Wednesday, October 6, 2010

Hedge Funds May Be About To Trigger A U.S. Dollar Collapse

Hedge funds may have been to blame for the flash crash in May, and perhaps there is an even darker hidden danger lurking. I think that global macro funds are trading against the dollar and it is worrisome to imagine the avalanche that could happen.

How plausible is it that hedge fund stress could trigger a straight up USD collapse? For these four reasons, our currency may be hanging in a more delicate balance than we realize.

* Ballooning trillions of national debt will be cheaper to pay by switching on the printing press and manufacturing money from air. It’s likely that our national government will contemplate this approach when it comes time to pay the piper. Attempting to mend systematic problems in our economy would be useless at this point. Devaluation would certainly be an easier solution although living in the 2010 version of Weimar Germany may be a lifestyle change for all of us.
* The shine of the USD, formerly the most popular currency in the world, is dulling. China has become disoriented and already tried to replace our dollar with an international reserve currency. They’ve already started dumping our Treasuries and buying gold.
On the other hand, it is not feasible that the world powers would want to demolish a key trading partner. Further, no new kid on the block has stepped up despite the world’s disenchantment with the greenback’s lost glimmer. (more)

Does a Commodity Investment Belong in Your Toolkit?

, Morningstar.

Question: A couple of years ago, it seemed that everyone was recommending that I put a small percentage of my portfolio in commodities to help fight against inflation. But lately I've been reading more about the how these funds haven't worked out as expected. So should I add commodities, or not?

Answer: Thanks for a timely question. Although there's a lot of research pointing to the beneficial effects of holding commodities in a portfolio, lately investors might be feeling like the current batch of commodity-focused products isn't quite ready for prime time.

I'll admit that I was a skeptic when financial-services firms and advisors began pushing commodities five or so years ago. Commodities enjoyed a stunning runup in the first part of this decade, and asset classes always seem to catch on as "must-have"only after they have enjoyed a big period of outperformance. Coincidence? I think not.

The Good…
True, there are a lot of data pointing to the long-term benefits of commodities as a portion of a long-term portfolio. For one thing, commodities--and here I'm talking about the prices of actual, physical stuff like metals, agricultural goods, and energy products--have a relatively low correlation with the price performance of traditional asset classes like stocks and bonds. That diversification ability, in turn, can improve a portfolio's risk/reward profile, even though commodity prices are extraordinarily volatile in and of themselves. (more)

Stocks: The best is over

Stocks closed out the best September in 71 years last week, but don't break out the champagne yet. October trading is likely to be choppy as uncertainty looms over the market.

September's run-up was spurred by economic readings that managed to beat painfully low expectations, said Alec Young, equity strategist at S&P Equity Research.

"The psychology and expectations about the economy had just gotten so depressed in August and double-dip fears were prevalent, so we got a relief rally in September when economic reports started coming out that weren't great but just weren't as bad," he said.

That relief is now subsiding amid a new wave of uncertainty about the economy ahead of the the government's monthly employment report, the first wave of corporate earnings and November's midterm elections.

But while that uncertainty is likely to stifle further rallies, it doesn't mean the market won't gradually make its way higher, Young said.

"The 9% months are over," said Young, referring to the S&P's 8.7% spike in September, its biggest September gain since 1939. "We're likely to continue seeing this upside, but it will be more like a slow grinding higher, not sprinting higher." (more)

Beware of the Bond Bubble

/ USNews,

There's been a debate brewing in the markets about whether the treasury bond market is reaching valuations approaching a bubble, which could pop and create significant losses for investors. I believe treasury bonds are extremely overpriced, and that investors need to tread carefully in what's typically considered a "safe" investment. If you're not careful with the duration or maturity (how long before an issuer is required to pay back your principal) of treasury bonds you buy, you could end up losing money in them as interest rates climb.

Investors have been piling into bonds since the beginning of 2009. According to the Investment Company Institute, investors have added more than $215 billion to bond funds since the first of the year through the end of August--adding money at a time when interest rates are at historic lows.

To me, it looks like investors are engaging in the same behavior they did during the dot-com frenzy and the housing bubble--they're buying what has been hot in the recent past, instead of looking for what will be the best investment down the road. It's sort of like horse racing. Bettors at the track study a horse's handicap to guess whether it will win the race. But just because a horse has won in the past doesn't mean the horse will finish first in the next race. (more)

Chart of the Day

$10,000 Gold?,

It has never been easy to have a rational conversation about the value of gold. Lately, with gold prices up more than 300% over the last decade, it is harder than ever. Just last December, fellow economists Martin Feldstein and Nouriel Roubini each penned op-eds bravely questioning bullish market sentiment, sensibly pointing out gold’s risks.

Wouldn’t you know it? Since their articles appeared, the price of gold has moved up still further. Gold prices even hit a record-high $1,300 recently. Last December, many gold bugs were arguing that the price was inevitably headed for $2,000. Now, emboldened by continuing appreciation, some are suggesting that gold could be headed even higher than that.

One successful gold investor recently explained to me that stock prices languished for a more than a decade before the Dow Jones index crossed the 1,000 mark in the early 1980’s. Since then, the index has climbed above 10,000. Now that gold has crossed the magic $1,000 barrier, why can’t it increase ten-fold, too?

Admittedly, getting to a much higher price for gold is not quite the leap of imagination that it seems. After adjusting for inflation, today’s price is nowhere near the all-time high of January 1980. Back then, gold hit $850, or well over $2,000 in today’s dollars. But January 1980 was arguably a “freak peak” during a period of heightened geo-political instability. At $1,300, today’s price is probably more than double very long-term, inflation-adjusted, average gold prices. So what could justify another huge increase in gold prices from here? (more)

The Housing Market Stumbles Again

Commentary: Seven lessons from the latest mortgage scandal

Some of the country's biggest mortgage lenders apparently have been bending the law to speed up foreclosures.

Investigations are under way at Bank of America Corp. (NYSE: BAC - News), J.P. Morgan Chase & Co. (NYSE: JPM - News) and Ally/GMAC for pushing foreclosures with flawed paperwork. All three have frozen many of their foreclosures pending a review. One suspects that others are doing the same.

What does this mean? Here are seven lessons from the latest scandal:

1. The banks are still stupid -- OK, not all of them, but a surprising number. Foreclosures actually hurt them. A foreclosure empties a home and helps blight a neighborhood. It drives down property prices and makes it harder to sell the home and the one next door. Yet here are several of the biggest banks actually bending the rules to speed these foreclosures up and make matters worse. It beggars belief.

Remember that throughout the crisis the banks largely have resisted bending the rules to prevent foreclosures -- something that might have helped everyone. They have been dragged kicking and screaming into renegotiating any doomed loans, even when there was absolutely no hope of it ever being repaid on the original terms. They have resisted short sales, and fought bitterly with real-estate agents who actually got them an offer. I've seen this firsthand. The banks caused the crisis; they barely have missed an opportunity to make it worse. (more)

Jay Taylor: Turning Hard Times Into Good Times

click here for audio

Commodities Rally Still Strong, Gold Will Hit $2,000: Rogers

The huge rally in gold is expected to continue—with $2,000 an ounce well within sight over the next decade, well-known commodities investor Jim Rogers told CNBC.

[US@GC.1 1342.6 3.70 (+0.28%) ] will be among the premier plays in commodities, which stand to benefit whether the economy rebounds or not, said Rogers, creator of the Rogers International Commodity Index.

"Gold is going to go a lot higher over the next decade. It may slow down for a while because it's run up so dramatically here in the last few weeks. But gold's going to be much higher," Rogers said. "Adjusted for inflation it should be well over $2,000 now. When I say something like it's going to 2,000 in 10 years it's not a very dramatic statement given the state of the world. I'm sure it's a given." (more)

FT: Call for new global currencies deal

The world's leading countries should agree a new currency pact to help rebalance the global economy, a leading association of financial institutions has urged.

The Institute of International Finance, which represents more than 420 of the world's leading banks and finance houses, warned on Monday that a lack of such co-ordinated rebalancing could lead to more protectionism. Charles Dallara, IIF managing director, said: "A core group of the world's leading economies need to come together and hammer out an understanding."

Last week, Guido Mantega, Brazil's finance minister, warned of the dangers of a "currency war" as countries unilaterally intervened to prevent the appreciation of their currencies. The US has been pressing China to allow its exchange rate to rise faster, while several countries including Japan, South Korea, Brazil and Switzerland, have been intervening to hold their currencies down. (more)

Gain in services powers stocks; Dow up nearly 200

(AP) -- Stocks surged to their highest level in five months Tuesday after a measure of the most important driver of the U.S. economy surged ahead in September, a hopeful sign for the country's main source of employment.

A surprise move by the Bank of Japan to cut its key interest rate to virtually zero also lifted stocks worldwide. The dollar fell as investors shed defensive assets, and a gauge of U.S. stock market volatility fell.

The Institute for Supply Management reported that its index of business activity at U.S. service companies expanded again last month, and far faster than analysts were expecting. The ISM's measure of service companies encompasses a wide range of industries including finance, health care and trade.

It was the ninth-straight month of expansion in service businesses, which have been growing at a slower pace in the U.S. relative to the much smaller manufacturing sector. Service providers account for about 83 percent of all private employment in the U.S. (more)