The Greenback Blues: Something's Gotta Give
By Mike Whitney
19/08/08 "ICH" --- - In a matter of weeks, the euro has been pounded into ground-chuck while the dollar has regained much of its former glory. What gives? The mighty greenback has surged 6% in the last month alone. Apparently, the early reports of the dollar's demise have been greatly exaggerated. The euro is caught in the same recessionary downdraft that is buffeting a number of currencies, all of which are unwinding at the same time although unevenly. Currency markets don't move in straight lines. But, don't be fooled, most paper money is steadily losing value due to the wild expansion of credit which started at the Federal Reserve. Investors are moving to cash and hunkering down. Who can blame them? As the massive equity bubble loses gas, balance sheets will have to be mended and lending will slow to a crawl. At present, Germany's slowdown and Spain's housing crash are drawing most of the attention but, just wait, the spotlight is shifting fast. Next week it could be shining down on the America's failing banking system or poor corporate-earnings reports in the US. Then it will be the dollar marching off to the gallows.
Europe's troubles have put to rest to idea that other countries can "decouple" from the US and thrive without help from the US consumer. That might be true in the long-term, but falling demand is already visible everywhere. Retail and auto sales are really taking a thumping and 2009 is shaping up to be even tougher. It's looking more and more like the Europeon Central Bank was faked-out by the early signs of inflation and missed the deflationary sledgehammer that was about to come crashing down. It was a rookie error by European Central Bank (ECB) chief Jean Claude Trichet and it should cost him his job. Raising interest rates while sliding into the jaws of recession is madness. Now all of Europe is headed for a hard landing and there's no way to soften the blow. The ECB doesn't have the same tools as the Fed; Trichet can't simply backstop the whole system with green paper and T-Bills like Bernanke. He can either slash rates or take a bleacher-seat and hope for the best.
The UK Telegraph's Ambrose Evans-Pritchard, sums up Europe's woes in last week's article "ECB Slammed as Europe Crumbles":
"The economies of Germany, France and Italy all contracted in the first quarter and may now be in full recession, shattering assumptions that Europe would prove able to shrug off the effects of the credit crunch....The picture is darkening so fast in Spain that Prime Minister Jose Luis Zapatero canceled holidays and called his cabinet back to Madrid yesterday for the first emergency session of its kind since the Franco dictatorship.
Growth has turned negative in Ireland, Denmark, Latvia, and Estonia, while grinding to a halt in Sweden and The Netherlands. Iceland contracted by a staggering 3.7pc. The grim data from Eurostat follows a recession warning in Britain, and shock news that the Japanese economy had shrunk 0.6pc in the second quarter. Almost the entire bloc of rich Organization for Economic Co-operation and Development (OECD) countries - still two thirds of the world economy - are now in the grip of a major downturn."
Evans-Pritchard's article reads like a chapter from the Book of Revelation all that's missing is the plague of locusts. The ECB is in a pickle and will have to allow the economy to cool off so the credit excesses can work themselves out. It's like a pig passing through the belly of the boa; it takes time.
As a result, deficits are likely to soar in the south (particularly Spain, Greece and Italy) while growth in the industrial north, Germany, will continue to shrink. Spain, Ireland and England are undergoing the biggest housing meltdown in history having fallen prey to the same Greenspan-inspired hanky-panky we've seen in the US. Hundreds of billions of dollars of low interest loans that were issued to unqualified mortgage applicants has clogged up the system. Now the bill has come due and the losses have to be written off. Expect more blood to come.
The problem is so big that the future of the EU and the euro are now very much in doubt. Currency traders are expecting the ECB to lower rates (and weaken the euro) just as the future's market is wagering that the Fed will raise rates to fight inflation. But don't bet on it. Interest rates are going down not up, regardless of the Fed's well-orchestrated PR campaign. Bernanke is just waiting for Trichet to make his move before he produces the Fed-scimitar and begins slashing rates. Don't forget, the Federal Reserve is essentially the board of directors for the nations banking system. If Bernanke is forced to choose between the people who depend on the dollar as a reliable store of value or bailing out the high-stakes gamblers who run the banks; the Fed chief will choose the banks 100 per cent of the time. In Vegas, that's called a "sure thing".
The perception that the dollar is getting stronger is an illusion. Deflation is "dollar positive" because investors who flee from toxic assets naturally move into cash. But that doesn't mean they have faith in the dollar; far from it. The fundamentals for the greenback get worse by the day. Fiscal and trade deficits are out of control, the national debt is tipping $10 trillion, foreign investment is drying up, and confidence in US leadership has never been lower. The dollar is on a time-line of roughly 6 to 18 months before it's rolled into spools and sold as toilet paper. Paper currency is a country's IOU; and foreign central banks are wary of taking checks from a country that no longer wins wars or has the capacity to pay off its debts. That's why, for the first time, there's serious talk about the US losing its triple A rating on government debt; and it could happen sooner than anyone thinks. Every time the Fed uses the dollar to prop up the faltering banking system or provide limitless capital for defunct GSEs like Fannie Mae and Freddie Mac; the dollar comes under greater pressure. At a certain point the dollar will crumble and the country will have to sell off its assets and industries to pay the bills. That's when the private equity vultures and Sovereign Wealth Funds will swoop down and scavenge anything of value for pennies on the dollar.
As the US housing market continues to collapse, trillions of dollars in equity and credit are disappearing in a deflationary bonfire. When a $400,000 home--with no down payment and negative equity--goes into foreclosure; $400,000 vanishes from the digital-pool of credit and has to be written down as a loss. So far, much of the losses have not yet been accounted for because the banks are using their own internal models for determining the downgraded value of their mortgage-backed assets. Two weeks ago, Merrill Lynch sold $30 billion of Mortgage-backed junk for 20 cents on the dollar. But they also financed the deal, so they really only received 5 cents on the dollar. This reflects the true "market value" of these assets. Naturally, Merrill's sale sent tremors through Wall Street where banks and other financial institutions are sitting on trillions of dollars of this garbage marking it down at a few percentage points every reporting period rather than doing what Merrill did and putting it all behind them. As a result, the banks have less capital to lend, which means economic activity will slow and the country will go into a deep recession. The point is, that the Federal Reserve now holds about $400 billion of this junk-paper on their balance sheets and the US Treasury is planning to take hundreds of billions more (perhaps as mush as $800 billion more under the new legislation!) to prop up Fannie Mae and Freddie Mac. The Bush administration is using the US taxpayer and the credibility of the dollar as collateral in its plan to bail out the most reckless, high-stakes Wall Street gamblers and their multi-trillion dollar ponzi scheme that has blown up in their face.
So, how does this affect the dollar?
The nation's debts are entirely balanced atop its currency. The greenback is like a circus strongman holding a barbell precariously over his head; as the weigh increases, the sweat begins to appear on his brow and the veins begin to bulge in his neck and forehead. Finally, the knees buckle and the and the over-matched weightlifter crashes to the canvas in a heap. That's the future of the dollar in a nutshell. Its just a matter of time.
But how does that explain the sudden fall in gold prices; after all, gold is the logical alternative to paper money, right?
Wrong. Gold is "real money" alright, but it's also a commodity. And when commodities are smashed by a deflationary tidal wave--as they have been the last few weeks-- gold will follow them into the basement. In truth, gold has taken an even worse pasting than the euro; free-falling from $980 per ounce in mid-July to $786 at Friday's market close. $194 in a month. Goldbugs are so fanatically committed to their views about "real currency" and "fiat money", that any correction in the market is seen as proof of government manipulation. (Even though they are right many times) There's plenty of evidence of meddling in the currency markets, just as one would expect. After all, the western banking system, led by the Fed, operates as a cartel. The head honchos are about as committed to free markets as Bush is to democracy, which isn't saying much. It's all a public relations ruse that's used to defend a de facto monopoly; the paper money scam. So, we shouldn't be surprised when foreign central banks unexplainably purchase $28 billion of US government securities at the 11th hour (as they did last month) to conceal our trade imbalance and prop up the waning dollar. Don't forget, it's their chestnuts they're keeping out of the fire, too. But, that doesn't mean the Fed has super powers or that every time gold goes into a tailspin its because the black helicopters fired invisible lasers into the currency markets. When the economy is in the grips of deflation; all asset-classes get dragged down, gold included. Many of the hedge funds and other big market players are selling their gold positions recognizing that the commodities boom is over and it's time to move on. That doesn't mean that gold won't rebound sharply when Bernanke slashes rates or if Bush blows up some new part of the globe. It simply means that in the short term, "cash is king". Pension funds and hedge funds will continue to deleverage to reduce their credit exposure to put themselves in a better position to roll over their debt. That means that gold's slide could last a while. This doesn't look like a conspiracy to me, but I intend to keep my tin-foil hat firmly strapped-on just in case.
No one knows where the bottom is for gold, but one thing is certain; it's future prospects are a lot brighter than the dollar's. The Bush administration has yet to demonstrate that it can enforce Dollar Hegemony via military intervention. That is a very big deal. If the dollar isn't backed by (stolen) Iraqi oil, then the $6 trillion stockpile of dollars and dollar-denominated assets that are languishing in foreign central banks and funds, will continue to dwindle until the dollar's position as "reserve currency" comes to an end.
That's one doomsday scenario, but there is another. If Bernanke and Paulson continue to pile all of the nation's credit problems on top of the greenback; foreign capital will head for the exits and the dollar will crash. Either way, the troubles are mounting and something's got to give.http://www.informationclearinghouse.info/article20547.htm
Jim Rogers Predicts Bigger Financial Shocks Loom
Fueling a Malaise That May Last for Years
By Keith Fitz-Gerald
19/08/08 " Money Morning/The Money Map Report" --- - VANCOUVER, B.C. Ė The U.S. financial crisis has cut so deep Ė and the government has taken on so much debt in misguided attempts to bail out such companies as Fannie Mae (FNM) and Freddie Mac (FRE) Ė that even larger financial shocks are still to come, global investing guru Jim Rogers said in an exclusive interview with Money Morning.
Indeed, the U.S. financial debacle is now so ingrained Ė and a so-called ďSuper CrashĒ so likely Ė that most Americans alive today wonít be around by the time the last of this credit-market mess is finally cleared away Ė if it ever is, Rogers said.
The end of this crisis ďis a long way away,Ē Rogers said. ďIn fact, it may not be in our lifetimes.Ē
During a 40-minute interview during a wealth-management conference in this West Coast Canadian city last month, Rogers also said that:
* U.S. Federal Reserve Chairman Ben S. Bernanke should ďresignĒ for the bailout deals heís handed out as heís tried to battle this credit crisis.
* That the U.S. national debt Ė the roughly $5 trillion held by the publicĖ essentially doubled in the course of a single weekend because of the Fed-led credit crisis bailout deals.
* That U.S. consumers and investors can expect much-higher interest rates Ė noting that if the Fed doesnít raise borrowing costs, market forces will make that happen.
* And that the average American has no idea just how bad this financial crisis is going to get.
ďThe next shock is going to be bigger and bigger, still,Ē Rogers said. ďThe shocks keep getting bigger because we keep propping things up Ö [and] bailing everyone out.Ē
Rogers first made a name for himself with The Quantum Fund, a hedge fund thatís often described as the first real global investment fund, which he and partner George Soros founded in 1970. Over the next decade, Quantum gained 4,200%, while the Standard & Poorís 500 Index climbed about 50%.
It was after Rogers "retired" in 1980 that the investing masses got to see him in action. Rogers traveled the world (several times), and penned such bestsellers as "Investment Biker" and the recently released "A Bull in China." And he made some historic market calls: Rogers predicted Chinaís meteoric growth a good decade before it became apparent and he subsequently foretold of the powerful updraft in global commodities prices thatís fueled a year-long bull market in the agriculture, energy and mining sectors.
Rogersí candor has made him a popular figure with individual investors, meaning his pronouncements are always closely watched. Here are some of the highlights from the exclusive interview we had with the author and investor, who now makes his home in Singapore:
Keith Fitz-Gerald (Q): Looks like the financial train wreck we talked about earlier this year is happening.
Jim Rogers: There was a train wreck, yes. Two or three Ė more than one, as you know. [U.S. Federal Reserve Chairman Ben S.] Bernanke and his boys both came to the rescue. Which is going to cover things up for a while. And then I donít know how long the rally will last and then weíll be off to the races again. Whether the rally lasts six days or six weeks, I donít know. I wish I did know that sort of thing, but I never do.
(Q):What would Chairman Bernanke have to do to ďget it right?Ē
(Q): Is there anything else that you think he could do that would be correct other than let these things fail?
Rogers: Well, at this stage, it doesnít seem like he can do it. He could raise interest rates Ė which he should do, anyway. Somebody should. The marketís going to do it whether he does it or not, eventually.
The problem is that heís got all that garbage on his balance sheet now. He has $400 billion of questionable assets owing to the feds on his balance sheet. I mean, he could try to reverse that. He could raise interest rates. Yeah, thatís what he could do. That would help. It would cause a shock to the system, but if we donít have the shock now, the shockís going to be much worse later on. Every shock, so far, has been worse than the last shock. Bear-Stearns [now part of JP Morgan Chase & Co. (JPM)] was one thing and then itís Fannie Mae (FNM), you know, and now Freddie Mac (FRE).
The next shockís going to be even bigger still. So the shocks keep getting bigger because we kept propping things up and this has been going on at least since Long-Term Capital Management. Theyíve been bailing everyone out and [former Fed Chairman Alan] Greenspan took interest rates down and then he took them down again after the ďdot-com bubbleĒ shock, so I guess Bernanke could try to start reversing some of this stuff.
But he has to not just reverse it Ė heíd have to increase interest rates a lot to make up for it and thatís not going to solve the problem either, because the basic problems are that Americaís got a horrible tax system, itís got litigation right, left, and center, itís got horrible education system, you know, and itís got many, many, many [other] problems that are going to take a while to resolve. If he did at least turn things around Ė turn some of these policies around Ė we would have a sharp drop, but at least it would clean out some of the excesses and the system could turn around and start doing better.
But this is academic Ė heís not going to do it. But again the best thing for him would be to abolish the Federal Reserve and resign. Thatíll be the best solution. Is he going to do that? No, of course not. He still thinks he knows what heís doing.
(Q): Earlier this year, when we talked in Singapore, you made the observation that the average American still doesnít know anythingís wrong Ė that anythingís happening. Is that still the case?
(Q): What would you tell the ďAverage JoeĒ in no-nonsense terms?
Rogers: I would say that for the last 200 years, Americaís elected politicians and scoundrels have built up $5 trillion in debt. In the last few weekends, some un-elected officials added another $5 trillion to Americaís national debt.
Suddenly weíre on the hook for another $5 trillion. There have been attempts to explain this to the public, about whatís happening with the debt, and with the fact that Americaís situation is deteriorating in the world.
I donít know why it doesnít sink in. People have other things on their minds, or donít want to be bothered. Too complicated, or whatever.
Iím sure when the [British Empire] declined there were many people who rang the bell and said: ďGuys, weíre making too many mistakes here in the U.K.Ē And nobody listened until it was too late.
When Spain was in decline, when Rome was in decline, Iím sure there were people who noticed that things were going wrong.
(Q): Many experts donít agree with Ė at the very least donít understand Ė the Fedís current strategies. How can our leaders think theyíre making the right choices? What do you think?
Rogers: Bernanke is a very-narrow-gauged guy. Heís spent his whole intellectual career studying the printing of money and we have now given him the keys to the printing presses. All he knows how to do is run them.
Bernanke was [on the record as saying] that there is no problem with housing in America. Thereís no problem in housing finance. I mean this was like in 2006 or 2005.
Rogers: He is the Federal Reserve and the Federal Reserve more than anybody is supposed to be regulating these [financial institutions], so they should have the inside scoop, if nothing else.
(Q): Thatís problematic.
Rogers: Itís mind-boggling. Hereís a man who doesnít understand the market, who doesnít understand economics Ė basic economics. His intellectual careerís been spent on the narrow-gauge study of printing money. Thatís all he knows.
Yes, heís got a PhD, which says economics on it, but economics can be one of 200 different narrow fields. And his is printing money, which heís good at, we know. Weíve learned that heís ready, willing and able to step in and bail out everybody.
Thereís this worry [whenever you have a major financial institution that looks ready to fail] that, ďOh my God, weíre going to go down, and if we go down, the whole system goes down.Ē
This is nothing new. Whole systems have been taken down before. Weíve had it happen plenty of times.
(Q): History is littered with failed financial institutions.
Rogers: I know. Itís not as though this is the first time itís ever happened. But since [Chairman Bernankeís] whole career is about printing money and studying the Depression, he says: ďOkay, got to print some more money. Got to save the day.Ē And, of course, thatís when he gets himself in deeper, because the first time you print it, you prop up Institution X, [but] then you got to worry about institution Y and Z.
(Q): And now weíve got a dangerous precedent.
Rogers: Thatís exactly right. And when the next guy calls him up, heís going to bail him out, too.
(Q): What do you think [former Fed Chairman] Paul Volcker thinks about all this?
Rogers: Well, Volcker has said itís certainly beyond the scope of central banking, as he understands central banking.
(Q): Thatís pretty darn clear.
Rogers: Volckerís been very clear Ė very clear to me, anyway Ė about what he thinks of it, and Volcker was the last decent American central banker. Weíve had couple in our history: Volcker and William McChesney Martin were two.
You know, McChesney Martin was the guy who said the job of a good central banker was to take away the punchbowl when the party starts getting good. Now [the Fed] Ė when the party starts getting out of control Ė pours more moonshine in. McChesney Martin would always pull the bowl away when people started getting a little giggly. Now the partyís out of control.
(Q): This could be the end of the Federal Reserve, which we talked about in Singapore. This would be the third failure Ė correct?
Rogers: Yes. We had two central banks that disappeared for whatever reason. This oneís going to disappear, too, I say.
(Q): Throughout your career youíve had a much-fabled ability to spot unique points in history Ė inflection points, if you will. Points when, as you put it, somebody puts money in the corner at which you then simply pick up.
Rogers: Thatís the way to invest, as far as Iím concerned.
(Q): So conceivably, history would show that the highest returns go to those who invest when thereís blood in the streets, even if itís their own.
(Q): Is there a point in time or something youíre looking for that will signal that the U.S. economy has reached the inflection point in this crisis?
Rogers: Well, yeah, but itís a long way away. In fact, it may not be in our lifetimes. Of course I covered my shorts Ė my financial shorts. Not all of them, but most of them last week.
So, if youíre talking about a temporary inflection point, we may have hit it.
If you look back at previous countries that have declined, you almost always see exchange controls Ė all sorts of controls Ė before failure. America is already doing some of that. America, for example, wouldnít let the Chinese buy the oil company, wouldnít let the [Dubai firm] buy the ports, et cetera.
But Iím really talking about full-fledged, all-out exchange controls. That would certainly be a sign, but usually exchange controls are not the end of the story. Historically, theyíre somewhere during the decline. Then the politicians bring in exchange controls and then things get worse from there before they bottom.
Before World War II, Japanís yen was two to the dollar. After they lost the war, the yen was 500 to the dollar. Thatís a collapse. That was also a bottom.
These are not predictions for the U.S., but Iím just saying that things have to usually get pretty, pretty, pretty, pretty bad.
It was similar in the United Kingdom. In 1918, the U.K. was the richest, most powerful country in the world. It had just won the First World War, et cetera. By 1939, it had exchange controls and this is in just one generation. And strict exchange controls. They in fact made it an act of treason for people to use anything except the pound sterling in settling debts.
(Q): Treason? Wow, I didnít know that.
Rogers: YesÖan act of treason. It used to be that people could use anything they wanted as money. Gold or other metals. Banks would issue their own currencies. Anything. You could even use other peopleís currencies.
Things were so bad in the U.K. in the 1930s they made it an act of treason to use anything except sterling and then by í39 they had full-exchange controls. And then, of course, they had the war and that disaster. It was a disaster before the war. The war just exacerbated the problems. And by the mid-70s, the U.K. was bankrupt. They could not sell long-term government bonds. Remember, this is a country that two generations or three generations before had been the richest most powerful country in the world.
Now the only thing that saved the U.K. was the North Sea oil fields, even though Prime Minister Margaret Thatcher likes to take credit, but Margaret Thatcher has good PR. Margaret Thatcher came into office in 1979 and North Sea oil started flowing. And the U.K. suddenly had a huge balance-of-payment surplus.
You know, even if Mother Teresa had come in [as prime minister] in í79, or Joseph Stalin, or whomever had come in 1979 Ė you know, Jimmy Carter, George Bush, whomever Ė it still wouldíve been great.
You give me the largest oil field in the world and Iíll show you a good time, too. Thatís what happened.
(Q): What if Thatcher had never come to power?
Rogers: Who knows, because the U.K. was in such disastrous straits when she came in. And thatís why she came to powerÖbecause it was such a disaster. Iím sure she wouldíve made things better, but short of all that oil, the situation wouldíve continued to decline.
So it may not be in our lifetimes that weíll see the bottom, just given the U.K.ís history, for instance.
(Q): Thatís going to be terrifying for individual investors to think about.
Rogers: Yeah. But remember that America had such a magnificent and gigantic position of dominance that deterioration will take time. You know, you donít just change that in a decade or two. It takes a lot of hard work by a lot of incompetent people to change the situation. The U.K. situation I just explainedÖthat decline was over 40 or 50 years, but they had so much money they could have continued to spiral downward for a long time.
Even Zimbabwe, you know, took 10 or 15 years to really get going into itís collapse, but Robert Mugabe came into power in 1980 and, as recently as 1995, things still looked good for Zimbabwe. But now, of course, itís a major disaster.
Thatís one of the advantages of Singapore. The place has an astonishing amount of wealth and only 4 million people. So even if it started squandering it in 2008, which they may be, itís going to take them forever to do so.
(Q): Is there a specific signal that this is ďover?Ē
Rogers: SureÖwhen our entire U.S. cabinet has Swiss bank accounts. Linked inside bank accounts. When that happens, weíll know weíre getting close because theyíll do it even after itís illegal Ė after Americaís put in the exchange controls.
(Q): Theyíll move their own money.
Rogers: Yeah, because you look at people like the Israelis and the Argentineans and people who have had exchange controls Ė the politicians usually figured it out and have taken care of themselves on the side.
(Q): We saw that in South Africa and other countries, for example, as people tried to get their money out.
Rogers: Everybody figures it out, eventually, including the politicians. They say: ďYou know, others canít do this, but itís alright for us.Ē Those days will come. I guess when all the congressmen have foreign bank accounts, weíll be at the bottom.
But weíve got a long way to go, yet.
[Editorís note: After interviewing legendary investor Jim Rogers at his home in Singapore back in March, Investment Director Keith Fitz-Gerald caught up with Rogers again in July Ė this time in Vancouver, where both were speaking at the Agora Wealth Symposium. Rogers talked extensively about the ill-advised bailouts of Bear Stearns, Fannie Mae and Freddie Mac, and the potentially ruinous fallout from the financial ďSuper CrashĒ thatís about to engulf the U.S. market. To find out how to get a report on the once-in-a-lifetime profit plays that will emanate from this so-called "SuperCrash" Ė and to also get a free copy of noted market analyst Peter D. Schiffís New York Times bestseller "Crash Proof: How to Profit from the Coming Economic Collapse" Ė please click here. And look for Part 2 of Money Morningís latest interview with Jim Rogers tomorrow (Wednesday).]http://www.informationclearinghouse.info/article20558.htm