World's Strongest Currency, Understanding the Market Rally, The Bond Bubble, Mini Cows and More!

Posted On May 27, 2009 By

by Addison Wiggin & Ian Mathias

  • America, take note: How one emerging nation garnered the world’s best-performing currency
  • Stocks soar… Rob Parenteau on what’s needed to keep the rally going
  • Dan Denning identifies “the key to understanding moves in commodity and stock prices”
  • U.S. sinks another $50 billion into GM… famous investor says debts will lead to Zimbabwe-style inflation
  • Today’s data disappoint… home prices plunge, FDIC’s bad bank list swells
  • Plus, ranchers’ “mini” solution to the economy’s mega-problems

 

  You know the dollar’s back in the doghouse — the dollar index just capped off its worst week since 1985. But what’s the best-performing currency of the year thus far? Any guesses?

The Brazilian real overtook the South African rand today as the world’s best-performing currency. Brazil posted a $146 million current account surplus in April, its government announced yesterday, the first such surplus since September 2007. Brazil’s government has introduced aggressive new tax cuts and new trade agreements (mostly with China), and has thus become the darling of the currency trade. Low taxes, open trade and account surplus is good for a nation’s economy? Huh… who’d have thought?

  “Any current account figure that’s written in black is good for a country and its currency!” chimes in our friend Chuck Butler. “And the real is no exception to this rule.

“The real is trading this morning at 2.0060, spittin’ distance from losing that ‘2’ handle! (The real is a European-style priced currency, so the lower the price, the more value it returns versus 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 real was holding serve, but eventually, it had to give up ground, with the euro losing value and commodity prices circling the bowl. But now that the euro and commodity prices are on the rise once again, the real is back in the driver’s seat”

  Even the real’s move yesterday pales in comparison with the American stock market. U.S. equities soared Tuesday, mostly driven by a way better-than-expected consumer confidence reading. Every S&P 500 sector traded up, leading the index to a 2.6% rally.

Those good vibes reverberated across the Pacific after U.S. markets closed. The big boards in Taiwan, Singapore and India soared over 3%, while Hong Kong stole the show with a 5.2% shot. The only Asian nation in the red this morning is South Korea, down 0.7%… understandable, given the North’s latest antics.

  “Our assessment,” observes Rob Parenteau, “is that equity investors have discarded the end-of-the-world scenarios that were prevalent three months ago, but they need a macro news flow pointing consistently to a robust economic recovery to keep running equity indexes higher. At best, we can find signs of stabilization in housing, which has been the hardest-hit sector and is typically one of the sectors that leads economic recoveries. Retail sales are holding steady as well, in a quarter when after-tax income should be getting a boost from the stimulus package.

“Yet with a recovery more dependent than usual on massive fiscal stimulus, bond investors and foreign investors are staring at a wall of Treasury bond issuance, and the weaker dollar and higher Treasury bond yields suggest they do not like what they see. In this environment, we are enjoying gains on precious metal positions, eyeing energy plays, thinking about putting on equity short positions again and will be building up commodity currency (the Australian dollar, the Canadian dollar and the Norwegian krone) long positions against the U.S. dollar.”

That’s a classic example of The Richebacher Society credo: Better life through proven economic thought. For the full monty of Rob’s 2009-2010 predictions — and how to profit from them — be sure to check out his latest special report.

  “We believe the action in the bond market is the key to understanding the move in commodity and stock prices,” adds Dan Denning. “What you see in the charts below is the widest spread between 10-year and 2-year notes since 2003.

“The yield curve is getting steeper. Investors are charging the U.S. more to loan to it long term while they seem to be happy to park cash in shorter-term maturities, even if the real yield is negligible.

“The current spread between 10-years and 2-years is 263 basis points (2.63%). It blew out to 274 basis points in 2003. That was about the same time that Alan Greenspan’s Fed slashed rates to 1% and kept them there to kick off the leveraged bull market in all asset classes across the globe. Global synchronized boom.

“The Fed doesn’t have that flexibility today, of course. U.S. short-term rates (the Fed funds rate) are already being held in a range between 0-0.25%. If the central bank wants to try to bring 10-year rates down, it’s going to have to buy more bonds directly. And if it does so by creating more money, we reckon it puts more bullish pressure under gold, oil and copper prices.

If you haven’t heard, the next installment of our Retirement Recovery Series will focus directly on how you can profit as the bond bubble bursts. This Webinar will be absolutely free to readers of The 5… all you have to do is sign up.

  “The problem with government debt growing so much,” says famous investor and economic commentator Marc Faber, “is that when the time will come and the Fed should increase interest rates, they will be very reluctant to do so and so inflation will start to accelerate.

“I am 100% sure that the U.S. will go into hyperinflation,” he added, the sort that will be “close to” Zimbabwe-style price insanity.

How could this happen, and how should you prepare? We suspect Faber will answer these questions — and others — when he speaks at our Investment Symposium this July in Vancouver, B.C. If you haven’t signed up yet, it’s time… the conference kicks off in less than two months. Get details here.

  Add another $50 billion to the government debt load today… according to sources from The New York Times, the government will give GM $50 billion in order to speedily move the company through bankruptcy court. Potential deals with GM debt holders officially fell through last night, as we forecast, and now Chapter 11 is all but imminent. Should this latest GM bailout come to fruition, the U.S. government is expected to receive a 70% ownership stake in return.

 

The U.S. government is on track to spend (borrow) over $70 billion on GM’s behalf… crazytown.

“General Motors is worth $879 million,” notes Eric Fry in today’s Rude Awakening. “Facebook is worth $10 billion. What else do you need to know about the strength of the American economy?”

Amen.

  Traders won’t be getting a macro news boost today. Indexes opened slightly down this morning, thanks in part to these two bits:

The median price of an existing home sold in April crashed 15.4% annually, the National Association of Realtors said today. The average price of such a home is now just $170,200. Home sales did pick up 2.9% from March, but not nearly enough to make a dent in the glut of supply. Existing home inventories actually increased last month, to a 10.2-month supply. That’s just under 4 million homes.

  The FDIC’s list of problem banks has grown to its highest level in 15 years. The government arm said this morning that 305 institutions now grace its infamous list, up 53 from the end of 2008 and the highest level since 1994. Just as scary, the troubled 305 banks control over $220 billion in assets.

As usual, the FDIC won’t name names… lest the public might grow concerned. Thirty-six banks have failed so far this year.

None of the news above is much help to the greenback. The dollar index is now hovering just above 80, a point of strong historic support.

Oil got a nice boost from yesterday’s bout of stock mania. The front-month contract rose above $63 a barrel for the first time in six months. The “black gold” goes for $62 a barrel as we write.

  Gold has been hanging tough this week, just below its two-month high of $961 an ounce. Despite a bit of a dip yesterday, the spot price is back above $950 today.

  Last today, a credit crisis revival this editor certainly didn’t see coming:

Mini-cows… creepy little buggers

“Farmers have not only cut back on the herd size, but also the size in the herd,” reports our resource man Alan Kunckman. “A decade ago, mini-cows represented only a small fraction of the cattle in the U.S. But according to the USDA, that number has quadrupled. There are now 20,000 mini-cows, up from 5,000 a decade ago, out of 94.5 million head of cattle in the U.S.

“These diminutive bovines help ranchers become much more efficient. They require less feed and land, but produce above average amounts of rib-eyes and filets… makes economic sense in troubling times.”

 

  “In regards to theCredit Suisse chart that shows the ‘second wave’ of upcoming mortgage payment resets,” writes a reader responding to yesterday’s 5, “I offer a novice opinion: I don’t think it’s going to be as bad as you think.

“I live in Florida and I have been looking around for places all around south Florida to buy. I have gone through and read many mortgage documents recorded on properties that I am following. Not a single one that I have read, if reset today, would be at a higher payment. Obviously, there is a HUGE ‘moving part’ of the equation, which is the benchmark indexes (Libor and the U.S. Treasury).

“Furthermore, my sample set is a drop in the bucket compared with the national housing market, but I believe it may not be as bad as you say. Now, if everyone loses their job, and can’t pay their current mortgage payment, then all bets are off.”

The 5: Thanks for the frontlines perspective. We agree, to an extent: If the Treasury and Fed are somehow able to pin down bond yields, and the job market perks up and the economy stabilizes… then yes, maybe the next wave of resets won’t be too bad.

But those aren’t the circumstances we expect soon, if at all, so we’d rather be prepared for the worst. We crafted a report that hits the crux of this issue to help launch The Richebacher Society. You should check it out, here.

Thanks for reading,

Ian Mathias

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