DJ30 – 11,131   down 101
US Treasury 10 Year Bond – 1.98%    down 0.02%
USDEUR  -  1.4000
Gold – $1877     up $4
Oil – $86.41    down  $0.04

Stocks fell on European default fears.  Gold initially went up to $1920 (A NEW ALL TIME HIGH) then got sold off $60 in the morning.  $40 of this fall happened within a couple of minutes – showing that Big Banks (like JP Morgan) were doing their selling to protect their “short” position in gold, and to create the “double top” at $1910 which I predicted.   I suspect gold will go sideways for awhile in a broad range ($1850 to $1900), and then make new highs.

News Headlines over Labor Day……..

Here are some headlines over the long weekend in no apparent order.  They provide a glum view of the world’s economy.  I’ve never seen the news so bad, and so many stories adding up to economic chaos in the world.  My senses are “on alert.”

1. Swiss peg Franc against Euro – see story below.
2. Italian and Spanish workers are ready to strike over national austerity programs.
3. Opposition is growing in Germany against bailing out other nation’s debt.  27 CDU (ruling party of Merkel) members against strengthening European bailout fund – enough to throw Merkel out of power.  CDU had major loss in local German election – in Merkel’s home state.
4. European bank deposits growing at ECB, now setting records  – meaning there is lessening faith to lend between European banks.
5. US Pension Funds for S&P 500 companies now can’t meet obligations by about $388B as stocks fall and interest rates remain low.
6. US Postal Service running out of money and need Congressional funding help – otherwise there will be layoffs, post office closings, etc.
7. European stock markets plunged on Monday – 4% to 6% down.
8. German President Christian Wulff accuses European Central Bank of exceeding the legitimacy of its charter – more pressure against bailouts.
9. Greek’s accused that they will miss their budget deficit plan.
10. Greek watchdog reports Greek debt is “out of control.”
11. The EU/ECB/IMF “troika” left Athens on Friday accusing Greece of failing to comply with the rescue terms.
12. IMF says world is facing a “downward spiral” – in other words, it’s not just the US facing a double dip recession – it’s the entire world.
    

A Lesson in Exchange Rates……

The world’s news provides are great example for a lesson in Exchange Rate Policy being played out in today’s world.

One of the strongest currencies in the world today is the Swiss Franc.  It is so strong that it is creating a problem for the Swiss.  The Swiss Franc has appreciated against the Dollar, but more importantly for Switzerland, it has appreciated against the Euro.  What does this mean for Switzerland?

1. As Switzerland is surrounded by Euro spending countries (Germany to the north, France to the west, Italy to the south, and Austria to the east) – almost all of its trade is with Euro countries.
2. A stronger Swiss Franc against the Euro means that ALL Swiss goods become proportionately more expensive to its neighbors – unless the Swiss manufacturer wants to cuts its margins – and I can assure you that cutting margins is not part of the Swiss genetics.
3. All imports become cheaper to Swiss citizens – so this is the good news for the Swiss.
4. But, as Switzerland exists on its exports – the costlier exports (to the buyer) are more important than the cheaper imports.
5. Costlier exports means less exports are sold.  This means less goods produced, and less profits for Swiss companies.
6. Swiss GDP falls in today’s scenario.
7. It is the Swiss National Bank (SNB) – the central bank for Switzerland – which must address this problem with exchange rates.  And, they are doing it starting yesterday.
   

The Swiss have been fortunate over the past 50 years as their exchange rate with the European nations – even before the Euro came along – was a slow moving affair and didn’t jeopardize its exports.

But, today, the Swiss/Euro exchange rate is appreciating very quickly as the Euro is debased.

So, here is what the SNB did.  It FIXED the exchange rate at 1.2 Swiss Francs/Euro, and declared they will buy as many Euros as necessary to maintain this exchange rate.    This declaration has resulted in an immediate  8% drop in the value of the Swiss Franc against the Euro.

This is not an historic event – as many countries have tried and failed to maintain (FIX) exchange rates in the past.  The Swiss will fail too.  It is just a matter of time.  You see that speculators take it as a personal challenge to break the SNB’s will to maintain that exchange rate – and they keep buying Swiss Francs to challenge the Swiss.

So, what will this lead to?

1. The Swiss Franc will maintain this exchange rate for some period of time – weeks and months, not years.
2. The 1.20 exchange rate will be challenged by speculators.
3. The SNB will spend the Swiss Treasury in defending the exchange rate – as they buy Euros with Swiss Francs.
4. Eventually, the SNB will have spent too much money defending the rate, and they will stop – and the Swiss Franc will bounce back up.
5. In my opinion – I can promise you that this sequence will play out.  Only the timing is unknown.
6. The Japanese Yen will also come under pressure immediately as people switch from putting their Euros (or other currencies) into Swiss Francs and start putting them into Japanese Yen.  This will drive up the value of the Yen
7. The Japanese Central Bank will have to respond with a similar program to the SNB – and defend a weaker Yen.  They already did this a few weeks ago when they tried to drive down the value of the Yen against the major currencies of the world – and succeeded for about 2 or 3 days only.
   

More importantly, this sequence of events is part of a grand scheme to drive down the value of all the major world currencies.  The weak currencies are the US Dollar, the Euro, and the UK Pound.  The strong currencies are the Swiss Franc and the Japanese Yen.  (The Chinese Yuan is also in the mix, but as it is not freely exchanged as these other currencies are, it doesn’t come into this play.)  Some pundits call this a “Race to the Bottom” or a “Devaluation of all currencies” or “World currency war.”  I believe that the US Federal Reserve is at the heart of this strategy, and it is the way that all countries around the globe will be able to pay for the massive debt that has been accumulated since WWII.  It will pay the debt with devalued (aka inflated) money.

What does this mean for you?  Well, in the short run, it might mean that the US Dollar rises against the Euro and Yen, etc.  But, in the long run, it means that the Dollars that you are holding (in Saving Accounts, Money Market Accounts, CDs, Bonds, 401Ks, etc) will become devalued and purchase much less in the future.  To protect your purchasing power, you must buy something like gold which is holding its value during these extreme times.

It has been awhile since I talked about how the various markets are doing in the US, so now is a good time to look at these markets and explain a little of what is actually happening.

Gold – as this is my recommendation for all readers to consider for inclusion in their personal investments – has been falling from its 2010 year end high of $1420, and hit $1340 the end of last week.  There are many reasons for this fall off in price, but here are the main ones that I believe are in play:

1. People are taking profits from the 29% increase of last year – and there are lots of profits to take.
2. The Euro was used last year as play against gold – sell the Euro and buy gold with the money.  This is being unwound right now as the Euro is gaining while gold is falling – normally they go in the same direction.
3. China is raising interest rates to cool off their massive growth in GDP – it is growing too fast for comfort of the Chinese leaders, and could lead to a fast growth in Chinese inflation – something that could cause unrest in the country, and something the Chinese leadership would avoid at all costs.
   

However, having said all that, I believe that the selling in gold is approaching its finish, and will resume its uptrend to new highs in the near future.  The fundamentals for gold have not changed one iota.  It has been a long time that I have given a “buy signal” for gold, but if the price goes below $1330/ounce where there happens to be some good support, then a purchase of gold would be called for.  (On the Silver front, I have stayed away from Silver for the main reason that I don’t follow it too closely.  However, Silver is also much more volatile than gold – down 10% versus 5% for gold’s decline – so that’s another reason I don’t recommend it.  However, if you believe it is a great investment, I would say go for it if you have done all your due dilligence homework.)

Stocks – have been going up when measured by the DJ30 or the S&P indices.  This is being caused by the Quantitative Easing 2 money being poured into our economy by the FED finding a home in stocks (plus other places too).  However, there is an underlying trend that you should not miss.  The small cap stocks are underperforming the rest of the stock market.  In other words, money is coming out of small cap stocks and going into large cap stocks (like the DJ30) stocks) – go and check out what is happening to those small caps, and you will be happy if you are not invested in them.

Bonds – are falling in value as interest rates trend upward.  This is the unexplained phenomenon as the FED is trying to reduce interest rates, but the market is defeating that goal, by raising interest rates.  Also, I have been reporting on the beginning of the end of the Muni Bond market which will also have a negative affect on bond values sometime later this year.

Dollar – started the year going upwards, but has fallen off sharply during the past week.  The Euro is now standing at 1.36 Dollars/Euro.  We will have to wait a little longer to see if the Dollar confirms its downward trend against all currencies.

Oil – started the year going upward, and went as high as about $92/barrel.  It is now standing around $88/barrel, as the OPEC have “hinted” they may increase the supply of oil.  You can ignore just about anything the OPEC nations ever say, and history shows they don’t follow up with their promises too well.  Oil wil probably hit $100/barrel by the first half of 2011.

Other News……

The Irish Government fell last week, and they called a general election on March 11th.  The ruling party will be wiped out in the next election as just about everyone in the country sees how incompetent they truly are.  They have earned their fate.  However, the much more interesting thing to follow is whether of not the next government to come into office will “repudiate” the deals made with the EU and IMF.  If they repudiate them, it will cause a shock waive heard around the world, and Greece will probably line up to do the same thing.

Spain is planning a restructuring of its banking system.  Effectively, I believe there will be a Spanish bailout of its banks as part of the restructure plan.  This sounds way too similar to what the Irish Government did before it found out how bad the banks really were.  There is a natural tendence for any bank to hide its real problems – assuming it has some bad problems.  Spain is no different.  People in Spain are demonstrating with “Donde Esta Mi Donera?” signs.  Spain is just further behind the power curve than Ireland.  Watch out for Portugal and Italy too.

Dubai built those beautiful islands off its shore so massive resorts and hotels and residences could be built on them.  I find it amusing that those islands are being reclaimed by the sea (sinking in effect), as the waves and tides due their endless work.  I wouldn’t have wanted to be one of the millionaires who bought one of those lots and built a mansion on it.

Bonds rallied (lower interest rate) as the FED intervened in the 7 year Treasury auction and bought themselves.

The Dollar went much lower today, but I’m hoping it turns around tomorrow and starts coming back stronger – we’ll see.

Gold broke out today, and is up to a new 7 week HIGH.

Oil jumped on demand by other nations, and this is a big inflationary threat to America – and you can measure it at your local gasoline pump.

In the news today…..

AIG – Geithner today said that we’ve lost our shirt putting money into AIG, and we aren’t going to unravel that mess for a long time.   He didn’t use those words, but that’s what he meant.  He said the government didn’t have the power to tell AIG to negotiate its payments to the people who it has paid Billions to – no the government just couldn’t get into that negotiation.  Huh??  Are we talking about the same government that’s rearranging GM?

California – yesterday the voters rejected any increase in taxes to pay for their budget problems.  Coincidentally, the governor of CA was in DC to celebrate the new car standards set by Obama which matched CA’s 7 year old standards.  I don’t believe in coincidences, and I think the US government will bail out California with YOUR dollars.  This is okay if you live in CA, but not if you don’t.  Of course every other state (except Alaska) will line up at the trough for bailout bucks too.

FED GDP Projection – has been reduced again.  This time the FED thinks the GDP for 2009 will be – 1.3% to – 2.0%.  This was revised from a – 0.5% to – 1.3%.  The FED has now raised their unemployment projection to possibly 10% from 8.8% – pretty good as the current unemployment is 8.9%.

Tonight’s Dinner Conversation…..

Japan’s GDP – was down 15.4% in the 1st Q, annualized.  This is far worse than anyone could imagine a year ago.  Could this happen to America? – I’ll leave that to you to ponder.  How did this happen?  Well, obviously people aren’t buying things that Japan makes and exports – as Japan is an exporting nation, and the majority of its industrial goods go overseas.  But, more hidden from the scenes is the fact that Japan’s currency, the Yen, is VERY strong, and this means that goods made in Japan are not falling in prices overseas, but are RISING.  This only makes the exports from Japan more difficult to sell.

What’s the lesson for Americans?  Well, the FED and Treasury and President say they want a STRONG Dollar.  Should we trust their statements?  Personally, I don’t.  The Dollar has rallied over this last 6 month crisis, but more recently, it appears to have started to fall again – which is its long term trend.  Also, what works best for the over-spending Congress? – a deflated Dollar (meaning a strong dollar), or an inflated Dollar (meaning a weak dollar)?  We are printing money like NEVER BEFORE – that is a fact and TRUE statement that you can ignore at your own peril.  The government has NO OPTIONS left to solve its overspending, and ambitious FUTURE spending programs.  Inflation is the easy way out for our current administration.

Foreign government are stopping to use Dollars as the “Reserve Currency”.  They are fleeing the Dollar with or without the US Government’s permission – you see the Bretton Woods Agreement says that ALL foreign nations must use the Dollar for trade.  But, there are tons of nations NOT using the Dollar TODAY.  China and Brazil just signed a bi-lateral deal to begin trade in Chinese and Brazilian currencies.  The OPEC nations are talking about an OPEC currency, or basket of currencies, to be used for all future oil purchases.

What does all this mean for the Dollar?  It means that the Dollar will become devalued against all other currencies.  When could this happen???  It could start soon, as more and more nations start to bail out of the Dollar trading.  Also, nations are sitting on a bunch of US Dollar assets (like Treasuries) that they would consider selling when the Dollar starts tanking.

How do YOU protect yourself?  If you can, get some of your assets out of Dollars.  Buy a stronger currency.  Some of those currencies today are the Swiss Franc, Norwegian Krona, Australian Dollar and New Zealand Dollar.  Do some careful research before you make your choice of currency.

How can you invest in a foreign currency?  One way is to just exchange Dollars into that currency.  Another way is to purchase an asset denominated in that currency – like bonds (pays interest – sweet) or stocks or ???  Most brokers provide this service.
 

Here are the last numbers for today:
Dow Jones 30 Industrial – 8421 (down 53 points)
10 Year Treasury Bond – 3.20% (up 0.04%)
Euro – $1.3770
Gold – $937 (up $11)
Oil – $62.04 (up $1.94)
Gasoline $1.81 (no change)   

Bonds also moved sideways, as did the Dollar.

Oil and gasoline fell slightly.

Gold fell a lot, being down $25 today.  The new price has broken a trend line on the downside, and gold must test recent support levels at $850 to $860 before we know what the future might hold.  So my advice is to wait for the test of these levels, and see if it bounced upward or continues downward.  One of the two will happen.

In the news today……

Unemployment was reported at 8.5% last week.  However, one of the equally important statistics is Underemployment.  This represents people who are not looking for a new job any longer because they’ve given up and are doing something else (like going back to school) or have taken a part time job.  Underemployment is currently running at 15.6%.  Together this means that 24.1% of the people in the US are either unemployed or making a lot less at a part time job (or something else) than they want to make.  Another way to look at this is that the Unemployment statistic of BOGUS!!!!!!!

The FED set up currency swap agreements with Japan, the UK, the ECB and the Swiss today so they can acquire those four currencies at any time.  Why would the FED do this?  It could be very innocent – like they want to reciprocate with those countries as they have already provided Dollars in the other direction.  However, there is usually more than one explanation for a major FED action, and I just haven’t figured this one out yet.  Is the FED anticipating a downturn in the Dollar that they can counter with those currencies?  Are there “friends of the FED” who might need those currencies on a weekend?

The “Stress Test” being performed by the US Treasury is a SHAM.  The Treasury has already stated that the Big Banks are too big to fail, so they are basically excused from the stress test, or the stress test will be structured in such a way that they pass. The results of the “stress test” are anticipated to be announced at the end of this month.   All the Big Banks are “friends of Geithner”.  I fear for the mid-level sized banks who hold some toxic securities and are not “friends of Geithner” as the Secretary can shut them down at a whim.  

One small history lesson on “stress tests.”  Fannie and Freddie had legislated (required by law) stress tests in their charter, and long ago before the Freddie and Fannie scandals came out, Freddie and Fannie ALWAYS passed their stress test.  However, these industries turned out to be insolvent, and the taxpayer picked up the bill.  Herein ends the history lesson.

Here are the last numbers for today:
Dow Jones 30 Industrial – 7976 (down 42 points)
10 Year Treasury Bond – 2.94% (up 0.03%)
Euro – $1.3413
Gold – $873 (down $25)
Oil – $51.05 (down $1.46)
Gasoline – $1.48 (down $0.02)       

Bonds moved sideways.

The Dollar significantly strengthened, and is now at the level where it was prior to the FED announcement that it will buy long term Treasuries.

Oil and gasoline both gave up some of their recent gains as we approach the weekend.  The week was a positive gain for oil and gasoline, and the price increases are already showing up at the pump.

Gold gave up some its “FED announcement” gains, but is still ahead of where it started.

In the news today…..

Good news in the market – at last:

1. Consumer Spending – up 0.2% in February.  It was up 1% in January.  This two month run is very important as at least 2/3 of our economy is driven by the consumer.  If this trend continues, it looks like the consumer spending has bottomed.  But, has it???
2. Personal Savings – was down 0.1% in February to 4.2%.  Personal Savings had to decline to pay for the increased Consumer Spending as consumers earned less in February as more people were being let go.  I have predicted that Personal Savings will increase back to the 9% range within a year or two.  As this increases, consumer spending must go down by the same amount of money, or be replaced by increased wages to keep Consumer Spending constant.  And we don’t want “constant”, we want a growing Consumer Spending. So, if Personal Savings does increase in the future, that percentage will come out of Consumer Spending – and that just doesn’t help our GDP calculation.
3. Consumer Confidence – increased in February.  This is a more subjective measure, but it is encouraging to see an improved confidence.
4. Jobless Claims – rose to a record last week (as reported yesterday), but my look at the chart of jobless claims says that this measure of the economy is flattening off – rather than growing as it has over the past 6 months.  It is imperative to have this measure not only flatten off, but to decline back to the “normal” level of about 400,000 claims per week.

So, does this mean we are out of the woods, and the future is rosy??  Not yet.  Increased unemployment just makes those previous statistics worse, as less money is earned by the American worker, and I believe unemployment is increasing.  The jobless claims even at no increase in the future is way too high.  If it stays there, we will have continued increase in the unemployment rate as long as this measure if above 400,000 per week.

Jobless Rate – is above 10% in the following states: Michigan, S. Carolina, Oregon, N. Carolina, California, Rhode Island and Nevada.  The number of states over 10% unemployment has increased from 4 to 7 in two months.  The smallest unemployment rate is in Wyoming.

Tonight’s Dinner Conversation

The S&P stock index is up over 20% from the current low.  This is a measure of a “bull” market for stocks.  The question for you to ponder is whether we are in a new BULL market, or just a BEAR market rally.  Here is something to chew on:

1. Stocks have fallen about 50% from their high
2. Stocks must rise 100% just to get back where they started
3. Stocks have risen about 20% of that 100% already.
4. My prediction was that we were going to have a stock rally in the spring, followed by another decline in stocks in the 3rd and 4th Quarter of 2009.  I’m sticking to that prediction.
5. Lots of financial experts have stated that the bottom has been reached, and now we are in a bull market.

Here are the last numbers for today:
Dow Jones 30 Industrial – 7776 (down 148 points)
10 Year Treasury Bond – 2.76% (up 0.03%)
Euro – $1.3294
Gold – $925 (down $17)
Oil – $52.38 (down $1.96)
Gasoline – $1.49 (down $0.04)  

In the news today…..

The major discussion point in the news yesterday and today is whether or not the government should be bailing out the automobile sector – GM, Ford, and Chrysler.  Why would the government do this?  Jobs – plain and simple.  What are the alternatives?  One alternative is to let GM go into bankruptcy – be restructured – and emerge as a new company – smaller and with better products.  But smaller means less jobs, and that could be politically unacceptable.

The AMERO – What is it????

I want to thank Dana for asking about the AMERO, and whether or not it is real.  Here is what I know:

1. The AMERO is not “official”.
2. The AMERO is based on the Euro model, and the Euro model is so new that it has not proven itself yet.  The current recession that will hit Europe should “test” the Euro theory.  We’ll see if it sticks.  The alternative is to go back to national currencies – unlikely to predict a return today, unless the Euro fails due to different rates of national spending patterns.
3. AMERO coins have been minted, but are NOT official.  They were created as a PR stunt to highlight the topic of the AMERO.
4. What about the US Constitution?  The concept of the AMERO is completely against the US Constitution, and a court case would immediately go to the Supreme Court to challenge the AMERO if anyone officially created it by law.
   

Why would anyone be talking about the AMERO?

Here are Yesterday’s numbers:
Dow Jones 30 Industrial – 8283 (down 411 points)
10 Year Treasury Bond – 3.67% (down 0.09%)
Euro – $1.2487
Gold – $718 (down $15)
Oil – $56.16 (down $3.17)
Gasoline – $1.25 (down $0.06)

Here are today’s numbers:
Dow Jones 30 Industrial – 11,734 (up 303 points)
10 Year Treasury Bond – 3.95% (up 0.02%)
Euro – $1.5006 – a massive jump in the Dollar!!!!!!!!!
Gold – $865 (down $13)
Oil – $115.20 (down $4.82)
Gasoline – $2.89 (down $0.12)

Here are today’s numbers:
Dow Jones 30 Industrial – 11,656 (up 40 points)
10 Year Treasury Bond – 4.05% (up $0.04)
Euro – $1.5408
Gold – $883 (down $3)
Oil – $118.58 (down $0.59)
Gasoline – $2.95 (down $0.01)