Wednesday, March 24, 2010

The Vultures Are Circling

For how much longer can the US Dollar continue to "catch a bid" on JUST the weakness in the Euro? There is no fundamental reason for the Dollar's continued illusion of strength. The US Dollar is no better, or worse, a fiat currency than the Euro. They are both completely worthless and irredeemable for nothing but the faith, hope, and charity of their prospective issuing governments. Their race to the bottom of the currency barrel may currently be lead by the Euro, but ultimately BOTH will lay at the bottom of the cliff shattered into oblivion.

How Perceptions Have Changed
by Claus Vogt, Money and Markets
Not long ago the euro was rising, and everybody seemed to hate the U.S dollar. During that market phase I constantly asked a rhetorical question: Why do you think the euro is any better than the dollar?

Now the European sovereign debt problems are making headlines, and everybody seems to hate the euro. Again I ask a rhetorical question: Why do you think the dollar is any better than the euro?

The Dollar Is Not Better Than the Euro,
And the Euro Is Not Better Than the Dollar

Both currencies, the euro and the dollar, are backed by nothing but politicians’ promises to finally return to some kind of serious fiscal and monetary policy. Both currencies are being inflated in lockstep. And both, the U.S. and Euroland, have mountains of explicit and even larger mountains of implicit sovereign debt.

The former is debt officially issued in the form of treasury notes and bonds. The latter is debt in the form of promises of the social welfare state.

...the sovereign debt problem is not contained to some minor countries at Europe’s periphery. Quite to the contrary, all major western countries and Japan have huge debt problems! This trap began many years ago. And now we are getting closer to pay day.

When thinking through this frightening debt situation, you can even find a structural argument in favor of the euro … the Europeans have at least formulated some rules concerning budget deficits and sovereign debts. That tells me they are aware that some monetary and fiscal prudence is necessary to guarantee sound money.

Unfortunately, they don’t obey these rules.

In the U.S., politicians and economists don’t even contemplate having any rules. They just decide as they go … not very assuring, is it?

Trader Dan Comments On Total Government Debt
By: Dan Norcini
I am sending this short series of charts to detail in picture form a picture of the US Federal Government total indebtedness in comparison to nominal GDP (Gross Domestic Product). The last chart is a ratio of the two overlaying total GDP against total government debt.

I think it is interesting to note the decline in the ratio which is occurring even as the government goes madly and hopelessly into further debt. Keynesians should take note.

Fitch downgrades Portugal on budget concerns
LISBON, March 24 (Reuters) - Fitch Ratings cut Portugal's sovereign credit rating by one notch to AA- on Wednesday, citing budgetary underperformance in 2009 and warning that further underperformance this year and next could cause another downgrade.

The change underlined concerns that the debt troubles that have afflicted Greece will move to other of the euro zone's weaker economies, and it drove European stocks and an already battered single currency lower EUR=.

But the premium Portugal has to pay on its bonds compared to German bunds actually fell after the announcement and analysts said the move had been well-flagged by Fitch and still left the rating comparable with other agencies.

Fitch also said the government's long-term budget austerity plan was broadly credible and it did not expect political instability to upset the passage of the necessary legislation.

"The downgrade has more of an impact on the wider sovereign debt crisis, rather than Portugal at the moment," said Peter Chatwell, bond analyst at Credit Agricole in London.

"Fitch were in the middle of Moody's and S&P in terms of their rating, so this downgrade has minimal material impact, and doesn't necessarily mean others will follow," he added

A CLASSIC case of "market psychology" dictating direction. A debt downgrade of one of the PIIGS? Pile on your shorts of the Euro whether warranted or not.

How Much Capital Does it Take to Lift a Dollar?
03/22/10 Baltimore, Maryland – On March 18, 2010 the Gold Anti-Trust Action Committee (GATA) wrote CFTC Chairman Gary Gensler a letter calling to his attention evidence that suggests an anti-gold cartel consisting of the U.S. Treasury, the Fed, and the bullion banks has been suppressing the gold price, and that this action is coordinated to further the “strong dollar” policy established by former U.S. Treasury Secretary Lawrence Summers.

If indeed this is the case, since all interventions end badly, a valuable question to answer is whether there are signs that the intervention has gotten long in the tooth. The most obvious would be that the capital required to rescue the ailing buck would be significantly higher than it was prior to the meltdown of the credit markets in 2008. Indeed, Peter Schiff speculated the dollar rally would end badly just three days before the GATA letter was published.

It may be years before a Fed audit or Freedom of Information Act filings reveal the extent of capital market manipulation that is occurring. Even if it were known, economists would be apt to cite “seen” over “unseen” effects. We can simply point to anecdotal evidence. It would be convenient to know if the intervention is nearing an end, sinking of its own weight. Here is one clue that might support the case that manipulation of our currency has become a Sisyphean task: Trading volume in the U.S. dollar ETFs, which necessarily captures a small percentage of foreign exchange trading volume, is exhibiting a huge imbalance.

When there was a strong consensus in 2009 that the buck was burning, trading volume in the UDN derivative, which is short the U.S. dollar, picked up and averaged just fewer than 2 million shares weekly. In some weeks, volume got close to 6 million.

In contrast, once the dollar rally began, volume in the UUP, which is long the U.S. dollar, suddenly jumped from levels similar to the UDN to 20 million or more shares weekly. Moreover, its underlying assets have swelled to ten times that of the UDN, weighing in at over $2 billion compared to UDN’s slight excess over $200 million. So nearly ten times as much money has been spent to send the dollar up about 10% as was placed to make it fall by some 25%.

All this has happened even though arguably there was somewhat more unanimity of opinion that the dollar would weaken in 2009 than there is it should strengthen now. Naysayers will claim that what is happening in this small pocket of foreign exchange trading is not terribly relevant. Or they might say it only reflects retail investor sentiment. But more than a few hedge funds participate in the ETF market, so there is an institutional presence there, and arbitrage is possible.

If the theoretical case being built by GATA is correct, then we may be witnessing reduced effectiveness of Fed and Treasury intervention, with the result being Mudville’s aging relief pitchers are certain to get pounded again. We may not be in the final innings yet, because we have not yet seen a series of rate hikes – which are sure to be a drawn out affair of meaningless 25 basis point increments – and simply because the counter rally in the dollar has only gone on for a few months. When you are dealing with irrationality, whether it is trading exuberance or the modern day application of busted economic theories, calling an inflection point is more an art than a science.

Time Is Running Out for the US Dollar
Jeffrey Nichols, Senior Economic Advisor to Rosland Capital
What is important to remember is that gold will often react to short-term items like actions in Europe and India. To the extent that these two developments -- euro skepticism and monetary tightening by India's central bank -- were indeed responsible for this week's gold-price decline, we think the market has again got it wrong in the short term. But no matter how wrong the market is in the short run, in the long run, it is always right.

First, the US dollar is appreciating not because the American economy is the picture of health or because US monetary and fiscal policies are instilling confidence in the long-term value of our currency. Indeed, the race between the greenback and the euro is a race to the bottom, not to the top. And, regardless of which one win's the race to the bottom, gold will be moving up in both currencies.

Rather, it is the euro that is depreciating against the dollar because the European economic situation is even worse than ours and because the euro's very survival is now being questioned. In India, the Reserve Bank's objective is to keep the economy growing at a healthy pace over the long term. A sustainable expansion in economic activity with rising household incomes and increasing prosperity will result in more demand for gold jewelry and investment across India, and over a longer period.

New-Home Sales Unexpectedly Fall in Feb; Durable Good Orders Up- Reuters
Sales of newly built U.S. homes fell for a fourth straight month to a record low in February, but another rise in new orders for durable goods offered hope that the economic recovery remained on course.

More "hope"... "Hope" will never force a recovery in the economy no matter what "signals" are devined from all the rigged economic data.

Home loan demand down 2nd week as rates rise
NEW YORK (Reuters) - U.S. mortgage applications fell for a second straight week, with demand for home loan refinancing sinking to its lowest level in a month as interest rates jumped, data from an industry group showed on Wednesday.

Demand for purchase loans, a tentative early indicator of home sales, edged higher, but activity was down from a year earlier, further evidence that the housing market has hit a lull after showing signs of a recovery late last year.

The Mortgage Bankers Association said its seasonally adjusted index of mortgage applications, which includes both purchase and refinance loans, for the week ended March 19, decreased 4.2 percent.

The four-week moving average of mortgage applications, which smooths the volatile weekly figures, was up 1.9 percent.

Harsh winter weather has taken a hefty toll on home sales, while stricter lending standards, higher fees, and declining incomes have made it tougher on borrowers.

Michael Moskowitz, president of Equity Now, a direct lender based in New York that does business in nine states, said unemployment and underemployment are also weighing on sales.

"There is a lot of nervousness right now and people are uncertain about their financial future," he said. "If you do not have a job, looking to buy a home is not high on your priority list."

Another huge obstacle is that many mortgages are "underwater," he said. Negative equity, when the amount owed on a mortgage exceeds the current value of the home, has been one of the biggest banes of homeowners, making many unqualified for home loan refinancing and preventing some from selling.

And Bernanke wants to end the purchases of Fannie and Freddie debt? Good luck with that plan Bumbling Ben. There is no housing recovery, there is no economic recovery, all there is is government stimulus. The private sector is in the fetal position, the vultures are circling.

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