Monetary Meltdown Monday

by: Philip Davis

[G20]Last Friday, Geithner’s message was "Do as I say, not as I do."

This weekend, Timmy took a big doo doo on the rest of the World as he pressed fellow Finance Ministers into (in theory) setting mechanisms to address trade balances (which means export countries need to strengthen their currencies against the dollar) while importing countries (like US) should not try to manipulate their own currency. Well, that sounds reasonable except, before the ink is even dry on the G20 release, Timmy flies off to China to get them to commit to revalue the Yuan, which is pegged to the Dollar and effectively DE-values the dollar in an entirely manipulative manner.

No, wE didn’t manipulate the Dollar, China did. We only told them to manipulate their currency which is tied to the dollar, so it’s not the same thing at all as us manipulating the dollar and —- oh my God Tim, how can you sleep at night???

So good morning, America, how are ya? I’ll tell you how you are, you are 1% poorer than you were on Friday as the Yen rises to 80 to the Dollar and the Euro rises to $1.41 and the Pound hits $1.58. That drove oil back over $82.50 and gold back to $1,350 and copper hit $3.89, up from $3.75 on Friday - that’s 3.5% inflation of a basic material over the weekend! That annualizes out to about 1,000% but let’s be fair and say this only happens on weekends and call it 52 x 3.5% for 182% - hyperinflation accomplished! Of course, we don’t need 182% increases in commodities to achieve hyperinflation, hyperinflation is anything over 26% and our Dollar is down 15% since May and that’s 5 months so we’re heading for 36% over 12 months already.

I’ve been invited to attend the Economists’ Buttonwood Gathering in New York today where the agenda will be discussing the States' Fiscal Crises led by Robert Rubin and Josh Bolten over lunch followed by BOE Governor Mervyn King’s speech on "International Reform in the Financial Sector" and then my favorite bond pimp, Mohamed El-Erian will be speaking about "Sovereign Risk and the Banks" followed after market hours by Vikram Pandit (Citigroup’s CEO) and then Nassim Taleb (Black Swan) after which there’d better be drinks!

I usually can’t be bothered with these things but this conference is likely to move the markets and I should, in theory, be able to chat with our Members live from the conference, so this should be fun. Tomorrow is currency day with the after-lunch meeting titled "Global Currency: Crisis of Confidence" with Joyce Chang (NYSE:JPM) and Paul Volcker giving their views and the 3:30 lecture is titled "China: The Decade of the Dragon?" with the exiled Stephen Roach, Jim Chanos, Gene Ma and Xu Sitao, who is The Economist’s China Director. So, lots of interesting stuff from interesting people and, while the gold bugs and the dollar doomsayers should be able to pull plenty of good quotes, I will be looking to get the mood of the attendees, who are themselves a veritable who’s who of the investing World.

With this global gathering of market movers, I guess we’d better get a global perspective on the markets, right? Let’s take a look at our global multi-chart and see how we are doing. The blue lines are our mid-points and the greens are the 10% lines and they reveal an interesting pattern:

click to enlarge

It’s a tale of two economies with our net exporters following the path of copper (mirroring the collapsing Dollar) and up around those 20% lines. As we can see from the Baltic Dry Index, which is DOWN 10% - there is not any more demand for goods, they are simply more expensive when priced in a weak currency. Germany’s currency is artificially held down by the weight of the rest of the EU while the UK gets less of a boost despite their oil and mining economy because the pound is not artificially tied down to the weaker EU nations. France is the World’s 5th largest economy and on par with US performance as that country enjoys week two of national strikes.

As we discussed last week, the weak Dollar allows our markets to "ignore and soar" as 15% pullbacks in our currency are reported as 15% earnings beats to US investors while the MSM does nothing to educate its readers as to value. In Friday’s Member chat, we compared the Dow, S&P and Nasdaq priced in Dollars, Euros and Yen to get a better picture of where our markets are now:

Priced in real currencies, our markets are DOWN 10-20% since May. That’s not entirely a bad thing - it means we look like a bargain to global investors, providing they are as clueless as to exchange rates as their American counterparts. Unfortunately, I don’t think foreigners are that stupid, which is one of the reasons I look forward to going to the conference today as I can actually quiz some of these famous foreign investors to see if they can pass the old "Jay Leno" test.

OK, that is just sad, isn’t it? But not as sad as the MSM in this country cheerleading stocks and the market as if they are "en fuego" when they are, in fact, losing ground to the declining dollar. October alone has seen a 5% drop in the dollar and only the Russell has managed a 5% gain. This is interesting because small-cap, relatively local companies benefit the least from the declining dollar but we haven’t gotten a lot of Russell earnings yet as the S&P had the floor last week so it will be interesting to see what holds up as the smaller companies begin reporting their earnings.

As I said to Members last week: "It looks like we could break out and up if the sentiment turns enough in favor of the US markets and we certainly look like a cheap laggard compared to EU or Asian investors local markets and that does mean a 10% upside is possble but, from our perspective - only if the Dollar stays here or goes down and foreign investors start to buy American. Not at all coincidentally - that’s exactly what Timmy’s asking for in South Korea this morning!"

Not counting our 10 new Dividend Plays, which are all bullish of course, we did manage to get a little more bearish than the prior week’s 21:10 bull/bear ratio of trade ideas. Last week we cut it down to 16 bullish to 10 bearish trade ideas although, once again, the bear plays were mainly of the hit and run variety as we are still fundamentally bearish but technically bullish - which means we have to take a lot of trades we don’t really believe in to play the game (although I favor not playing (cash!) into the election, but we service a large Membership and it is kind of dull not to trade at all, isn’t it?).

Generally, we just want to make sure we make 2.5% a month to keep up with inflation but, other than that, the markets are a very scary place to be and, with Halloween approaching, you never know what horrors you are going to find when you pull that mask off.

We have a Datapalooza this week with Existing Home Sales at 10 today followed by the old Case-Shiller not adjusted for the declining dollar Home Price Index at 9 and Consumer Confidence (or lack thereof) at 10 along with the FHFA also not reflecting the declining dollar Home Price Index. Why is it that it’s easy for us to understand that if the $1M Zimbabwe Dollars becomes $1Bn Zimbabwe Dollars a year later, that a man selling his home for $10M is a fool but we don’t understand how 1 US Dollar, that is now $1.35 US Dollars to buy the same oil, gold, copper, silver, diamonds, corn, wheat, soybeans etc that it did last year means your "stable" home price is actually an additional 35% drop? Is it really that hard to see?

The same goes for the people selling cars and clothing and even beloved iPods - if you are collecting the same amount of money but getting paid in what is effectively Monopoly money - are you really doing well? Now, where was I? Oh yes, data! Wednesday we get to see if anyone applied for a Mortgage last week and at 8:30 we get Durable Goods Orders, which should be up as we sold the Saudis a bunch of WMDs in the form of fighter jets. At 10am we get New Home Sales and, of course, Oil Inventories at 10:30. Thursday another 450,000 pink slips will be handed to US workers but, more importantly, on Friday we get the Q3 GDP where bad news will be good news for those who pray for QE2. We also get the Chicago PMI and Michigan Sentiment on Friday and, of course, then we head into the election so fun, fun, fun!

It’s going to be an exciting week and it’s starting off with a bang as the Dollar tests new lows at the open. I think this is an excellent opportunity to cash in long positions and sit on that worthless cash through the election or at least to get very, very well-hedged. Seven banks were shut down on Friday, lifting the year’s total to 139 banks that were in such bad shape that FDIC examiners had to storm in and confiscate everything over a weekend.

The Hillcrest Bank of Overland Park, Kan, had $1.6Bn in assets and we are just 1 more bank away from topping last year’s mark of 140 bank closures, the most failures since the year after the first Bush left office in 1992 (just a coincidence, I’m sure).

Perhaps BAC will make the list one day as the are being hit with a Class Action Suit on behalf of homeowners seeking damages for alleged disregard of foreclosure process rules. The suit, filed Wednesday in federal court in Newark, N.J., accuses Bank of America and two subsidiaries, LaSalle Bank and BAC Home Loans Servicing, of “an undisciplined rush to seize homes” through “pervasive and willful disregard of knowledge, facts and statutes.” The putative class in the suit, Beals v. Bank of America, N.A., 10-cv-05427, consists of all named defendants in pending New Jersey foreclosure actions initiated by Bank of America or its affiliates. The complaint includes counts of common-law fraud, breach of the covenant of good faith and fair dealing and violations of the New Jersey Fair Foreclosure Act and Consumer Fraud Act.

It continues to be all about the Dollar this week and we shall see how low it can go. I’ll be talking to the luminaries all day at the conference and I’ll keep you informed as to the mood, as well as the official spin from El Erian and company.

Be careful out there!