Wednesday, May 27, 2009

And It Will Absolutely Kill the Dollar and Your Treasuries…

Also In Today’s Letter…

• Stocks & Currencies May Be Finally Cutting the Chord!
• Tiny Yields & Sinking Buck: Trouble for Treasuries…
• Everything is In Place for a Real Rally!

By Chuck Butler Yesterday, U.S. stocks jumped 196 points, while the major foreign currencies range traded. Hmmm….This could be the first sign that stocks are finally breaking their strange tie with currencies.

Not that FX University will become a “stock jockey journal.” Stocks jumped on the news that consumer confidence surged this month. Talk about looking at things through rose colored glasses!

I’m also guessing the stock jockeys were looking at what’s behind door #1 (consumer confidence) and not at what’s behind door #2, because “door #2” is hiding the Case-Shiller House Price Index.

For the first quarter, the S&P/Case-Shiller U.S. National Home Price Index posted a 19.1% drop from a year earlier. That’s the biggest quarterly decline for the reading’s 21-year history. So much for those dolts who thought we would see Home Prices level off!

Not that there’s anything wrong with “wanting” to see home prices levels to stop falling, but come on. Where was the proof of that happening? There was none. And now, obviously, home prices are continuing their multi-year tumble. The most important thing about the report is that it gives no signs…

Get that? NO SIGNS, of abating Home Price declines.

Tiny Yields & Sinking Dollar: Fun Times on the U.S. Treasury Ranch…

Treasury yields continue to inch higher and higher. It’s almost as if they are looking for the pressure point that will cause the U.S. / Fed and Treasury too much pain. In the meantime,

Treasuries are losing value. Of course if you hold them to maturity you still get their principal back.

But how many investors who bought Treasuries in the past year as a “flight to safety” plan are holding them to maturity? My guess is very few… And so it goes for those who thought they were making a flight to safety!

And of course, the dollars they bought to make those Treasury purchases have lost quite a bit of ground since March, which means the Treasury holders are getting hit with a double whammy. First your bond prices are dropping, and the currency they’re valued in is dropping in value.
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Fun times at the old Treasury ranch, eh?

Recall that I’ve gone out on the limb (no worries, I picked a big strong limb!) recently and told you inflation is on the way. In fact, I believe once the current deflationary asset price scenario clears out of the market, we’ll see inflation that rivals the inflation we saw in the late 70’s, early 80’s. This type of inflation will absolutely kill the price of bonds.

Dr. Marc Faber agrees. In fact, he’s now predicting we’ll see “Zimbabwe-type hyperinflation” because the Fed won’t be able to raise rates.

The Perfect Storm for the Dollar Could Already Be Here…

Now, I think Dr. Faber mentioned Zimbabwe to illustrate his “hyperinflation” call… Myself? I think that just what I said above– that inflation will rival that seen in the late 70’s, early 80’s.

However, Dr. Faber has a point, and that is… When a Central Bank raises interest rates, they have to issue new Treasuries with higher yields, than previous ones issued. That makes the previous Treasuries less valuable.

So, what will the Fed do, when the first signs of run-away inflation show up? Do they bite the bullet and raise rates causing all their previous issues to lose value (hello, China, I’ve got bad news for you), or will they do nothing, absolutely nothing?

And what’s this all got to do with currencies? Ahhhh grasshopper…

Everything has to do with currencies! When Treasury holders sell off those dollar-dominated Treasuries, they will also be selling off the dollar. That will lower the dollar’s value.

And then throw in what I’ve been talking about lately with China already signing six currency swap agreements with countries that allow them to take dollars out of their trade equation with these countries, and put renminbi into wider use, and you’ve got the “Perfect Storm” forming for the dollar, folks.

Keep in mind: This is just my prediction. It’s not a fact per se – at least not yet. But, it’s staring us right in the face! I don’t know why more people aren’t talking about this!

Okay, let’s go somewhere else, all this talk is starting to give me a rash!

Free Markets? Not if the Central Banks Have Anything to Say About It

There were rumors yesterday that Asian countries like Singapore, India, and Japan had to intervene in the markets because of the dollar’s decline. It’s likely that Asian Central Banks had to sell their currency and buy dollars to keep the fall in the dollar to a minimum.

I really, truly don’t like when Central Banks get into the markets. It’s manipulation… And as long as they can do that, and print money… There really is no such thing as “free markets” right?

If Alan Greenspan can manipulate interest rates to allow the stock market to run higher for years, was it the stocks that were the “root” of the rally, or was it the Fed Reserve manipulation?

Yes, I’m sure you know the answer…

Good News: Everything Is in Place for the Real to Rally

The good news this morning is that Brazil has posted their first current account surplus in 19 months! In April, Brazil’s current account surplus was US$146 million.

And any current account figure that’s written in black is good for a country and their currency! And the real is no exception to this rule.

The Brazilian real is trading this morning at 2.0060, within spittin’ distance of losing that “2″ handle! (The real is a European Style priced currency, so the lower the price, the more value it returns vs. the dollar) The real hasn’t seen the underbelly of a “2″ handle since October of last year!

You may recall last fall, I wrote about how the Brazilian real was holding its ground, but eventually it had to fall, with the euro losing value and commodity prices circling the bowl.

But now that the Big Dog euro and commodity prices are on the rise, the real is back in the driver’s seat once again. Ooh, ooh, ooh, driver’s seat… (Can anyone tell me the band that sings that song? No Googling it!)

And finally… The first test of the 2-year auction of Treasuries, passed. But getting investors to go short probably isn’t the real problem. The real test will be the 10-year and out. I told you earlier that yields were rising. Well how does this sound? 10-year yields are up 129 Basis Points so far this year and 103 Basis Points since the March 18th quantitative easing announcement.

That’s it for today… Today is a very special day. It’s the first ever World MS Day – 100 nations around the globe are joining together to build awareness for multiple sclerosis. My mom had MS, so that’s why I point this out today.

Time to get on with this Hump Day… I hope your Wednesday is Wonderful!
Chuck Butler

P.S. The next issue of Currency Capitalist has an easy, cheap way to profit from the falling dollar. Members, please look for your latest issue online this weekend! Not a member yet? Click here to test-drive our newsletter completely risk-free.