Hmmm… Where have I heard that before? Anyway, I thought that by continuing to use the words “extended period”, that the dollar would get pummeled… And momentarily, it looked as though it might, as the offset currency to the dollar, euro (EUR), raced to trade above 1.49… But a funny thing happened on the way to the forum, and the invisible hand reached down and reversed this move in a NY Minute! The work of the PPT? Probably… The Plunge Protection Team probably stepped in to keep the dollar from a free-fall… That’s my take on it anyway!

With interest rates remaining at near zero levels here in the US, I thought it to be appropriate to pull out this new nickname for Big Ben… “Zimbabwe Ben”… (Thanks Ty!)

The rate hike decision ball gets thrown “across the pond” to the Bank of England (BOE) and the European Central Bank (ECB) this morning for their versions of: Leave rates at present levels, but try to sound upbeat… I think you’ll have the “tale of two central banks” here this morning. While both will keep rates unchanged, I think you’ll see the BOE opt for more bond purchases in an attempt to shore up Britain’s banking system. The ECB will NOT be making any such announcement.

In fact, I believe we’ll hear ECB President, Trichet, announce that the ECB is moving closer to withdrawing stimulus from the economy! So, those of you who have the ability to go long euros versus sterling (GBP), this would seem to me to be the “trade o’ the day”… But what do I know? I’m not a short term “cross trader”!

So… With the FOMC finished and the two European Central Banks on the docket today, somehow the risk aversion has crept back into the markets.

I received an email from a reader the other day, asking me why I prefer Australian dollars (AUD) to New Zealand, as the kiwi (NZD) had outperformed its kissing cousin across the Tasman from 2002 to 2008…. Well… New Zealand enjoyed a wider yield differential than Australia during that time period, as it posted the highest interest rates in the industrialized world… Now that’s saying something right there, and a good reason kiwi outperformed the Aussie dollar…

But times have changed… And a very timely talk by Reserve Bank of New Zealand Governor Bollard yesterday, helps explain why Aussie dollars are now over kiwi… Here’s Governor Bollard…

“Both countries have survived the crisis well, due to a mix of strong institutions and stimulative policies. However, their immediate prospects are different. Australia has avoided negative growth, and its prospects are driven by strong terms of trade, vast mineral deposits, the Chinese market, and rapid population growth.

“New Zealand has had a recession, and the pick-up is slower and more vulnerable – a difference financial markets do not appear to appreciate.

“Australia is a lucky country, but we could be a lucky neighbor.

“Australia is entering a new minerals boom, investing heavily and encouraged by new finds, re-opening markets, bottlenecks and strong prices. Strong investment and export growth would mean big challenges for Australian policy. This all means an economy that looks less like New Zealand.

“However, Australia’s potential raised the prospects for New Zealand’s manufacturers and services, which have a bigger share of exports than the same sectors in Australia.”

OK… So Australia is a “lucky country” but New Zealand could be the “lucky neighbor”… Makes sense to me!

The Brazilian real (BRL) rally took a walk on the wild side yesterday, gaining 2.5% versus the dollar in one day! But that’s relatively tame for some of the wild moves we’ve seen in recent times with the real… As long as you are not watching the currency like a hawk, and sweating out each pip move, this is no biggie… Keep your eyes on the horizon.

I find it somewhat humorous that the Brazilian government officials have tried and tried to throw down roadblocks for the real, and the investors just keep coming in droves… The 2% tax on capital inflows did nothing to slow down the real’s move versus the dollar, except for the day it was announced… After that, it was Wayne and Garth playing street hockey once more… “Game On!”

OK… I had a few callers and emails yesterday telling me that I was wrong about the gold sales to the Reserve Bank of India (RBI), saying that it was done in SDRs… I think the confusion exists in the fact that the gold sale kept getting reported as $6.7 billion worth of gold… But to put these questions to rest… Here is a report from the Economic Times of India (their leading financial newspaper).

The purchase was in SDR 4.8 billion worth.

Today in the US we’ll see the Weekly Initial Jobless Claims data, which will remain above 500,000 per week… And the ICSC Chain Store sales figures, which if consumer spending has gone back to “pre-cash for clunkers” levels, would mean these figures would be soft… But I don’t think this data gets much playing time with traders, so we’ll just carry on.

And then there was this… OK… So… Some people chastised me yesterday for saying that the government can’t prove the 650,000 jobs they claim they “saved”… Well… Here’s a ditty for you! Did you know that the government is claiming that by giving a person that already has a job, a raise, it constitutes as “saving” that job? Want more funny accounting? Stay tuned, same bat time, same bat channel!

To recap… The FOMC left rates unchanged and said they would remain there for an “extended period of time” this sent the dollar to the woodshed, but reversed on a dime… PPT at work? The BOE and ECB meet this morning to discuss monetary policy. Expect the BOE to announce more bond purchases, and expect the ECB to announce a move to withdraw stimulus. We learned that New Zealand is not Australia, but lucky to be Australia’s neighbor! And try as they might to keep the real from gaining versus the dollar, the Brazilian government’s moves have not worked.

Rates to Remain Near Zero originally appeared in the Daily Reckoning. The Daily Reckoning, a FREE daily e-letter, offers a "uniquely refreshing" perspective on the global economy, investing, and today's markets.

So… What put the tiger in gold’s tank yesterday and overnight? Well, the weaker dollar helped… The thought that the Fed would keep rates on hold this week helped… But the real beef came from the announcement that the Reserve Bank of India was buying 200 tons of gold from the IMF… I know, I know, I told you yesterday that I thought it would be a “wash” for the dollar and the gold price… But that was before I learned that the Reserve Bank of India paid for their $6.7 billion dollars worth of gold with… SDRs!

So… Either, the Reserve Bank of India (RBI) didn’t want to get rid of their dollar reserves… (Yeah, right!) Or… The IMF didn’t want anything to do with dollars, and preferred receiving SDRs! (For those new to class, an SDR is a basket of currencies that make up one unit called a “Special Drawing Right”, which the IMF uses; and lately it’s been rumored to be the replacement for the dollar as the reserve currency of the world… The one government, one currency thing.)

I’ll pin my colors to the mast of the IMF not wanting anything to do with dollars at this point! Been there, done that, bought the T-shirt!

So… The price of gold is nearing $1,100… I reminded my beautiful bride last night that just two months ago I told a group of close friends that they should seriously be considering buying gold as it had slipped to $940 an ounce… I wonder what they think when they see gold at nearly $1,100… I’m sure the V-8 head slap is going on all over my neighborhood!

OK… So what’s going on with the currencies, as the dollar has had the hammer for three consecutive days now… Well… The dollar is back on the slippery slope this morning, as those same thoughts about the Fed will keep rates unchanged this week, really emphasizing the fact that Australia has raised rates 50 BPS so far, and Norway has raised them 25 BPS… There are places to go where you can get higher yields.

I get a kick out of some people that call the desk here, and say… “I’m looking for a high yield of around 8-10%, with no risk… Do you have that?” Sure, right here in my back pocket! NOT!

The FOMC meeting will be a two-day meeting, so get the board games out, find the deck of cards, and make sure you have good batteries for the Battleship Game! When the Fed Heads get tired of the board games, and all, they’ll announce tomorrow afternoon that they are going to leave rates unchanged, and that while they see improvement in the economy, sans the 3.5% third quarter GDP, it’s too soon to remove the accommodating rates… How do I know that? I don’t… But, I’ll bet a dollar to a Krispy Kreme that what they say is pretty darn close to that!

The key will be to see if the Fed Heads, led by Big Ben Bernanke, leave the words “extended period” unchanged regarding how long the low rates will remain… For if they do, the dollar will immediately be sent to the woodshed once more, without passing Go, and without collecting $200! So… The statement following the rate announcement is the key tomorrow.

So… The euro (EUR) is 1-cent higher this morning, the Aussie dollar (AUD) is about 1-cent higher, and so on… Those that bought at yesterday’s blue light special prices will be smiling like a Cheshire Cat this morning!

OK… I have to talk about this… For I’ve received a ton of emails about it…

Quite a few readers have sent me a recent Nouriel Roubini interview, knowing that Mr. Roubini has long been a fave of mine.

Well… Mr. Roubini talked about the dollar being “the mother of all carry trades”, which I told you had become the new funding currency for the carry trade a few months ago…

Mr. Roubini also talked about how this was fueling a huge run-up in the prices of risk assets… I’ve also told you about that, and how, should the US do the double dip, a huge sell off of stocks would probably occur, and cause an adverse affect on the risk assets of currencies and commodities.

So, all in all, nothing new… So I was surprised that readers wanted me to comment on this. Well, the caveat here is that Mr. Roubini is calling for a massive sell-off of the risk assets when the correction comes… He doesn’t specify when this will happen.

I’ve also said that the risk assets have gone too far too fast, and that a correction is due… So, let’s move on from there.

I see where Marc Faber is saying that the correction will net the dollar 10% versus the euro… Again, he doesn’t say when this will happen, just that it will…

But again, as diversification people, with our eyes fixed on the horizon that shows that the only way the US government can repay their debts is with cheaper dollars… We just batten down the hatches for this correction, for we know that on the other side of the correction is another massive move upward.

There was something else that I wanted to talk about… And it’s something that I’m sure I’ll get a few emails about… Good and bad… But here goes… Did you see that Ford announced a nice profit for the last quarter… CAPITALISM ISN’T DEAD! Three cheers for capitalism!

So way to go Ford! Didn’t take bailout money… And one year later books a profit! Whereas GMAC is in need of additional bailout money, and Chrysler is fiat now… Great use of taxpayer money wasn’t it?

Here I go again… Sorry, didn’t mean to go on a tangent about this stuff… It’s just that I have no idea why this doesn’t just tick off any American who reads about it! But not to worry, the government has more plans to spend money they don’t have!

Hey! Earlier I talked about Australia’s rate increases… Well, the Reserve Bank of Australia (RBA) is running scared these days… Scared that their rhetoric about rate increases is going to push the Aussie dollar to parity with the green/peachback… So guess what the RBA members have decided to do? You’ve got it! They’re going to “tone down” their interest rate hike rhetoric… RBA Governor Stevens said that the 28% gain in the Aussie dollars this year versus the US dollar would be a good inflation fighter, and allow him to slow down the rate increases.

Well… Don’t get off the Aussie dollar love train just because the RBA Governor suggests that he could slow down rate increases. The Aussie dollar already enjoys more than 300 BPS of yield differential to the US dollar, Japanese yen (JPY), Canadian dollar (CAD), and Swiss franc (CHF)!

And the Lisbon Treaty that was hung up in the Czech Republic has finally been signed by the Czech Republic’s President, thus completing the rounds and putting the Treaty in place. Now, I’m not a big fan of the Treaty, but… It’s what the Eurozone needed to remain viable, and so it it’s done. This removes the albatross from around the euro’s neck, and will shut up those people who keep talking about a collapse of the European Union, and the euro.

Chris Wood is filling in for good friend David Galland this week on David’s daily letter called Casey’s Daily Dispatch… He had this to say yesterday, which I believe just about sums it all up regarding the Fed and Treasury here in the US…

“A group of federal agencies including the FDIC, Federal Reserve, and Office of Thrift Supervision just released new guidelines for how banks deal with troubled commercial real estate loans. And get this:

“Under the guidelines, loans to creditworthy borrowers that have been restructured and are current won’t be classified as high risk by regulators solely because the collateral backing them has declined to an amount less than the loan balance.

“Yes, you read that correctly. Banks won’t have to show losses ‘solely’ because the collateral has fallen in value below the loan. Perhaps most incredible is that this move is being applauded by the business community. The next step will be a federal move to facilitate refinancing that same collateral.”

That’s pretty amazing, don’t you think? First the financial institutions were allowed to drop the “mark-to-market” on their collateral… And now this… And people still question why foreigners are growing very weary of these things, and becoming quite scared regarding their dollar-backed holdings? They shouldn’t question any longer, eh?

And then there was this…

Remember how excited I was that Ron Paul’s bill to audit the Fed was going to discussion? I thought, surely this would be it… The Fed would finally get audited, and treated like the corporation they are! But, then Ty Keough sent me this, and my hopes were dashed…

Representative Ron Paul, the Texas Republican who has called for an end to the Federal Reserve, said legislation he introduced to audit monetary policy has been “gutted” while moving toward a possible vote in the Democratic-controlled House.

The bill, with 308 co-sponsors, has been stripped of provisions that would remove Fed exemptions from audits of transactions with foreign central banks, monetary policy deliberations, transactions made under the direction of the Federal Open Market Committee and communications between the Board, the reserve banks and staff, Paul said today.

“There’s nothing left, it’s been gutted,” he said…

OK… To recap… Gold is soaring! Gold has reached a new record all-time high! The dollar has given back some of its gains in the past four days as traders begin to realize that the Fed is going to keep rates unchanged tomorrow. The government is up to its usual tricks regarding collateral and the bill to audit the Fed.

Gold Over $1,090 and Climbing originally appeared in the Daily Reckoning. The Daily Reckoning, a FREE daily e-letter, offers a "uniquely refreshing" perspective on the global economy, investing, and today's markets.

So… The dollar’s losses were reversed by mid-day, and the non-dollar currencies were taken to the woodshed. Shoot, even a rate hike by the Reserve Bank of Australia (RBA) couldn’t reverse the risk aversion trading. I’ll get back to the rate hike by the RBA in just a minute… But first I need to talk about this shift to risk aversion once again… We saw this briefly last week, and it faded into the wind… I hope this shift to risk aversion is soon a small item in our rear view mirrors!

Now… The ISM Manufacturing Index rose to 55.7 from the prior month’s 52.6 reading. This marks the strongest reading for the index since the April 2006 reading of 56.0. Let me explain something to you, which I’ve explained before, but this really illustrates what I’m talking about… And that is… This Manufacturing renaissance here in the US comes as a benefit of the weak dollar that’s been in place for over six months now. It’s that simple, folks… You want Manufacturing in the US to be robust? Then you need a discounted clearing mechanism… And that is the dollar.

The Asians are learning to trade among themselves without the US, and the Eurozone already has 80% of their trade among themselves. That doesn’t bode well for US exports unless… Unless there is a discount… And that discount comes in the price they have to pay/convert their currency for the dollars that are needed to buy the export… So… Why shoot the goose that lays the golden eggs?

OK… As I mentioned above… The RBA raised rates 25 BPS (0.25%) last night, as I expected them to, and had told you they would! The Aussie dollar (AUD) got sold though after rallying briefly… Traders got spooked when the RBA Governor said that “it was prudent to lessen gradually” the stimulus to the economy provided by lower borrowing costs… OK folks, that’s central bank parlance for: the interest rate hikes are going to slow down from here on out… So don’t expect a rate hike at every subsequent meeting!

Oh come on, Aussie dollar traders! The Aussie dollar yield differential to the US is now staggering! As it is to Japan, Europe, and Canada! Only New Zealand and Brazil can play on the same team as Australia when it comes to significant yield differentials! But NOOOOOOOOO! You get spooked! Have you no intestinal fortitude? HEY! The good news is that it gives latecomers a chance to buy at cheaper levels, or… Those that already own, a chance to pick up more at a cheaper level! Courtesy of the Chicken Little Aussie dollar traders!

Well… I guess I can’t blame them too much, with the risk aversion campers taking over the campground… Here’s another thing that I saw last night that has the risk aversion campers spreading like wildfire… A long time reader of the Pfennig and Bloomberg TV personality, Pimm Fox reported last night that: President Barack Obama’s advisers are “seriously” considering proposing a second stimulus measure to boost the economy, Commerce Secretary Gary Locke said in an interview. Locke said another stimulus would be “very targeted and specific and we need to be mindful of the deficit as well.”

Hmmm… OK… How many times have I said in the past eight months that the government was going to see the need for more stimulus? The answer? MANY! I’ve got a question… If the GDP was “so robust” as the government officials claimed it to be, then why are they discussing more stimulus? BECAUSE THE GDP WAS A FRAUD! We all know that… I explained it all to you yesterday! But the announcement that more stimuli is being “seriously considered” is what we as kids used to call “cheater’s proof”!

What does “very targeted and specific” mean? It means the government is going to get deeper and deeper into the private sector… That’s what it means!

I have a question for the government… You told us the $787 billion stimulus package last February was going to keep unemployment from reaching 10%… Guess what? That didn’t work! So, what makes you think whatever taxpayer money you spend now is going to work? Oh, and don’t give me that barrel of baloney that you’ve “saved” 650,000 jobs. Saved Jobs CANNOT BE PROVED! So why not say you saved 1 million or 2 million jobs? I mean, what difference does it make… It’s not true, and can’t be proved!

Whoa there big boy… You had better stop before the Pfennig gets sent to the White House to shut me down! Yeah, like it hasn’t been sent there before now!

OK… Did you hear about the IMF gold sale? The IMF sold 200 tons of gold… Not to worry though, the Reserve Bank of India stepped to the plate and bought the gold… Gold revisited $1,060 after this announcement, but in reality it should have been a wash, and the price of gold has backed off a few dollars overnight… But still pretty well bid, given the risk aversion going on in the currencies.

And why not? Gold is a store of value… Of wealth… Whey wouldn’t it buck the trend?

Speaking of which… The Big Boss, Frank Trotter, and I were talking last week about gold, and we kicked around this thought of sharing a money lesson with kids… And he sent me this…

“The weather turned around here in about three weeks. Great Fall, then ten days of deluge, now the chill of late Fall. And instead of Thanksgiving displays, the march of catalogues imploring us to turn away from savings and save the world through spending have begun to hit the door. In the past few years as our children have become young adults we have started to turn away from the quest for unneeded presents and zombie-like consumption and have started to implement a contribution concept: research and choose a cause that will appeal to the recipient, ensure that the cause is not acting like your average NGO running around in white land cruisers or and staying at five star hotels in the third world, and make a modest contribution. It isn’t working perfectly and we certainly backslide enough; but it’s underway. We may turn it into a gift of a few shares of a good company but enough of this.

“Something else that meets the need of a physical gift, but one with a message has been on my mind lately. It isn’t easy to start a conversation with a young person, especially quite young about global economics and the transient value of money. In fact, it’s hard to start a conversation with almost anyone on the topic. So what’s a better way to provide a gift box and a message? (Readers of ‘A Pfennig for your Thoughts’ will certainly be ahead of me…) The gift of real money, of course… Gold coins.

“With the gift of a coin, or a set of coins you can tell so many stories or impart values in a variety of ways. Coins are struck around the world providing a geography lesson and of course an insightful and cogent discussion of central bank attention to their country’s money supply (well okay, you might want to skip that one). You can tell the story of gold in the history of the world, and if you are brave and the audience attentive, how gold has held its value over the centuries and will probably do so for centuries to come. Bringing things up to date you can cover the astounding fiscal and monetary policy that has become our new national pastime over the current and past administrations (but be sure to take your blood pressure medicine). Tell ’em ‘you are worth an ounce a year’ (or more).

“If you are buying for one or two friends or children or grandchildren, head down to the local coin store and grab a couple bullion coins. If you have a good size list or have the capacity to do something substantial then give the team here at EverBank a call. In any event, let’s all be sure to teach our kids, grand-kids and the people around us in general about the monetary value of gold.”

WOW! That was great Frank! I love it when the Big Boss puts down his thoughts in writing and shares them with the rest of us!

OK… To recap… The dollar is enjoying a strong rally thanks to the risk aversion crowd that is getting spooked about the banks, after the 115th US bank this year failed… The Reserve Bank of Australia raised rates again by 25 BPS, and the Reserve Bank of India bought 200 tons of gold that the IMF felt it needed to sell, so a wash if you will. And then Chuck went on a rant about stimulus.

Risk Aversion Boosts the Dollar originally appeared in the Daily Reckoning. The Daily Reckoning, a FREE daily e-letter, offers a "uniquely refreshing" perspective on the global economy, investing, and today's markets.

So… The currencies slid versus the dollar on Friday, and haven’t really rebounded overnight from what I can see. The Aussie dollar (AUD) seems to be champing at the bit to move higher versus the US dollar, but just can’t get the Big Dog, euro (EUR), to get off the porch this morning!

The reason the Aussie dollar is champing at the bit to move higher, is the news from China this past weekend that their manufacturing data from October showed the fastest gain in 18 months! So, in keeping with the Manufacturing Index here in the US in mind, the Chinese Manufacturing Index moved to 55.4 in October, from the 55 in September, and the Chinese say that exports were strong. OK… We have to apply the “believe half of what the Chinese tell us about their economy” principle… And if that’s so, then the Manufacturing Index still is above the expansion line of 50… And that’s a good thing for the global economies!

I would think that news like this from China would be a springboard for commodities, and the commodity currencies of Australia, Brazil, Norway, New Zealand, and Canada.

Speaking of strong manufacturing… The Eurozone printed a strong Manufacturing Index report this morning too! Manufacturing in Europe expanded for the first time in 17 months, in October, increasing to 50.7 versus 49.3 in September!

The dollar index is beginning to show some weakness as I write this morning… And one would certainly think that news like this from China and the Eurozone, would push the dollar down… But, there’s that stinkin’ trading theme hanging over us like the Sword of Damocles! And with the news this past weekend that CIT Group was going to have to file bankruptcy, if things hold true, it would be good for the dollar… The flight to safety, and all that!

Hey! Doesn’t this news about CIT Group tick you off a bit? It does me… And I’ll tell you why! CIT Group had received $2.33 billion of taxpayer money in an attempt to bail them out last year, but they failed anyway! Again! Wouldn’t it have been far better to just let them fail when they first showed signs of not being able to compete, and survive? I know that in the whole scheme of things $2.33 billion doesn’t sound like that much… Considering the trillions that have been spent, allocated or guaranteed! But… $2.33 billion here, and $2.33 billion there, and pretty soon you’re talking about a nice sized pile of cash, that would not have been wasted!

The business section of our local paper had an article this past weekend that I referred to last week regarding GMAC and Ally Bank… Here’s David Nicklaus saying what I wanted to last week… “That clever Ally Bank ad, the one where a boy is denied a toy truck because of a ‘limited-time offer’ omits a fact that would interest most viewers.

“You, the taxpayer, are propping up Ally – the bank that’s so good at making fun of other banks. And it looks like Ally’s parent, GMAC Financial Services, will ask for more money soon.”

So… The government is in competition with private sector banks… And they can pay interest rates that are higher than other banks, because… If they lose money, they can just go back to the well and get more bailout money!

This is all just becoming one Big Mess, folks… You’ve got to see what’s going on here! It’s called big government… And when you have big government, you have big deficits! The government does not have any money to spend unless they steal it… I mean take it from taxpayers first! And they’re spending what they don’t have! Tax receipts are falling, and the government’s expenditures are rising! That’s a bad formula, folks…

And one that makes you so aware of the need to be diversified with a portion of your investments out of the dollar!

OK… I’ve got to stop there, I have to go to the doctor’s office this morning, and I don’t need my blood pressure boiling!

Hey! I was reading an article on Friday about Australia in which the Australian Treasurer, Wayne Swan, told reporters that he truly believes that the Australian economy is going to outpace most of the world in 2010… This plays well with my thought that I’ve held for so long, and have told you dear readers about for some time now, and that is… Australia is the proxy for global growth… And if the “insiders” in Australia think their economy will outpace most of the world, that’s a good sign for the global growth! And one that I think traders should be taking notice of!

I think that Brazil has a long way to go to catch up with Australia, but Brazil has made great leaps in the past five years, and has really taken steps to be in the same conversation when talking about Australia. The country is still an emerging market, though, and with that, you get wild swings in the currency… Just so you know!

I want to get back to the GDP report in the US from last week… Recall that above, I told you that the government made a big deal out of the fact that a large portion of the rise in GDP was consumer spending… But you have to ask yourself this question… “How are consumers propping up GDP with spending in the face of over 16% unemployment? Personal consumption climbed while personal income fell in the quarter, as documented in the Pfennig each time they printed… So, the only way that works is if… Wait, you don’t think… Nah, we’ve learned our lesson, right? Oh well, I’ll throw it out there… The only way that works is if the money is borrowed… Credit cards, etc. OH NO! Tell me we’re not going down this road again! Ahhh grasshopper, but Christmas is just around the corner… With 16% unemployment going on, this should be a very “plastic” Christmas shopping season!

Ok… The week ahead is chock-full-o-data and events… Like… The FOMC meeting tomorrow, that carries over to Wednesday… You know what I say about those two-day FOMC meetings! Got any aces? Go Fish!

We’ll see our own version of Manufacturing Index – the ISM – as it prints this morning… We’ll also see Pending Home Sales. Tomorrow is the Auto Sales, and Factory Orders. Wednesday we’ll get the Treasury Refunding Announcement, and Thursday is weekly initial Jobless Claims, and the stupid Productivity reports, and then Friday is the Jobs Jamboree!

So… We’ve got a lot to talk about his week… I’m supposed to be leaving for Cabo tomorrow, but I doubt the doctor is going to let me travel, so I’ll probably be here all week. So, Chris gets off the hook this week most likely.

To recap… The euphoria that was all over the markets after the GDP report was wiped out by a very weak consumer spending report for September. The dollar rebounded on the “bad news for the economy” thus confirming that the “trading theme” is still in place. CIT Group filed for bankruptcy this weekend, thus wasting the $2.33 billion that was given to them by the government from taxpayers! And both China and the Eurozone’s manufacturing indexes were strong last month, which should be a good thing for the global economies, commodities, and so on…

Consumer Spending Drives GDP? originally appeared in the Daily Reckoning. The Daily Reckoning, a FREE daily e-letter, offers a "uniquely refreshing" perspective on the global economy, investing, and today's markets.

Well, it wasn’t data that caused this move… It was a few things that I’ll list for you that ganged up on the currencies and gave the markets the thought that the US economy just might not be free and clear, which brought about a return of the “risk aversion” trades… Here’s the list that ganged up on the non-dollar currencies.

Things making the US economy look like it’s on shaky ground again include:

1. Rumors that first-time homebuyers’ credit will not be extended past November 30th
2. Rumors that the ING rights issue is not being well received
3. Talk of bank downgrades
4. Mention of a new bill addressing ‘too big to fail’ giving the government broad power to dismantle financial companies that get into trouble

I was asked by our public relations people to put together some thoughts for CNBC… So, the above stuff was what I put together… CNBC then asked for an interview… Well, this is where I get off the bus… Long time readers know that I’ve been ambushed twice at CNBC, and decided to not go back for a third time. So, even though this interview has little chance of an ambushing, since they asked for the info… The Big Boss Frank Trotter will be doing the honors at 8:40 CT/9:40 ET, today… So, don’t forget to tune in!

Another thing that may be giving the dollar some love is the yield on the 10-year Treasury… This yield, as reported in yesterday’s Pfennig, had bumped up to 3.50%, which had been the proverbial line in the sand in the past. 3.50% had been the level that had seen strong Treasury buying (probably by the Fed!) to bring the yield back down… But yesterday, we saw this yield inch higher to 3.54%… We should keep an eye out for this, to see if there is any slippage in the yield, because that would only mean one thing… The Fed is buying again! And that’s the reason the dollar got some love yesterday from this yield… Because so far… The Fed hasn’t gotten their hands dirty here… But should they, once again, it won’t support the dollar.

So… There you have it! Just when we thought the data this week would send the dollar to the woodshed, these things popped up to underpin the dollar! Hopefully, it’s just a case of sell the rumor and buy the fact for the non-dollar currencies, as most of this stuff was just rumors in the markets.

But it did get people/investors/traders thinking about just how oversold, in the short-term, the dollar was… It normally takes something like this to get those thoughts to come to the front of the class, as the negativity had such a stronghold.

We’ve seen these “risk aversion” moves in the past seven months, and each time they’ve only lasted a short while. But that doesn’t mean we’ll see the risk aversion campers leave shortly this time. They might… And they might not… Don’t you just love it? I know one thing for sure! The sell-off yesterday was swift and strong. For instance, the euro (EUR) was 1.5050 before the sell off, and is 1.4890 this morning! What does that look like to you? Buzz! If you said, “Chuck, it looks like a cheaper level to buy” then you may have won a free subscription to the Pfennig newsletter! If you did not have that answer, then there’s a free parting gift for you at the door! HA!

Yes, it certainly does look like a cheaper level to buy… Of course it doesn’t mean that tomorrow’s price won’t be cheaper, but given the history of the risk aversion reversals in the past, it doesn’t mean that it will be cheaper either!

And… According to Commerzbank… “It would probably be premature to call this the end of the dollar’s weakness. It remains under pressure due to the low interest rates and the resulting attractiveness as a financing currency for carry trades.”

I saw a story last night about the Brazilian real (BRL), and how the real has gained +35% versus the dollar this year, as a Big Mac in Brazil costs more than it does in New York and London… Uh-Oh! That Big Mac Index again! But that doesn’t scare the research team over at Goldman Sachs, for they still believe the real has room to gain versus the dollar… And you know me and the Big Mac Index… While it’s a “nice” measure, it’s not the holy grail of currency outlooks… I can point back to 2000 and 2001, when the Big Mac Index said the dollar was overvalued, but it took nearly two years before we saw dollar weakness… So, I don’t put much faith in the Big Mac Index, for short term forecasting. Not that I forecast – at least not in this letter I don’t – for I would be hung out to dry by readers if I got something wrong… I mean look at when I said I thought the Aussie dollar
(AUD) COULD go to parity, and it only got to 98.5-cents!

OK… Dr. Marc Faber was in the news last night, as he was giving an interview on Bloomberg TV…

“The dollar will become worthless when people eventually realize the fiscal situation in the US is a disaster. It will go to a value of zero eventually, but not right now. Looking at Mr. Obama’s administration, it should already be there.” He went on to say…

“In my opinion, about 50% of tax revenues will be used just to cover interest payments on the government debt. That’s unsustainable. Then you’ll really be forced to print money. The best investments right now are foreign currencies, commodities, and equities.” And then when asked about Fed Chairman, Big Ben Bernanke, Dr. Faber said, “He’s a money printer. He’s nothing else.”

Whew! That’s taking the whole shootin’ match of the government and the Fed, to the woodshed, eh?

For those of you keeping score at home, make sure you’ve jotted down the right figure of dollars that the US government and the Fed have spent, lent or guaranteed… $11.6 trillion!

OK… It looks like the last country that’s needed to sign the Lisbon Treaty, the Czech Republic, is going to sign it… Now, let me be perfectly clear about this… I don’t agree with the Lisbon Treaty, but the European Union has gone so far down this road now, that there’s no turning back, so you might as well go along and sign the thing, I guess… The one thing it does do, is underpin the euro… For if this Treaty did not get signed, the pressure on the euro would be great, because you would have had all the naysayers coming out of the walls again talking about a collapse of the European Union and a return to the legacy currencies. You know: Deutsche marks, French francs, Spanish pesetas, and so on.

Speaking of Europe… I know it’s not really November… But it’s close enough! The Norges Bank of Norway will meet tomorrow, and are expected now to raise rates, which would make them the first European central bank to raise rates… Notice I said “now”? Well, the rest of the crowd are jumping on my bandwagon that began a couple of months ago when I said that it was a race between Australia and Norway to be the first to raise rates… There weren’t many pundits out there calling for rate hikes… But as time has gone on, and they read the Pfennig, they’ve come along nicely! HAHAHAHAHAHA!

In the last couple of weeks, the Pfennig and I have been mentioned a couple of times by the best writer on the planet, Richard Russell… And now, I have learned that Harry Schultz has mentioned us in his most recent letter… The Pfennig is really beginning to get noticed, eh? That just puts more pressure on me to come up with fresh, informative information!

Hmmm… And then there was this… PIMCO’s Bill Gross, who is known as the “bond king” admitted that he “has some concern on owning Treasuries”… If Bill Gross has some concern, folks, shouldn’t we? I recently did about a 20-minute video for our friends over at the Sovereign Society on the Treasury Bubble… Sure wish Bill Gross would have said something like this when I was putting that video together! Imagine what I could do with a statement like that when I’m doing a video on the Treasury Bubble!

OK, to recap… The dollar came back with vengeance yesterday, after some rumors on the street led people to believe that things in the US won’t be free and clear after all, which led to risk aversion… We’ve seen this risk aversion before, and each time it hasn’t lasted too long… Dr. Marc Faber checks in with some comments on the dollar, and Bill Gross has some concern about owning Treasuries!

Rumors Kill the Currency Rally originally appeared in the Daily Reckoning. The Daily Reckoning, a FREE daily e-letter, offers a "uniquely refreshing" perspective on the global economy, investing, and today's markets.

On Friday, the Swiss franc (CHF) hit parity to the dollar… I was not here to see it, obviously, but Chris tells me the franc’s strong move on Friday morning was the result of a Morgan Stanley report. The report said that the recovering European economy and accelerating inflation would keep the central bank from selling the Swiss franc in order to push it lower versus the euro and the dollar.

The franc is back below parity this morning, as that level brought about some profit taking, but I don’t expect for this move back below parity to last too long.

Chris also told me that Bank of Canada (BOC) Governor Carney was sending out warnings that the markets had taken the loonie (CAD) too high… Carney doesn’t believe the inflation fears are unwarranted, and that he might have to keep an option open to weaken the currency (by selling it) should this continue… OK, what we have here is a failure to communicate! Carney isn’t going to intervene except with his jawbone, folks!

At least I don’t think Carney will intervene… It’s not that I know something that everybody else doesn’t know about his situation, it’s just a hunch on my part. But as Chris mentioned in his note to me, with commodity prices continuing to rise, thus taking the loonie along for the ride, we’ll get to see just what Mr. Carney has up his sleeve!

Still, though, the fear that the BOC could step in and cause losses to currency traders does carry some weight, at least until the markets push the envelope inch by inch to see if the central bank bites. If it doesn’t bite, then they will push a little more… Eventually, they’ll see that the central bank is not going to intervene, and then the cow is out of the barn!

The other commodity currencies of Australia (AUD), New Zealand (NZD), Brazil (BRL) and Norway (NOK) continue to inch higher versus the dollar as we go along here day to day. With this being the last week of October, we’ll soon be turning the calendar pages to November, which just might bring us another rate hike in Australia, and the first hikes from Norway and New Zealand. Brazil has stated that rates need to go up 200 basis points (2%) but has not given any timeline for that to take place.

I spent a lot of time last week talking about the interest rate/yield differentials and how that’s going to be the next thing to beat down the dollar… And November has the potential to be a month of fireworks regarding rate hikes, and rate/yield differentials.

Last Thursday, I told you about China’s reported +8.9% economic growth… And since then, I’ve read quite a few stories from people who do not believe China’s claim… All have their reasons for saying that… I recall a conversation I had with a customer a month ago who had lived and had a business in China… He told me that whatever the Chinese say, believe half of it… So, with that in mind… If the Chinese say they grew +8.9%, then 1/2 of that would be +4.45%… And that’s still far greater than any country on this earth!

Well… Here in the US, the number of bank failures this year topped 100, last week… I believe the number is now 106 for 2009… 106 bank failures… Six would seem to be too many for my taste, but then add another 100! OUCH! All these failures and bailouts and TARP and TALF and back rooms deals to keep firms alive… And here at EverBank, we just continue to grow… OK, I’m slapping us on the back… But I just couldn’t pass up that opportunity!

OK, getting back to the failed banks… Why didn’t the government bail out these banks? Well, I think we all know that answer, but it kind of ticks you off doesn’t it? I’m not for bailouts, but shoot Rudy, once you start something like that, where do you draw the line? Oh! You silly bird! You know exactly where the government drew the line! With Lehman Brothers! Of which I still contend had some conspiracy undertones to it, with Lehman being Goldman’s chief competition, and all.

I was gone for a minute… Did you miss me? HA! No I slid my chair over to take a closer look at the economic calendar for this week that I pulled up on my trusty Bloomie! It looks as though the data we do get this week will show that the US economy is healing ever so slightly…

Anyway… The data this week includes the S&P/CaseShiller Home Price Index, and other “stuff”… And by week’s end, like I said, the data should show healing… But, if the trading theme plays out, that would be bad for the dollar!

Confused? Well, you’re probably a newer reader, and so… For you, I’ll explain… The trading theme for the currencies for over six months now has been to punish the dollar whenever the data shows economic improvement. That’s counter-intuitive to what you would think… But the thinking here is that: If the US economy is healing, the rest of the global economies will rebound much faster, and investors will shift funds from low yielding US assets to higher yielding foreign assets.

So… Now you know!

The Japanese stock market (Nikkei) posted a gain overnight, moving the index to a four-week high… The only reason I tell you this, is that it probably will lead to US stock strength, which has also been a nail in the dollar’s coffin the past seven months.

So, I guess what I’m getting at here is that we could very well see further weakness in the dollar this week… But, you can’t count on these trading themes, for just about the time you do, they reverse themselves! Or at least that’s how it always seems for me when I buy into an asset class!

Ty showed me a website last week called “thenothingstore.com” they had a note that I found to be simply genius! They make fun of the “unmighty dollar” and give you dollar bills to print (Funny money!) And then tell you to: “Click on a denomination above, print the bills, cut them out, and stuff in an envelope. Send to your congressman or senator marked as a CAMPAIGN CONTRIBUTION. They’ll get the message!”

Now that would be funny!

Then there was this… It is rumored that the Russian government is going to sell some of their gold holdings to help reduce their budget deficit… It’s thought that the Russians would have to sell about 50 tons of gold to fill their budget gap… The price of gold is not reflecting this story yet, so maybe it’s just a rumor… But, I would have to think the Russians would not think twice about doing something like this… Once again, we’ll have to call on the Chinese to soak up the gold that will hit the streets, or else we could see slippage in the gold price.

That reminds me of a conversation with our Mortgage guru, Stacy Blair, while in North Georgia two weeks ago… Stacy asked me why the US didn’t just sell their gold holdings to fill their budget gap… I told him that while that sounded good, what do we do next year? And the year after that? I mean the government has said that we need to prepare for $9 trillion in budget deficits for the next nine years… And then there are the conspiracy people that question just how much gold the US has? I mean Ft. Knox hasn’t been audited in a month of leap years!

To recap… The euro had pushed higher into the 1.50 handle until German consumer confidence caused a bit of slippage. The Swiss franc hit parity to the dollar last Friday, but has seen some profit taking since, and the Canadian dollar / loonie is softer on a warning from the central bank about the strength of the currency. US data this week could show some healing in the economy, which would not be good for the dollar.

Swiss Franc Hits Parity originally appeared in the Daily Reckoning. The Daily Reckoning, a FREE daily e-letter, offers a "uniquely refreshing" perspective on the global economy, investing, and today's markets.

Here’s the skinny… China printed a very strong third quarter GDP number overnight of +8.9%, and instead of basking in the glow of that report, currency traders took a different route, and decided that if: China is growing that strongly, then stimulus in China will be removed soon, and other countries will follow suit… No one in the markets believes that the US economy can withstand a removal of stimulus… Big Ben Bernanke might believe so, but the markets say, “Ain’t no way!”

So, here we are once again with this stupid trading theme of “what’s bad for the US is bad for the world, and thus a flight to the dollar and Treasuries is required”… I just love how these guys decide that “this is what’s going to happen and the rest of the trading world is going to follow them”… The non-dollar currencies got all caught up in this, and thus were sold off almost throughout the Asian and European sessions… I have seen the euro pop back up since I came in though, so maybe this will be short-lived.

There was news out of Brazil yesterday that was interesting… Yesterday I told you about the “tax” on capital inflows to slow down the stock market, and the real… Well, there were rumors yesterday that the Brazilian government would change this from “Capital inflows” to “Capital outflows”… This would apply to balances that were in the country for less than two months… So… This removes the albatross from the real’s (BRL) neck, in my opinion.

I came across some news yesterday that just kind of hit me right between the eyes… The news about the “Pay Czar” just got me thinking.

Well… Too bad the new “Pay Czar” doesn’t work for us in Congress! The new “Pay Czar” slashed compensation at 25 of the financial institutions that took government funds, lowering compensation by 50%!

But he wouldn’t – and nor would his colleagues on “the Hill” – like it very much if he started slashing their compensation! But wait! That’s a great idea! When he’s finished with the financial institutions, he can go to “the Hill” and start slashing compensation there… Freddie Krueger-style!

Because… Today, every dollar of growth comes with about four dollars of debt.

Again, the same reader sent me another email yesterday, telling me that I need to stop banging on the current administration, for deficit spending… It wasn’t their fault the annual deficit went from $450 billion in 2008, to $1.42 trillion in 2009! AGAIN! I DON’T CARE WHO SPENT IT; WE DIDN’T HAVE IT TO SPEND! And once again, let me be perfectly clear about this… When the first $150 billion of checks were sent to kick-start the economy, I ranted and kicked and screamed… When the first TARP was introduced, I screamed to the heavens! I stated then that I would NOT have bailed out anyone! I would not have spent money we didn’t have! I would have let those that could not stand on their own, fail… Think about that… The Big Ben’s and Summers’ of the world are telling you that “they saved the world”… Saved us from what? Financial ruin? We’re freakin’ broke now, what difference would it have made on that front? Job losses? Oh! And 10% (really 16%) unemployment is “saving us”? Or how about collapsing the markets? Well, I personally doubt that would have happened, folks… That’s just a scare tactic they use.

Think about this for a minute… If we had done nothing… Like Ronald Reagan did after the stock market collapse of 1987, we would have suffered some great losses… But we would be past it by now… Instead, the same firms that took billions from the government are still hurting. Did you see that Bank of America (BOA) booked a $2.2 billion loss for the third quarter! Even the Fed’s Beige Book revealed that the Fed’s regular report found that the overall economy is still plagued by weakness in banking and increasing unemployment.

OK, back to the currencies… One currency you would have thought would have gone through the roof on the news that China’s third quarter economic growth was +8.9%, is the Aussie dollar (AUD)… But NOOOOOOOOO! That didn’t happen… Once again the thought here is that economies around the world cannot withstand the removal of stimulus.. Starting right here in the US, but traveling around the world to China too… The thought process (strange as it might seem) is that if China grew this fast with stimulus, the Chinese government might see this as an opportunity to remove the stimulus, and when they do… All hell breaks loose!

While I agree that stimulus removal in the US would send our economy spiraling down the slippery slope of a double dip, I don’t agree that it would be the same in China.

So… The Aussie dollar is about 1-cent cheaper than it was yesterday afternoon. Looks like, smells like, walks like, and talks like a cheaper buying level opportunity!

Remember when I thought that Sweden’s central bank, the Riksbank, was prudent? Well, that all changed a few months ago, when the Riksbank joined the Bank of Canada in saying that they would not raise rates until the second half of 2010. Well, the Riksbank repeated that line this morning after they left rates unchanged… I just don’t get it… What the heck are these central banks thinking? I guess they just don’t have a brain… The need to go visit the Wizard of Oz; I heard he’s giving out brains!

Oil is back to $80 this morning… Gold is $1,055… And that means the Canadian dollar/loonie (CAD) is back on the rally tracks, heading toward parity against the dollar once more!

And for those of you who like to take a walk on the wild side… The South African rand (ZAR) has really taken a blow to the mid-section in the past couple of days. You see, there was a rumor floating around that the South African Reserve Bank (SARB) was going “freeze” the rand, to keep it from getting too strong versus the dollar. It was rumored that the Economic Development minister, Patel, was going to propose that the rand be “frozen”… Both the ministry and the central bank have denied ever discussing this proposal.

Let’s hope that they haven’t! That would be awful! Just look at the damage the rand has suffered on the rumor! So… If the leaders in South Africa can calm down the markets, we’ll see a rebound in the rand, and it will have been a case of “sell the rumor, buy the fact”.

Our office coordinator extraordinaire, Danielle Goodman, gave me one of those fake $1,000,000 bills yesterday and wanted to know if that was enough to buy a BRIC MarketSafe CD!

But that got me thinking about the hyperinflation story I told you about the other day… Let’s hope that we never have inflation that bad… Where $1,000,000 bills are floating around like $100 bills (i.e. C-notes, Benjamins, etc.).

The new Japanese PM is beginning to take some direction for his new Japan… For instance, this caught my eye… Prime Minister Yukio Hatoyama has advocated creation of an East Asian Community, modeled after the European Union, with China at its heart and the US left outside. Hmmmm… The Big Boss, Frank Trotter and I did a report about six years ago for The Daily Reckoning, where we outlined this Asian Union, and called the new currency there the “Pan”… That would be truly amazing if that Asian Union came to reality!

But like we said then… The wounds run pretty deep between China and Japan, and it will take quite a lot of love and tenderness to get past that! Which country has the love and which one has the tenderness? HA!

Well… The euro has continued to push back against the dollar since I came in this morning… So, maybe it can get back to 1.50, which sure looks like a nice crooked number to me!

Gold is $1,055 having lost $5 this morning. Don’t you just “love” all those commercials on TV these days with guys telling you to buy gold? Where were they when gold was $250, or $500, or $750? They were afraid that gold’s rise was not on terra firma, and they rolled up in a ball in the basement of their buildings, shaking with fear! HAHAHAHA! Nah… Just kidding… But I do find it weird that these guys are coming out of the woodwork now… Guys like Casey, Bonner, the Mogambo Guru and I have been here all along with the same message about buying gold.

The Data Cupboard finally yields some data worth looking at this morning, as the Weekly Initial Jobless Claims prints along with Leading Indicators… We’re still seeing +500K new jobless claims every week, folks… When will this stop? I contend that the US economy cannot sufficiently recover until the unemployment situation is addressed. Why is our government trying to shove this, that and the other thing down our throats these days, and not addressing the unemployment situation? I mean, a tax cut for businesses would be a great move there don’t you think? The other thing the government is ignoring is the deficit… Instead they’re thinking of new expenditures! I’ve written my congress people until my fingers won’t write any longer about this… What have you done? Come on people! This is immoral what they’re doing to our grandkids, and we just let them?

OK, I’ve got to get off that subject!

Let’s go to the recap now, as I feel myself getting all lathered up to scream at the walls about this stuff!

So to recap… The euro traded past 1.50 yesterday for the first time since August 2008. The non-dollar currencies have given back yesterday’s gains after China announced a +8.9% GDP for the third quarter, thus making the traders think that stimulus worldwide will be removed, which would be bad for the US and thus, we return to the stupid trading theme of rewarding the dollar when things are bad! UGH!

Currency Rally Reversal originally appeared in the Daily Reckoning. The Daily Reckoning, a FREE daily e-letter, offers a "uniquely refreshing" perspective on the global economy, investing, and today's markets.

OK… Yesterday, after signing off and hitting the “send button” for the Pfennig, I saw a story that shot across the desk, and then Don Ries sent me a follow-up later in the morning. The story was about the Brazilian government imposing a 2% tax on capital inflows. This was done in an attempt to slow down the Brazilian economy by slowing down the “hot money” that’s going into the Brazilian stock market by foreigners… Talk about throwing a cat amongst the pigeons!

Talk about pulling the rug from underneath the real (BRL)! It lost 3.5% for the day! WOW! I had a reader call and accuse me of not writing about this story in yesterday’s Pfennig, because I didn’t want to water down the BRIC MarketSafe CD sales… WHAT? First of all, I didn’t know about it until after I had sent the Pfennig out… And second of all… What does a tax today – that may not even be in place six months from now – have to do with the real’s value three years from now? Besides, this is good news for those who are buying the real now, for they get to buy it 3.5% cheaper! I shake my head and repeat… HOGWASH! Accusing me of hiding something!

Anyway… My colleague on the Currency Capitalist newsletter, Ashish Advani, had this to say about the tax announcement in Brazil.

“Frankly, I think this move to restrict capital flows is a pointless exercise at best. It’s simply a waste of time to think that they can control the strengthening Brazilian real.”

OK, back to me… In addition to Ashish’s thoughts… I tend to think there’s something up Bullwinkle’s sleeve here… Recall that about a week ago or so, I told you that Brazil’s Central Banker had mentioned the need to raise interest rates 200 basis points (or 2%). So… The government sees the real responding to that comment, and thinks, “Oh my God, we’ve got a big problem when rates really do go up 2%, for this real will skyrocket! What’s a government to do? Ahhh, we’ll impose a tax to offset the rate hikes, thus currency neutrality.”

So… I still like the real, but this really points out what I’ve been trying to say for some time now. These emerging markets currencies are Big Swingers, when they’re going good, they’re really good, but when things go awry, they really go bad, fast! But, that’s their game, as long as you know it, no biggie!

But like Ashish said, I see this as a short-term adjustment for the real…

OK… So, that news yesterday sent not only the real to the woodshed, but sent the Aussie (AUD), kiwi (NZD), Norwegian krone (NOK), and Canadian dollar (CAD) to join the real in the woodshed! The Big Dog, euro (EUR) lost about 1/2-cent, but was able to avoid the trip to the woodshed.

I also received an email yesterday from a reader that really ticked me off… And I get ticked off every time someone accuses me of this! The reader said that I was accusing the current administration with the “total deficit”… I AM NOT! I HAVE NOT! I USED TO SHOOT ARROWS AT THE PREVIOUS ADMINISTRATION FOR THEIR DEFICIT SPENDING! I CANNOT BELIEVE I HAVE TO KEEP EXPLAINING THESE THINGS! Look… Do the research and then point a finger at me! The research in this case would show that for over nine years, I’ve harped and harped about deficit spending! Remember when the US current account deficit reached 4.5% of GDP in 2001, and I blasted the government for doing that? Oh, forget about it Chuck, this is akin to talking to one of your kids… One of these days when they’re adults they will talk about how smart you became in your late years!

And as long as we’re on the subject of deficit spending, (which has been going on for more than eight years!!!!) Ty Keough sent me this:

The US is an empire in decline, according to Niall Ferguson, Harvard professor and author of The Ascent of Money.

“People have predicted the end of America in the past and been wrong,” Ferguson concedes. “But let’s face it: If you’re trying to borrow $9 trillion to save your financial system…and already half your public [is] debt held by foreigners, it’s not really the conduct of rising empires, is it?”

Given its massive deficits and overseas military adventures, America today is similar to the Spanish Empire in the 17th century and Britain’s in the 20th, he says. “Excessive debt is usually a predictor of subsequent trouble.”

OK… Here’s some more Niall Ferguson… Ferguson dismisses the dollar loyalists, citing the British pound (GBP) – the last international reserve currency – as his example. “These things don’t last forever” but don’t expect it to happen overnight. “It’s a long multi-decade process,” he states. Even with the dollar near a 14-month low against the euro, he claims it’s not without historical precedence for the greenback to lose “another 20%” this year.

For international investors the loss is enough to offset this year’s stock market gains. Not exactly great motivation for foreigners to keep buying the almighty dollar.”

Sounds like Mr. Ferguson has been a loyal reader of the Pfennig for the past 17 years!

Fed Head, Janet Yellen gave a speech yesterday… Her comments are usually good for a few quotes, and this was no exception… Fed Head Yellen said, “It is to be expected that interest rate differentials will drive capital flows,” and that “US structural budget deficits, a serious problem, will require painful decisions.”

Well now, there are two subjects that I’ve talked quite a bit about lately, eh? Interest rate differentials, and the budget deficit problem… And some people wonder why I say that currency and precious metals diversification is a must? Really? When one of your own Fed Heads thinks that these things will be problems, doesn’t that spell it out for you? I thought so.

Not that I’m waving the flag for the Russian ruble here, folks, but I think it’s important to note that I’ve said all along that Russia is an “oil play” and nothing more… And that the currency has rallied in step with the rise in oil prices recently… And the ruble’s biggest move versus the dollar came overnight after oil briefly touched $80 yesterday!

A few people asked me yesterday why I didn’t include the Swiss franc (CHF) when I was talking about Aussie dollars and loonies going to parity against the US dollar… Well, for one, I wasn’t talking about that; I simply gave you a quote from Citigroup’s research team. But since you asked… The franc is only one cent away from parity, so in my mind it’s already there! I just keep thinking about the Swiss National Bank’s (SNB) warning to the markets about franc strength.

But hey! What could the little old SNB do to stop the franc from going to parity against the dollar?

Well… I was wrong… There I said it! I said that I thought the Bank of Canada (BOC) would lift their previous statement that their near-zero interest rates would remain in place until the second half of 2010… The BOC did NOT lift that statement… In fact, the BOC hung the loonie out on a line to be beaten until dry! The BOC whined about the strong loonie as working against economic growth.

So… I think the BOC did what they set out to do, and that was to: 1. Stop the talk about a rate hike before their stated timeline, and 2. Stem the loonie’s rise… The loonie dropped about 2% on the day.

But, like most things… The pain of the BOC statement will be forgotten about in a few weeks, and I suspect the loonie to be back on the road to parity against the dollar.

And then there was this… Long-time readers know my dislike of the Reserve Bank of New Zealand’s (RBNZ) Governor Bollard, due to his penchant for dissing his own currency, the kiwi. Well, in a turn of direction… Governor Bollard said in a speech last night that “there is little the Bank can do to bring down the value of New Zealand dollars, and that the high value of New Zealand dollars is not necessarily an impediment to raising the official cash rate in order to quell rising house prices.”

That’s central bank parlance for: “I’m giving you the green light to push kiwi higher”.

US Housing Starts were disappointing in yesterday’s print from September, where a 0.5% gain was very much less than expected.

PPI (wholesale inflation) declined 0.6% in September… Which is a very strange number, don’t you think?

To recap… Do you know what network neutrality is? You had better find out! Brazil imposed a 2% tax on capital inflows in an attempt to slow the economy and the real’s rise. The real reacted with a 3.5% drop versus the dollar. The other commodity currencies followed the real down versus the dollar. The Bank of Canada also tried to stop the loonie’s rise, and the RBNZ’s Governor Bollard give the green light to kiwi appreciation!

The Real Leads Commodity Currencies to the Woodshed originally appeared in the Daily Reckoning. The Daily Reckoning, a FREE daily e-letter, offers a "uniquely refreshing" perspective on the global economy, investing, and today's markets.

Front and center this morning, the currencies – which had given background overnight to the dollar – are back in rally mode, and are taking liberties with the dollar once more. For most of the night, that was not the case, though. The dollar had rallied back and sent the euro, for instance, to the 1.48 handle, after the single unit spent yesterday at 1.49 and change… There seemed to be a move to the dollar, but that didn’t last long, and the currencies are once again rallying versus the dollar this morning, and the euro has pushed to 1.4970 as I write.

Daily noise, eh? Yes, you have to wade through it most days, and keep your eyes fixed on the horizon…

OK, I mentioned above that the finance ministers of the Eurozone met yesterday, and tried to stem the dollar’s decline by backing the US administration’s stated preference for a strong dollar… Of course we all know that the US administration’s stated preference for a strong dollar is a bunch of horse dookie! So… What was it that the Eurozone FMs were backing? A false statement by the US? Now, that’s something to hang your hat on, eh? The dolts just continue to mount daily don’t they?

But, you can’t be too hard on the beaver (Eurozone FMs) for they have to sound like they don’t want their euro to get too strong, for if they really said what they wanted to say, the euro would be back to 1.60 with a bullet in a heartbeat! So… In the end, I don’t think currency traders were swayed by the Eurozone FMs, at least not for too long!

Yesterday, I talked about Canada and the Bank of Canada (BOC) and how I thought that the BOC would remove their statement about interest rates remaining on hold until the second half of 2010… I had a few readers question me on this, saying that Canada’s economy is in no shape to withstand a rate hike… OK… Hear me out on this… I’m not saying that the BOC will hike rates now, or even in 2009… But, if Canadian energy prices of oil, natural gas, and coal continue to get stronger, I’m afraid the BOC will have to entertain thoughts of raising rates to fight inflation… But not now… So… I hope you get what I’m saying here.

So… The US fiscal deficit for 2009 was $1.42 trillion… Remember how I used to take the previous administration to the woodshed for posting $450 billion fiscal deficits? How did we go from $450 billion to $1.42 trillion (if that’s really the number)? Well… That’s not a question to really answer, folks, we all know how we got here… But now that we’re here, what happens next?

I came across this when putting the two monthly newsletters together on Sunday; I think it would be appropriate to share it with you here…

Peter Bernholz (Professor Economics in Basel) studied the world’s 12 most important periods of hyperinflation and discovered that the tipping point occurs when deficits amounted to 40% of the expenditures.

For the United States we have arrived at exactly that point. The deficit of $1.5 trillion amounts to 41.7% of the $3.6 trillion in expenses.

You see, that Peter Bernholz rounds some numbers, but for those of you keeping score at home, the real point is that the US deficits are greater than 40% of expenditures… And you know me, I truly believe in this history repeating itself.

The point I’m trying to make here is that according to Mr. Bernholz, we can soon expect a bout of hyperinflation! OH BOY! Where do I sign up for that? Not only do we have a falling dollar causing us to lose purchasing power, but what purchasing power we have left is going to be eaten away with inflation! Like I said, OH BOY! Gee Willikers, that sounds like the cat’s meow! NOT!

So… Here we go again, with me getting on the soapbox and telling you that the only way to protect yourself from a falling dollar and hyperinflation is to diversify with non-dollar currencies and precious metals.

OK… I get emails all the time from readers that say, “OK Chuck, you tell us to diversify, but you don’t tell us what to buy”… Well… To the untrained eye, that would be true… But to long time readers they know better… So, keep reading, and it will hit you right between the eyes one day, and you’ll slap your forehead and say, “I could have had a V-8”!

The boys and girls over at Citigroup have written a letter to their clients telling them “the dollar is weakening because foreign central banks are diversifying their reserves and US investors are buying high-yielding emerging market assets.” They went on to say, “The Australian and Canadian dollars are likely to rise to parity against the US currency.”

So, there’s one more on the roster that believe Aussie dollars (AUD) and loonies (CAD) will go to parity against the dollar… The loonie isn’t exactly the same stretch of a forecast as the Aussie dollar, as loonies are almost 97-cents right now, with Aussie dollars trading near 93-cents…

Doesn’t that make sense given the talk we just had about hyperinflation? What currencies are going to help protect you against hyperinflation? The commodity currencies! Aussie, kiwi (NZD), Canada, Norway (NOK), Brazil (BRL) and you can even throw in the S. African rand (ZAR), for those who like Mr. Toad’s wild ride!

The folks at Citigroup also had this to say about the euro, which I found to be quite interesting… “The euro will extend gains against the US dollar and the British pound, and may reach parity against the UK currency in 6 to 12 months.”

I would think that for the euro to reach parity with the pound, it would involve the pound falling quite a bit from current levels… And that makes sense to me… Did you see the report the other day from the UK where they reported bad bank debt to be twice the forecast amount? YIKES!

You know… The Asian currencies – which never really participated in the first bout of dollar weakness – are still stuck in the mud… Well, they are being manipulated to be stuck in the mud, for the most part… But, something’s got to give here sooner or later. Why do I say that? Well, as I’ve told you for months now, the Chinese economy was the first to exit their slowdown/recession… Shoot Rudy, even Japan is showing signs of economic growth! And then we have India going strong too… And of course you have the “kind of Asian countries” of Australia and New Zealand… Where we already know that Australia has raised rates and New Zealand would love to raise rates… So, this region is leading the world out of the recession… Hmmm… I thought only the US economy was allowed to do that! Uh-Oh… Looks like we have a shift in how the world works!

Hey! Even Big Ben Bernanke sees the Asian countries as leading the world out of the global recession! Big Ben said… “Asia appears to be leading the global economic recovery.” Hmmm… See, even a blind squirrel can find an acorn! HA!

I had to laugh when I read this headline this morning… “Yen rises as Fujii repeats reluctance to stem currency’s rise”… I laugh because the last time Japan’s new finance minister talked about not intervening to stop the yen’s rise, he back-pedaled and said that traders mistook him to say that he was not going to intervene… So this on again/off again love affair with Fujii and intervention, just makes me laugh! I would think that after getting burned on Fujii comments a couple of weeks ago, that Traders would not get too lathered up when he talks about not intervening.

OK… Here in the US while we are still a sovereign nation, the Fed Reserve, is doing some testing of reverse repos as a means of drawing the excess liquidity/stimulus out of the markets… I don’t think we have to put too much into these tests right now. But it will be a method that the Fed uses at some point in the future… The IMF is against removing any stimulus now… So, that may carry some weight.

Gold prices rose yesterday for the first time in a couple of days, pushing back above $1,060… I would think that until we know for sure that the Fed is removing stimulus, that gold would remain well bid… When we do know that stimulus is being removed… Gold might take a step or two back… But then we’ll have to wait-n-see what happens with inflation.

I read where ETF holdings of gold are sluggish… Well, that certainly makes sense to me! With what we’re seeing these days from our government pushing us toward who-knows-what, physical gold is the thing people want right now… And you can’t get physical gold out of an ETF! So… All those people that have long said that the ETF was just as good as holding gold either in your buried coffee cans in the back yard, or in pooled accounts, are wrong, when it comes to physical gold demands.

And I don’t know about you, but I filled my gas tank the other day, and the price of gas has really shot up recently, eh? And a quick look at oil prices tells it all… Oil prices have risen to $79, while trading at $69 just a month ago! Is oil the proxy for rising inflation?

OK… To recap… The dollar rebounded a bit overnight, but has given back to a currency rally this morning. Citigroup believes Aussie and Canadian dollars will reach parity to the US dollar. The Bank of Canada meets today. Our fiscal deficit reached 40% of our expenditures, which historically is a harbinger to hyperinflation, and gold is back above $1,060 this morning…

US Hyperinflation? originally appeared in the Daily Reckoning. The Daily Reckoning, a FREE daily e-letter, offers a "uniquely refreshing" perspective on the global economy, investing, and today's markets.

The Big Dog, euro (EUR), has really pushed the envelope this morning, rising from 1.4860 to 1.4945 as I write. The Aussie dollar (AUD) is also working alongside the euro, pushing the dollar down. I just put the finishing touches on both the Review & Focus monthly letter, and my “other letter” – The Currency Capitalist – yesterday, and I had some strong words for the government that has allowed this weakness in the dollar. And trust me, if the US government wanted a strong dollar, all they would have to do is say so with conviction, and not this wamby pamby stuff they try to get away with just to put a governor on the dollar’s decline. Think about this for a minute… It’s true, it’s really true… Your government doesn’t care about the currency… And they think it will always be there for us to spend.

WOW! I really got carried away there, eh? I don’t need to get up on the soapbox already on a Monday morning! But… These are the things that need to be said, and I’ll say them! Not like our wamby pamby media, that will talk about the weak dollar, but never what causes it!

The government finally got around to printing their final Monthly Budget Statement that would end their fiscal year (September 30th). The final total was $1.42 trillion in the red… That’s 10% of GDP! That’s the highest level since World War II! And remember when I kept telling you that the expenditures for this administration in 2009 would come in at $3.5 trillion dollars? Well, that’s just about where they came in… And with revenues dropping 16.6% from 2008, we are left with this atrocious deficit of $1.42 trillion! And don’t forget (here I go sounding like an infomercial again) that the next 10 years is forecast to add an additional $9 trillion to our national debt!

OK, so what’s up with the TICs data from Friday? Remember now… The TICs data is an accounting of the net foreign purchases that are needed to finance that atrocious deficit… So how’d we do? Well… The big picture of all the flows in and out for the last 12 months turned negative, and is just shy of the worst recorded level, which was in 1982… OUCH! Central banks seem to be buying about the same amount, which isn’t a good thing when you consider the increase in Treasury issuance… But the real fall-off has come from the moms and pops… The private investors if you will. So… This could be just an aberration, or… It could very well be a loss of confidence of global investors in the US.

There was a hint of this loss of confidence on Friday in the China Daily newspaper… And it wasn’t the fact that the story was in the paper, it was the fact that the story was front and center for everyone to read… It was a quote by Big Al Greenspan, our former Fed Chairman who said that he “fears the budget deficit of the US more than the collapse of the dollar.” Hmmm.

What the heck is Big Al talking about? He knows full well that the deficit is the cause of the dollar depreciation! And just the fact that the Chinese put it front and center on their daily newspaper tells me that they are making fun of Big Al, and at the same time telling their readers that they should avoid dollars… I don’t know what it tells anyone else, but that’s what it tells me!

Recently, I’ve talked about seeing signs of a return to fundamentals… I really do believe that we’re headed in that direction once again, which would be like manna from heaven to your Pfennig writer! Fundamentals are much easier to understand that these crazy trading themes that go against normal logical thinking!

Well… The boys over at PIMCO, the world’s largest bond fund, seem to believe that “Fundamental forces are set to put downward pressure on the dollar as the recovery gathers momentum. Those forces include massive budget deficits, bets the Federal Reserve will keep borrowing costs near zero for an extended period, and prospects for a double-dip recession in the US.”

Sounds about right to me! Given those fundamentals for the dollar, and take away the “flight to safety” trading theme, you’ve got a Betty Crocker award winning recipe for a dollar decline!

The Bank of Canada (BOC) meets tomorrow… I’m going out on a limb here to say that I think the BOC will remove that statement they’ve repeated for a few months now that interest rates would remain at current levels near zero until the second half of 2010. Why do I think that, when the BOC has been so adamant about this statement in previous meetings? Ahhh, grasshopper… First of all, Australia has already raised interest rates, and their central banker has already talked very hawkish about future rate hikes. The other “commodity countries” of Norway, New Zealand and Brazil, are also beginning to talk up rate hikes… So, in my mind, the BOC will begin to “feel the heat” of their commodity brothers raising rates, and the only way they’ll be able to move then is to remove the statement about leaving rates unchanged… NOW!

Getting back to the euro for a minute… I find this move higher by the euro versus the dollar this morning to be quite impressive, given that The Financial Times (FT) had an article saying, “It was time for the ECB (European Central Bank) to get serious about an overvalued euro”… Funny, the timing of this article… The Eurozone Finance Ministers are meeting today… And in the face of all this… The euro rallies!

And as I mentioned earlier in the letter, the Aussie dollar is stronger this morning… It’s my feeling right now that the negativity toward the US dollar is really seen and magnified in the performance of the Aussie dollar… And why not? You’ve got a country that was not affected by the financial meltdown, that was the first to raise interest rates, that is rich in the commodities that China demands (and China is forecast to grow 9% in the third quarter), and that has a central banker that has given the green light for appreciation of the Aussie dollar versus the US dollar!

The data cupboard is full of second tier data prints this week, so I really don’t think the markets will get any direction from the likes of PPI, Housing Starts, etc. But maybe they will! You never know with these fickle dudes!

So… To recap… The TICs data last Friday indicated a loss of confidence in the United States; the budget deficit for the US was $1.42 trillion for the fiscal year ending September 30th; the currencies, for the most part, are rallying this morning versus the dollar; and the data cupboard will fail to give the markets direction this week.

Losing Confidence in the US? originally appeared in the Daily Reckoning. The Daily Reckoning, a FREE daily e-letter, offers a "uniquely refreshing" perspective on the global economy, investing, and today's markets.