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Friday August 17, 2007 - 11:26:12 GMT
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Was that you Hank? Plus: The dollar is only bouncing, death looms!

Key News
• The European Central Bank should scrap plans to raise interest rates in September as markets around the world plunge, economists said. (Bloomberg)

Key Reports Due (WSJ):
10:00a.m. Mid-Aug Reuters/U Of Mich Sentiment Index. Previous: 90.4.


Larks are singing on the breeze
and I think we better get ready for a squeeze


FX Trading –  Was that you Hank? Plus: The dollar is only bouncing, death looms!

After watching US stocks stage such a dramatic rally yesterday, into the close, one thing came to mind—PLUNG PROTECTION TEAM or more elegantly known as P-P-T!



I guess PPT was so busy here in the US, they were worn out by the time Tokyo opened:


The Nikkei tanked over 5% in its latest trading session.  Yikes!

The question, which no one can answer with any degree of confidence (that doesn’t preclude them sounding confident when they say it), is this: When is this going to be over?  And secondly, how far does $-yen fall? 

One thing that seems correlated is the Nikkei (black line) and $-yen (red line), as you can see in the chart below comparing the two price series on a daily basis, though who leads and who follows is always a bit challenging:


Why would this relationship hold?  One reason we can think of is all those local currency traders—we sometimes refer to them as “Japanese citizens,”  have been acting hedge-fund-esk for a long time i.e. Japanese citizens have borrowed their own currency in droves and sent it packing to places like Australia and New Zealand—just like the hedge fund guys.  The difference is the Japanese citizens didn’t get an extra 20% kicker to make the trade, as they were happy with the yield differential and the “fact” that this trade would last forever. 

We got to thinking of the public service advertisement from Japan to its citizens: “This trade is so simple even a hedge fund manager without grey hair (read 99% of them) can do it and be a hero—why not you!” 

The Japanese government gets its own citizens to actively suppress the yen.  Exports boom and all are happy. 

Thus, once again the most elegant words ever enunciated in the world of economics resonate in our heads:

                  “There’s no such thing as a free lunch.”

                                               Milton Friedman (One of our all-time Heroes)

Money is rushing back to Japanese shores from hedge funds, real and from those who play one in real life.  When they run out of exposure, the $-yen move flattens out.  That’s about the best that we think can be said.  No matter that Hank & Co. may be on the case.


The Dollar is only bouncing, its real death looms.  Buy gold is the mantra chant.   

[Editor’s note: Comments on gold this morning are targeted to those very comfortable speculators who reside in safe Western nations yet always seem so edgy about the future and usually believe banana republic time is just around the corner for the United States.  Granted, there is a whole bunch wrong with the US, but this is a relative game we play.  It ain’t looking all that great anywhere else.]

I continue to be surprised by the mindset of people who should know better.  I told you that I was at an investment conference (it was very well done I thought) in Vancouver about three weeks ago.  It was a large conference, probably 800-900 including the resident gurus.  And to a man or women, everyone with the possible exception of me was STRIDENT dollar bearish.  I was more agnostic on the dollar, a mindset I usually try (key word) to maintain in an effort to stay open to alternative scenarios.

And of course, those at the conference were also STRIDENT bullish on gold. 

The leader of the conference articulated this stridence with perfection. (P.S. the leader still articulates the same theme no matter that one would be getting their portfolios smashed in the interim.  But when it comes to investing, the guru crowd rarely lets the facts get in the way of a good story.)

Okay…after seeing such strident views, a few things popped into my head:

• Bingo! 
• Lights flashing! 
• Bell ringing! 
• Sentiment extreme!
• Great contrarian indicator! 
• No one left to sell dollar! 
• No one left to buy gold! 
• Total and complete close minded speculators who were about to get hammered!

Of course, this is about the time the US dollar decided it was time to get off the canvas.  And it has.  And of course this was the time for all to see that gold was “not just another asset class” as it was articulated at the conference.  No, it is so much more.  You already know what I think it is—the greater-fool’s theory.  If gold is in an uptrend, buy it.  If it’s in a downtrend, sell it.  It’s that simple.

Gold pays nothing.  You can’t eat it (technically not true, but let’s say its not very filling).  And as a friend says, “You can’t just slice off a piece of your gold bar that you carry around in your pocket and pay for movie tickets.”

I know…Armageddon is coming!  That’s of course a good reason to buy gold.  Because then you can melt it down and make something really useful—bullets! 

And to wrap up my little tirade against this view that gold is all things wonderful in the world and the dollar all things ugly, I leave you with this, which comes from an economic research firm named GaveKal.  They are independent thinkers and very smart people.   

“Indeed, despite two or three world wars (whether one counts the cold war), a supposed massive debasement of our currencies (as the gold bugs like to say), hyper inflation, and the recent Gold rally, Gold has returned a princely -9% in real terms in 111 years!  We have also rarely seen four consecutive years of gains (1930s, early 1970s, late 1970, 2002-2006).  Meanwhile, the Dow Jones (without dividends reinvested!) has put in a far more honorable performance. [Up 1,126% in real terms over those same 111 years]

Have a great weekend. 

Jack Crooks


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