Why the Smart Money is Trading Dollar Bills for Hard Assets

“With each passing day,” we observed last week, “inflation seems less and less a theoretical fiction, and more and more a genuine threat… No self-respecting economist or self-aggrandizing central banker is acknowledging any inflationary risk whatsoever,” we continued. “But the indifferent data points of real-world prices testify to the contrary.”

Shortly after airing these remarks we learned that import prices soared 1.2% during the month of December alone – lifting the year-over-year surge in import prices to 4.7%. The following day we learned that producer prices jumped 3.8% year-over-year. A few days after that, the Federal Reserve Bank of Philadelphia announced that producer prices in the Philadelphia region had jumped to their highest levels since July 2008.

These data points do not prove that an inflationary threat is stirring, but they do offer compelling testimony. Meanwhile, commodity prices are providing ample corroborating evidence. During the past eight months, the Reuters/Jefferies CRB Index of commodity prices has soared 32% – far outpacing the stock market over that timeframe. The grain complex, in particular, has been on a tear, as the prices of both wheat and corn have nearly doubled since last summer

These eye-popping gains may be exceptional, but they are hardly unique. All but one of the 19 commodities in the CRB Index has advanced during the last two years. (more)

The Fed, the Fear Index, and the Dollar

Bloomberg provides some insight into the current two-day Fed meeting:

“The Fed is not ready to let up on its accelerator,” said Gramley, senior economic adviser for Potomac Research Group in Washington. “They are going to be impressed with the fact the economy has gained some momentum, but there are still strong headwinds to growth, and bank lending is quite modest.”

Policy makers will probably affirm their plan to buy Treasury securities through June to reduce long-term yields and spur lending, said Mark Gertler, a New York University professor and research co-author with Bernanke.

With the markets not having experienced a correction for some time and the Fed due to release a statement tomorrow, it is prudent to review some big picture issues. The VIX, or the “Fear Index”, falls when investors are less concerned about volatility or pullbacks. Conversely, the VIX rises when concerns about volatility and possible corrective activity begin to mount.

The chart below is a monthly chart of the VIX going back to 2002. The VIX is at a level where it could logically reverse and begin to move higher, which would most likely coincide with a pullback of some kind in risk assets. Two things we are monitoring relative to the VIX are highlighted in the chart. The parallel blue trendlines in the Relative Strength Index (RSI) have acted as both resistance (red arrows) and support (green arrows) – notice the blue line is at a point where it could provide support for the VIX. A break below the lower blue RSI trendline would open the door for another push higher in risk assets. (more)

Richard Russell: The Dollar Has Lost All Stability And Is Ready For A Crash

Legendary newsletter writer Richard Russell has been calling for the collapse of the U.S. economy for awhile.

Based on recent dollar movements he says that crash is going to come now (via King World News) First the dollar has lost all stability:

Today there's no definition for the dollar. So how do we price the dollar? At one time, the dollar was priced in terms of the time-honored standards -- gold and silver. But today we must price the dollar against other fiat currencies. "A dollar is worth so much against the yuan, or so much against the pound sterling, or against the euro and so forth"

Second the dollar is moving in a bearish pattern:

To get back to the chart, we see that the Dollar Index is now trading below its blue 50-day moving average. The 50-day, in turn, is below the red 200-day MA. Thus, the Dollar is in the classic bearish configuration as long as it trades below its 50-day MA.

Note also that the Dollar has now broken below three preceding lows, a bearish situation.

Furthermore, MACD has turned bearish, pushing the blue histograms into negative territory (bottom of the chart).

Russell compares the dollar to the foundation of a house. When it crumbles (soon) the whole thing will come crashing down. To prepare for this scenario you should get the hell out of dollars:

The Russell advice -- swap your dollars for physical gold or CEF, GLD, or SGOL. In other words, do as China and Russia and many other nation are now doing -- get out of your dollar assets.

But remember, Russell has been making these predictions for awhile.

McAlvany Weekly Commentary

An Interview With Ian McAvity

Posted on 26 January 2011.

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Gold Holdings in ETPs Plunge Amid Signs of Recovery

Gold held through exchange-traded products, or ETPs, tumbled by the most in more than two years amid speculation that improving prospects for the global economic recovery are undermining demand and hurting prices.

Assets in gold-backed ETPs fell 31 metric tons yesterday to 2,043.09 tons, the lowest level since Aug. 10, according to data compiled by Bloomberg from 10 providers. That’s the biggest drop in percentage terms since October 2008, the data show. Holdings have shrunk 3.4 percent from the record 2,114.6 tons on Dec. 20.

Global economic growth may be 4.4 percent this year, the International Monetary Fund said yesterday, boosting its outlook from 4.2 percent. More than half the respondents in a quarterly poll of 1,000 Bloomberg subscribers said that the gold market is a bubble, according to the survey taken Jan. 20-24. Spot gold has lost 6.5 percent since setting a record last month.

“Strong economic data has improved confidence about the global outlook and reduced the need to hold gold and silver as a safe haven against credit risk, event risk and currency weakness,” Standard Chartered Plc said in a weekly report dated Jan. 25. “We expect further weakness in both markets.” (more)

Chart of the Day: The REAL Unemployment Rate Is 22%

Bank of England chief Mervyn King: standard of living to plunge at fastest rate since 1920s

Households face the most dramatic squeeze in living standards since the 1920s, the Governor of the Bank of England warned, as he reacted to the shock disclosure that the economy was shrinking again.

Families will see their disposable income eaten up as they “pay the inevitable price” for the financial crisis, Mervyn King warned.

With wages failing to keep pace with rising inflation, workers’ take- home pay will end the year worth the same as in 2005 — the most prolonged fall in living standards for more than 80 years, he claimed.

Mr King issued the warning in a speech in Newcastle upon Tyne after official figures showed that gross domestic product fell by 0.5 per cent during the final three months last year. The Government blamed the unexpected reduction — the first since the third quarter of 2009 — on the freezing weather that paralysed much of the country last month.

But there were fears that the country was poised to slip back into recession, defined as two successive quarters of negative growth. Economists said the situation was “an absolute disaster”.

The economic gloom deepened this morning as figures showed that mortgage lending by the major banks dived to an 11-and-a-half-year low during December. (more)

BNN: Top Picks

Norman Levine, Managing Director, Portfolio Management Corp shares his top picks.

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US Warns of Quickly Rising Food Prices in 2011 Read more: US Warns of Quickly Rising Food Prices in 2011

Food inflation, already destabilizing emerging giants in Asia, is coming soon to the United States. The government expects rising commodity prices and energy demand for ethanol to push up food prices by between 2 percent and 3 percent in 2011, according to the U.S. Department of Agriculture's Economic Research Service.

Such a rise would be a return to normal food-price increases, according to the government.

Also, overall inflation may stay “officially” low, however, since the government regularly removes food and energy costs from its calculations.

“Although food-price inflation was relatively weak for most of 2009 and 2010, higher food-commodity and energy prices have recently exerted pressure on wholesale and retail food prices,” the USDA said in a release. (more)

“Hence, higher prices are projected to push inflation toward the historical average inflation rate of 2 to 3 percent in 2011.”

Read more: US Warns of Quickly Rising Food Prices in 2011

The Wall Street Financial Crisis: A Mistake or a Crime?

All over Europe and in much of the rest of the world, a new fictional hero has engaged the fascination of millions of readers. His name is Mikael Blomkvist, and he’s the protagonist of the late Stieg Larsson’s Millennium trilogy. These thrillers, set against the background of high financial crimes and misdemeanors, have become global best-sellers, doubtless in part owing to their gripping plots, elaborate mysteries and engaging characters. But their success is also indisputably a by-product of the macroeconomic chicaneries of our era and the human catastrophes they have wrought.

Larsson understood that financial crimes are far from victimless. They have upended millions of people’s lives, even if most of the victims don’t understand how they’ve been shortchanged and who is responsible.

Although the financial crisis that swept the world may have started on Wall Street, it has brought down governments and shredded economic security worldwide, resulting in the loss of millions of jobs and homes as businesses collapse, foreclosures grow, credit tightens and communities are devastated. One estimate of the damage: $197 trillion.

The Pew Economic Policy Group reports the average U.S. household lost $66,000 in stock holdings and $30,000 in real estate values from June 2008 through March 2009 due to the upheaval in world markets. This brings us close to $100,000 per family. Against that backdrop, it’s not hard to see the appeal of Larsson’s hero Blomkvist, whose “contempt for his fellow financial journalists” the author encapsulates with stinging clarity: “A bank director who blows millions on foolhardy speculations should not keep his job. A managing director who plays shell company games should do time…. The job of the financial journalist was to examine the sharks who created interest crises and speculated away the savings of small investors, to scrutinize company boards with the same merciless zeal with which political reporters pursue the tiniest steps out of line of ministers and members of Parliament.”

This is why I identified with Blomkvists’s fictional mission; in some ways it captured my own frustrations in a media world for which “the c-word”— as in financial crime—seems must never be spoken. (more)