Monday Monetary Meltdown – Chart Art

Last Friday, Geithner’s message was “Do as I say, not as I do.”

This weekend, Timmy took a big doo doo on the rest of the World as he pressed fellow Finance Ministers into (in theory)setting mechanisms to address trade balances (which means export countries need to strengthen their currencies against the dollar) while importing countries (like US) should not try to manipulate their own currency.  Well, that sounds reasonable EXCEPT, before the ink is even dry on the G20 release, Timmy flies off to China to get them to commit to revalue the Yuan, which is pegged to the Dollar and effectively DE-values the dollar in an entirely manipulative manner.

No, WE didn’t manipulate the Dollar, China did.  We only told them to manipulate their currency which is tied to the dollar, so it’s not the same thing at all as us manipulating the dollar and —- oh my God Tim, how can you sleep at night???

So good morning, America, how are ya?  I’ll tell you how you are, you are 1% poorer than you were on Friday as the Yen rises to 80 to the Dollar and the Euro rises to $1.41 and the Pound hits $1.58.  That drive oil back over $82.50 and gold back to $1,350 and copper hit $3.89, up from $3.75 on Friday – that’s 3.5% inflation of a basic material OVER THE WEEKEND!  That annualizes out to about 1,000% but let’s be fair and say this only happens on weekends and call it 52 x 3.5% for 182% – hyperinflation accomplished!  Of course, we don’t need 182% increases in commodities to achieve hyperinflation, hyperinflation is anything over 26% and our Dollar is down 15% since May and that’s 5 months so we’re heading for 36% over 12 months already.

I’ve been invited to attend the Economists’ Buttonwood Gathering in New York today where the agenda will be discussing the State’s Fiscal Crises led by Robert Rubin and Josh Bolten over lunch followed by BOE Governor Mervyn King’s speech on “International Reform in the Financial Sector” and then my favorite bond pimp, Mohamed El-Erian will be speaking about “Sovereign Risk and the Banks” followed after market hours by Vikram Pandit (Citigroup’s CEO) and then Nassim Taleb (Black Swan) after which there’d better be drinks!

I usually can’t be bothered with these things but this conference is likely to move the markets and I should, in theory, be able to chat with our Members…

 

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Screwflation Nation – Ben and Tim are at it Again!

Strong dollar?  Hahahahahahahahahahahaha….

That is was the answer to a question I had this summer when I met with an unnamed Treasury official whose name might rhyme with Jimothy.  The unnamed official nearly fell off his chair laughing when I said “So, does the US still have a strong dollar policy?”  It was meant as a joke.  I was sitting at Treasury with Yves Smith, John Lounsbury and a couple of other writers on Aug 16th, with the dollar at 82.5, down from 88.7 in May.  I mentioned in my Aug 17th post that, based on my meeting at Treasury: “we’re certainly not going to be expecting a “strong dollar” policy.”  At the time, I summed up the meeting for Members saying:

I would say that Geithner’s view of the economy is about the same as John Cleese’s view of the dead parrot: “This bird wouldn’t go “voom” if you put a million volts through it!“  I agree, Krugman agrees, the Dallas Fed agrees, Bernanke agrees – this is a $15Tn, 300M person economy that is at a virtual standstill.

Unnamed Official makes the very good argument that we are like a business with debt but good cash flow and Global lenders are currently lining up to give us more cash (low TBill rates, low corporate borrowing cost, strong demand for bank capital raises). Why don’t we do what a normal business does and borrow money to expand?

Why indeed?  And that is just what has been happening as the dollar has dropped another 7.8% in the 66 days since that meeting as we borrow our assets off while the Fed keeps things looking good buy sucking up whatever junk the Treasury decides to print.  Kudos to Doug Kass for taking my “Inflation Nation” concept to the next level and coining the very apt phrase “Screwflation,” which he explains:

Screwflation, like its first cousin stagflation, is an expression of a period of slow and uneven economic growth, but, its potential inflationary consequences have an outsized impact on a specific group. The emergence of screwflation hurts just the group that you want to protect — namely, the middle class, a segment of the population that has already spent a decade experiencing an erosion in disposable income and a painful period (at least over the past several years) of lower stock and home prices. Importantly, quantitative easing is designed to lower real interest rates and, at the same time, raise inflation. A…

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Testy Tuesday – 7.5% or Bust!

Wheee, this is fun!

Will our 7.5% lines hold? As I mentioned yesterday, we expected a test of our 7.5% lines at  Dow 10,950, S&P 1,160, Nasdaq 2,400, NYSE 7,450 and Russell 690 and we remain TECHNICALLY bullish if we hold them.  The Dollar was doing well until about 3am this morning but then turned down sharply – some sort of rumor is driving the market and, of course, heading into the G20 pretty much any comment made by any Central Banking official is blown way out of proportion.

China is likely to raise rates today, making a small concession to the US on their exchange rates but more so to cool off the massive property bubble that is forming in their cities.  That may put some downward pressure on commodities without strengthening the dollar – an interesting combo, but one that illustrates how China is becoming more important in the Global marketplace than the US.

If China is raising their lending rate to 5.56% and their deposit rate to 2.5%, they risk attracting even more money, including a reverse carry-trade from the US, when money can be borrowed from the Fed at 0.25% and lent to China for 2.5% giving the trader a 2.25% profit for the year.  2.25% may not sound that sexy, but when it’s done by Investment Banks and other investors who can lever their money 10:1, that’s a 22.5% on their cash.  This is how Japan has supported their economy for two decades but it’s hard to imagine what will happen if the US Dollar, which makes up 62% of all money on the planet, starts flowing out of the country in even faster quantities.

We were just discussing investing in foreign countries in Member chat and I warned that this may not be the best time to make that kind of move as the dollar is very possibly bottoming here and transferring US Dollars to another currency risks hitting a reversal that wipes out any interest gains and possibly even some the principal as the Dollar rebounds and you find yourself in the wrong currency at the wrong time.

I guess I should talk about AAPL although we’ve already discussed it in depth in Member Chat but they do seem to have had some kind of earnings and, although very nice – expectations were already a bit high so they seem to be pulling back…

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Which Way Wednesday – Top of the Charts Edition

Is it time to throw fundamentals out the window?

As we went through the Sept 21st Fed minutes in yesterday’s Member chat we read some things that were AWFUL about the economy.  I went through my usual exercise of parsing out the minutes and making comments for Members and it’s been a long time since I had to use red highlights that often!  Still the market rallied, ostensibly on the premise that the economy is SO BAD, that the Fed will have no choice but to flood the economy with newly printed Dollars so that a rising tide of currency will lift all asset ships.

The boy from Zimbabwe  on the right is a multi-Trillionaire and those Trillions should be just enough to buy him a loaf of bread if he hurries to the store before they change the prices this morning.  This is what is happening to our own economy, only on a smaller scale (so far).  Our government,  like Zimbabwe, has gotten into so much debt that they can never hope to repay it but new bills keep coming in every day so – What is a government to do?

Why print more money of course!

Now, when a bill comes in, they just crank up the presses and drop the fresh bills in an envelope.  Unfortunately, after a while, the people who provide goods and services you and your government pay for begin to catch on that those bills are suddenly very easy to come by and they begin to demand more and more of them as exchange.  It’s a little hard to picture unless you run it into the abstract but think of it like an auction, where 5 people have $5 each to bid on 5 items.  Well those items (commodities) will get somewhere between $0 and $5 from the bidders, right?  Now, what happens if one of the bidders prints himself up $45 additional dollars?  Now he can bid $10 on each item and the other bidders will get nothing.

That’s what the top 1% are doing with commodities and other assets right now.  The assets are the same assets they were last year and the year before that.  There has been very little variation between supply and demand and demand has probably gone down a bit during the recession but that doesn’t matter as 1% of the people have MUCH more money than the other 99% and they…

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Meaningless Monday – Rethinking That Round Earth Idea

What if the World is flat?

It sure looks flat.  You have to go to space to see that it’s round, even in an airplane it looks pretty flat, doesn’t it?  Well, fiat currencies are like that too.   We talk about Quantitative Easing as if the World is flat because Americans (who are trained to be self-centered to the point of Xenophobia from birth) don’t think of their connections to other counties on this planet.  To understand the American investor is to look at this map and understand that it is not a joke…

So investors in the US discuss Quantitative Easing as if we can simply devalue the dollar and every other country on Earth has no choice but to bend over and accept our worthless currency because they are lucky we even bother to trade with them.  To most American’s, it’s still 1950 and we just won the war and Europe better kiss our ass and the rest of the World better fear us or they’re NEXT.  That pretty much sums up our next 50 years of diplomacy, doesn’t it?

That is the mindset that now permeates investors attitudes towards our currency which is, in fact, the World’s Reserve Currency.  What does it mean to be the World’s Reserve Currency?  Well, nothing more than the fact that it is held in significant quantities by governments and institutions as part of their exchange reserves.  That is what our government and the Fed are now taking advantage of by printing Trillions of additional dollars and devaluing our currency, which is currently 62% of the World’s reserve holdings, although that is down from 71% in 1999 and 64% in 2008.

That’s the problem the rest of the World faces as we race to devalue our own currency – they simply can’t replace it fast enough to stop us.  The only real alternative to the dollar is the Euro, which makes up 27.3% of the World’s reserves, next is the Pound at 4.3%, followed by the Yen at 3%.  Let’s say, for argument’s sake, there is an even $100Tn in the World.  That means $62.2Tn of it is the US Dollar and $3Tn is the Japanese Yen.  No matter how irresponsible you think the US is being with it’s currency – you simply can’t buy enough Yen to replace them.  There are only $27.3Tn in Euros (and they don’t look like a good bet, do they?)…

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Food Stamp Friday – Newt Shows America His True Colors

I try to keep politics out of the weekly posts but screw that!

That disgusting, vile, son-of-a-bitch (just my opinion, we report – you decide!) Newt Gingrich is on a 12-city pre-election tourwhere he is advising Republican candidates to frame the choice for voters between Democrats as “the party of food stamps” while selling the GOP as “the party of paychecks.”

With a truly shocking 42M Americans in such dire straits that they need food stamps to make ends meet (and our study of the shopping habits of the poor last weekclearly illustrated that this aid is the only way they can eat as they shop the same day the checks come every month), Gingrich this week distributed a memo to Republican hopefuls saying they should use the final month to stress tax and spending cuts as a way to spur job growth while attacking Democratic policies as detrimental that effort.

“It’s perfectly fair to say they are earning the title of the party of food stamps,” he said. “By contrast, we have historically since Ronald Reagan of 1980 been the party of job creation.”

The party of job creation???  Ha!  Ha, ha, ha, ha, ha, ha – ha!  Ha, ha, ha.  Ha!  OK, I think I’m done now.  Ha!  OK, now I can go on (but I’m still giggling).  I will sum up the very cogent point I made to Members early this morning by simply saying: Is this out of touch elitist wealth-sucking windbag totally insane or just a big, fat liar?  Let’s look at a chart:

What?  Don’t like this one?   Do you think it’s unfair to keep picking on poor W?  I hear this all the time, Obama’s been in office 21 months, he needs to OWN this recession now and we need to stop looking at the idiot who caused it and pretend it was all Obama’s fault since he took office in the month that job losses maxed out at 850,000.

As logical as that line of reasoning may be, I do like to try to keep a historical perspective on things.  We republished a full set of charts that illustrate my points from Member Chat over at Seeking Alpha, so you can view them here, but let me share just two that I find relevant.  For the first chart, let’s take a look at ALL the post-Depression Presidents, including the great and powerful Ronald Reagan, and see how they…

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Weak Dollar Wednesday – 82 Yen to the Dollar!

That’s right kids, you now only need 82 Yen to buy a US Dollar!

That’s down from 125 Yen in 2007 and down 15% since May alone.  That means that, even if your $300,000 home kept 80% of it’s value during the last 3 years, it still dropped from 37.5M Yen to 19.7M Yen, almost 50% less – and the Japanese STILL don’t want to buy our real estate!  Maybe it’s because we totally burned them on that in the ’80s and, unlike American investors, they have learned their lesson.

The S&P priced in Yen looks similar to this chart of the S&P priced in gold – a very sad downtrend that is unlikely to be broken and, even if it is – so what?  Are we so easily fooled that we actually believe that, just because it takes more of our hard-earned dollars to buy a stock, that the market is recovering?  Surely we have a better grasp of finance than that, don’t we?  It’s like me giving my daughters Monopoly money for an allowance and selling them various household fixtures.  I can tell them they earned $10,000 and that they bought the living room sofa for $10,000 so they can pretend they have an asset but the whole thing kind of falls apart if they try to sell the sofa at a garage sale or if they try to take their fake $10,000 and buy something outside the house.

That’s what the US economy is like right now – it’s all well and good as long as we’re all willing to “extend and pretend” but, whatever you do - do not attempt to leave the boundaries of the game.  Banks are looking mighty fine with Bank Bonds back at the best levels since before the EU bailout -  even though derivatives (remember those?) are now at an all-time high.  All of the banks are doing it so what’s the harm if we do it too?  Just like all the Central Banks are devaluing their currency – ours just happens to be the best at it and that makes our market LOOK strong at the moment – kudos to Ben!

Not only have I been advocating a cash-out into this nonsense rally but we actually went with UUP at $22.50 yesterday in Member Chat as I simply don’t think the dollar can lose that much more ground.

If I’m right, then our cash…