this week continue to spread, despite efforts by the Federal Reserve to encourage banks to lend to other financial companies.

Another:

Credit crisis puts vise grip on leveraged companies

There are 93 US companies at risk of defaulting on $53 billion in debts, a new report shows, marking a 50 percent jump since last June, when the credit crisis started. Many of these debt-laden companies were involved in giant leveraged buyouts.

Standard & Poor’s ‘‘weakest links’’ report is forecasting that 75 US companies will default on their debts in the next 12 months. Of the 93 companies at risk, more than half were involved in takeovers by big-name private equity firms, including Boston’s Thomas H. Lee Partners, Bain Capital, and J.W. Childs Associates.

The sectors worst hit are media and entertainment, and consumer and retail. Many of the names are familiar to consumers, like Uno Restaurant Holdings Corp., the Boston-based pizza restaurant group; Linens ‘n Things Inc., the home goods chain; and Univision Communications Inc., the Spanish-language television and radio company.

‘‘This is just the beginning,’’ said Diane Vazza, managing director and head of Global Fixed Income Research at Standard and Poor’s in New York. For companies struggling with debt payments, she said, ‘‘There’s no way in a slowing economy, potentially a recessionary economy, to grow out of that.’’

I could go on with additional links to illustrate the depths of this credit crisis, but I think you get the point—the recent smoke and mirrors caused by PPT market manipulation has solved nothing. Our banking system is still insolvent and the fed is pumping money into a bottomless pit.

BOTTOM LINE: A one or two day turn around for stocks and commodities means little.

NOTHING, absolutely nothing regarding underlying fundamentals has changed from last week, except the titanic has taken on a bit more water, and the captain is desperately trying to reassure us by saying -- "it's only a small leak and lifeboats (PM's) won't be needed."

Go ahead and trust the captain -- but at your own peril...

OK, my doom and gloom is out of the way -- how about some closing funnies?

Regards and happy easter to all!

Randy

Nefarious Market Manipulation

As I wrote in my Sunday post: Tumultuous Week Ahead, the Plunge Protection Team (PPT) certainly has been busy.

Yesterday, the team bailed out/monetized Bear Stearns debts with $30 Billion of public money (and I'm sure we'll see plenty more where that came from).

Today, not to be outdone by the previous day’s activities, the nefarious market manipulators (PPT) pulled out all stops and their orchestrated manipulation operation was synched up perfectly to the FOMC announcement -- and was so extreme/blatant (across all spectrums), that I nearly fell ill from disgust.

Specific Examples of their Manipulation:

FOMC Rate announcement took place today at 2:15PM EST and the cut was 75bp.

To anyone with a working brain, the results of a significant rate cut like this should be dollar negative and gold positive (right?) Well look at the charts below—especially after the FOMC announcement

US DOLLAR INDEX CHART—Note the Dollar’s increase after 2:15 PM

SPOT GOLD—Note the fall in gold price after 2:15 PM (down > $20)



How about the DOW sell-off immediately after the 2:15 announcement (investors were disappointed with a 75bp cut—they expected 1%) and the PPT rescue, and huge rally later in the day?


S&P Chart below is nearly identical to the DOW above


We have a “free market" economy/society?

Come on, cut us a break — We may act like sheep sometimes, but we're not stupid, and your manipulation operation was obvious to anyone with a heartbeat.


I guess the NY Times was spot on with their article yesterday:


Fed Acts to Rescue Financial Markets. (Snippets below)

The New York Fed, which runs the Fed’s daily market operation and has long been the Federal Reserve’s primary channel for dealing with Wall Street...

In a potentially even bigger move, the Federal Reserve also announced its biggest commitment yet to lend money to struggling investment banks. The central bank said its new lending program would make money available to the 20 large investment banks that serve as “primary dealers” and trade Treasury securities directly with the Fed.

Much like a $200 billion loan program the Fed announced last Tuesday, this program will essentially allow the government to hold as collateral a wide variety of investments that include hard-to-sell securities backed by mortgages (My 2 cents--Worthless Toxic Waste). But Fed officials told reporters on Sunday night that the new program would have no limit on the amount of money that can be borrowed. (Did he just say “NO LIMIT”???)

“The Federal Reserve, in close consultation with the Treasury, is working to promote liquid, well-functioning financial markets, which are essential for economic growth,” he said. “These steps will provide financial institutions with greater assurance of access to funds.”

I guess the next question is: Will their incessant nefarious manipulation schemes work? Will they be able to re-instill confidence and liquid, well-functioning financial markets?

My thoughts are: They will not fix a thing, but will merely prolong the inevitable agony...

But for today, Bernanke's Prayers were answered...

Please post up your thoughts/comments on the issue.

best regards
Randy

OPEC May Drop Dollar for Euro

As I've stated previously, for over 3 decades now, U.S. Oil pricing agreements with OPEC have provided THE foundation for the US dollar's elite status in the world and oil replaced gold (after being dropped by Nixon in 1971) as the backing for the World’s Reserve Currency.

We Americans, however, were never satisfied with just having a good thing, as we wanted our cake and needed to eat it too, so we racked up enormous/un-payable debts to pay for lots of guns and butter, sold toxic securitized AAA rated garbage to our best friends, family and business partners, squandered international goodwill through inept/arrogant foreign policy, and as of late, we’ve thrown all caution and common sense into the wind and are now vigorously trying to hyperinflate our way out of this current deflationary banking/financial crisis.

Well it was great while it lasted, but the gig is nearly up.

OPEC Rattles the Dollar

The possibility that OPEC would make an active decision to price oil barrels in a currency other than the dollar has been bandied about, but never spoken of by anyone with any real power. That changed today, after OPEC Secretary-General Abdullah al-Badri was quoted in the Middle East Economic Digest, saying “maybe we can price the oil in the euro.”

The weakened dollar has eroded the purchasing power of the oil-rich nations at a time when consumers in those countries are also dealing with growing inflation risks, in part because several prominent nations, such as the UAE and Qatar, maintain currency pegs to the U.S. dollar. Inflation has been rising in those countries, but these countries have been lowering interest rates in order to keep pace with U.S. policy, even though they have very different fundamentals.

Eventually, those pegs are likely to be abandoned. “The days of the peg are numbered as these nations can’t continue to cut rates to 3% with inflation 4 times that rate,” says Ashraf Laidi, head of currency strategy at CMC Markets. “They will need to revalue the peg and change it to a basket of currencies.”

When this 1974 OPEC dollar pricing agreement is finally abandoned, the US Dollar's foundation as World Reserve will be yanked out from beneath it.

We in the U.S. better start preparing for a much lower standard of living because it's coming.

Randy

GOLD -- How High?

Well, as expected, the Fed cut rates again today and Gold took off while the dollar fell.

Bernanke cut rates on December 11th, followed it up with a emergency cut last week, and then a new one today. Holy cow! Sure seems like someone is running scared, as cuts are becomming quite a common occurrence. I even believe we may see another emergency cut before March 18th. Stay tuned...

So, with all the recent rate cuts, what's happening w/regard to our economy and what are the expected consequences for gold?

Let me try to keep this simple and find a good starting point:

If you’ve been keeping an eye on the Gold and Silver Market over the last couple of years, you’re probably well aware of the fact that precious metals (PM) are exploding in price, but (like many) maybe you don’t really understand the PM market, or recognize the reasons why we’re seeing the rapid price increases.

Well, in an attempt to help you understand what is transpiring, I’ll provide a few of the reasons for the price explosion below:

• The US Housing bubble has finally burst and is expected to get much worse
• Our financial/banking system offloaded too much toxic paper (mortgage backed securities and derivatives of such) to foreigners and investors who have been burned badly & are not happy about it.
• Banking system write-downs have been massive thus far and more will follow
• Credit markets are locked up and mortgage lending standards have tightened dramatically; the negative consequences are expected to cross over to auto loans, credit cards, etc later this year
• Fed Chairman Bernanke and the PPT team (led by Treasury Secretary Paulson—previously CEO of Goldman Sachs and a Treasury “Plant”) have panicked and have sacrificed the dollar in an attempt to bail out our financial/banking systems -- By lowering rates 125 b.p. in just 8 days, at a time when the dollar is at its weakest point in history, should be proof enough of their priorities and loyalties.
• Deflation is on the horizon and therefore the Fed will make every attempt to INFLATE (print more money and inject it into the system—continuing to devalue our currency)
• Foreign dollar holders are working to diversify their holdings—among other things, in different currencies, commodities, energy & gold
• 43 of the world’s largest stock indexes, from around the globe, have officially entered “Bear” Territory in early 2008
• There is wide-scale pressure afloat to price oil in currencies other than the depreciating US Dollar
• OPEC nations are seriously discussing the need to de-peg their currencies from the dollar, as inflation internal to their domestic economies has been raging out of control
• Investors are fleeing volatile markets and are seeking security in gold

Now, I'm not saying that we won’t encounter a volatile ride w/gold, as we will most likely experience wide swings in the future--some up and some down (maybe even a down-swing back into the low $800's in the not so distant future), but overall I believe the mid-to-long term trend is Up, Up, Up!

Ok, if the long-term trend is up, just how high can the gold price go?

Well, based on the 1980 high of ~ $850, today's > $920 price is a new "nominal" dollar denominated high, but if you were to adjust for government published inflation figures, gold would need to be > $2,200oz to equate to the $850oz, 1980 price.

Additionally, as I've told you before, our governments published inflation stats have been understated for many years, and if the true rate of inflation were to be used in the calculation process (using the same metrics from the early 80’s – metrics that have changed dramatically since--to severely understate inflation), Gold would need to be priced ~ $5,000oz to equate the $850 purchasing power of 1980.

Looked at another way: Gold was $35 oz back in 1971 and soared to ~ $850 in 1980 ($850/35=24.2)—so it increased in price by a factor of 24. Now, if we were to select the bottom of the last Gold bear market in 2001 and multiply $250oz by the same factor of 24, the potential upside target of $6,000oz is not unrealistic—if the same stag-flationary environment were to return (which many predict will happen).

With all that now said, I believe the fundamentals of today's economy are much worse than those in the 70's, as back in the day we were a net exporting country, had a strong manufacturing base, had a positive national savings rate, and very little debt. Today foreigners are holding > $4.4 Trillion of our dollars, we have a $9+ Trillion dollar debt load, are running extensive trade deficits ever year, and have > $60 Trillion in un-funded future obligations.

Bottom line: I feel this Gold bull market is still in its early stages. When gold finally breaks the $1,200 mark, common investors will most likely wake up and the gold market will be flooded with new dollars. Eventually, the gold market will become a bubble itself and when that happens, it may be time to cash out.

Hold on to your hat because it's going to be a very interesting and wild ride…

Regards

Randy

Financial Wizard Manipulation

I have to give some credit to our Global Financial/Wall-Street Wizards. Today’s engineered price drop in commodities (Oil, Gold, Silver, etc) was pretty impressive, and the fact that it was executed on a thin trading holiday (Veterans Day) was no mere coincidence, as it provided them with a tremendous amount of leverage.

Don’t be alarmed though. This sell off, engineered by Central Banks to strengthen the dollar vs. nearly every currency except the Yen, is temporary in nature, and was done to (1) take some trade pressure off countries with strengthening currencies (2) restore some confidence back into the dollar, (3) reduce the nearly vertical ascent in gold/oil prices and (4) bring some green signals back into the ailing US equities market... They absolutely had to do this, because FASB 157 is to take effect on Thursday, Nov. 15. These new FASB provisions will make it much harder for banks to avoid “mark-to-market” pricing on their level-3 (off balance) securities, triggering much larger financial write-offs and potentially exploding into a new financial panic…

From Barrons: “ RBC Capital Markets interest-rate strategist T.J. Marta says that additional write-downs are coming and adds the U.S. banking sector is "embarking on its third major crisis since the 1920s." He adds: "Not only have the 'go-go' days of structured products come to an inglorious end -- at least temporarily -- but vast swaths of the financial system lie in ruins,"

The Financial Wizards understand that this is coming and they absolutely have to try to shore up investor confidence in the U.S. system beforehand… Today was a compelling, yet futile attempt at their manipulative ways.

So how did they engineer this?

As you all know by now, the Dollar has been bleeding badly and has been setting new record lows against almost every currency daily—except for the Yen. The Japanese for years have been trying to keep their currency artificially low to (1) enhance trade and (2) supply the global system with an endless spigot of cheap money. The Yen Carry Trade has evolved (Yen borrowed at .5% and leveraged at high multiples to invest in other areas) and has provided nearly free money for all who wish to blow big beautiful bubbles.

As previously stated, the Yen was practically the only currency NOT strengthening in direct relationship to the falling dollar. Therefore, in order to strengthen the dollar against the currencies it was falling against, make the Yen stronger… Voila! The dollar strengthens… Additionally, this Yen-Dollar manipulation was being rigged while concurrently having OPEC work to bring down Oil Prices.

With regard to the Dollar, just look at what Central Banks are up against (Bloomberg snippets below)

Nov. 12 (Bloomberg) – “Central banks from Bogota to Mumbai are imposing foreign-exchange curbs to take control of their soaring currencies from traders dumping the dollar.”

``Central banks are struggling to find new ways to intervene against their currencies and some of the proposals simply can't work,'' said Mirza Baig, an analyst in Singapore at Deutsche Bank AG, the world's biggest currency trader. Some plans are ``truly bizarre,'' he wrote in a report.”

`More Violent Correction'” An index tracking the dollar against seven major trading partners dropped to 71.11 on Nov. 2, the lowest ever, a week after the Fed reduced its target rate for overnight loans between banks by a quarter-percentage point to an 18-month low of 4.5 percent.””

Stephen Jen, head of currency research at Morgan Stanley in London, said on Nov. 2 that the dollar's slide threatens to turn into a ``more violent correction'' that may require joint intervention by the U.S., European Union and Japan. The dollar will trade at $1.51 per euro by year-end, Jen said on Nov. 8.”`

`The weaker dollar causes central banks to look at foreign inflows differently,'' Robert Fullem, vice president of U.S. corporate-currency sales at Bank of Tokyo-Mitsubishi UFJ Ltd. in New York. ``The market is pushing the central banks into corners. I don't have faith in them. They may have to push the envelope further.''

So, where do we go from here?

I wouldn’t put much faith in the Financial Wizards, as they are putting a band-aid on a gaping wound where a tourniquet is required. Sure, they can help to slow the bleeding, but with over 400 billion in toxic waste to be written down soon, bleeding to death will be the final outcome.

Bottom line: don’t worry about the noise generated by our Financial Wizards today. Over the mid-long term, this will be regarded as merely a blip... The dollar, financials and many equities are going much, much lower while real assets (Gold, Silver, Oil, etc) are going much, much higher.


For all our soldiers who are still in harm’s way today, let us give thanks and say a prayer for their safe return.

Best regards and Happy Veteran’s Day to all!