An Economy on the Edge

The Daily Reckoning – Weekend Edition
December 2-3, 2006
Baltimore, Maryland
by Kate “Short Fuse” Incontrera


It looked like we were off to a good start this week – the post-Thanksgiving weekend data showed that U.S. shoppers spent 19% more during the holiday weekend than they did last year. Consumer confidence is at a 15-month high, gas prices are down, and U.S. unemployment is at its lowest in five years.

And then…the bad news started to roll in…the U.S. inflation figures that were released Thursday showed that inflation remains “stubbornly high,” according to the Fed’s favored inflation measure.

“Ben Bernanke,” reports the FT, “made clear this week that persistent price pressures might prompt the central bank to raise interest rates in the year ahead, even though many investors expect a cut in the coming months.”

And Big Ben isn’t the only one with problems looming overhead – U.S. Treasury Secretary Henry Paulson faces the challenge of tempering the dollar’s decline…and it does not look like that will be an easy feat.

On Friday, the greenback fell to a 20-month low against the euro, and a 14-year low against the sterling. This is the biggest decline since 2001, following the September 11 attacks – and takes the dollar’s fall since the beginning of 2006 to 14%.

Ouch. Of course, there are many varying opinions of what is causing the dollar’s tumble. Do we blame the faltering housing market, where homebuilding has recorded a drop for the seventh straight month? Or could is this consistent with a deeper problem – is our economy just slowing down more than anyone accounted for?

Or could it be that a “severe and persistent trade deficit – now set to hit $860 billion or 6.6% of GDP this year – has a made such a slide inevitable, and will herald a broader and irreversible decline in the currency of an economy losing its potency and dominance,” as one Scottish paper suggests?

We’re not sure – but loading up on gold and hunkering down in the Mogambo’s bunker is looking more and more tempting.

Short Fuse
The Daily Reckoning

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— The Daily Reckoning Book of the Week —

Demise of the Dollar…and why it’s great for your investments
by Addison Wiggin

The DR’s own Addison Wiggin spent over a week in the #1 slot on Amazon’s bestseller list – knocking Harry Potter to number two. He then showed up on Barnes and Noble’s bestseller list and debuted on The Wall Street Journal’s Business bestseller list at #8!

The logical next step was for the book to get on the New York Times bestseller list…which it did, sitting strongly at #5!

The Demise of the Dollar examines the reasons for the dollar’s slide – including the nation’s historic trade deficit, the euro, government spending habits, globalization, and other international factors – and offers an up-close look at the Federal Reserve’s attempts to “manage” the dollar’s value.

To purchase your copy, see:

The Demise of the Dollar

THIS WEEK in THE DAILY RECKONING: This week, an important event occurred: India opened up its retail sector for the first time ever, to Wal-Mart. You can bet that this ignited some major debates – and some major profits. Read all about it in James Boric’s essay, A Day That Will Go Down in History, below…

Little Big Bubbles                                                12/01/06
by Bill Bonner

“The derivatives market has reached a face value of $480 trillion…30 times the size of the U.S. economy…and 12 times the size of the entire world economy. Trading in derivatives has become not merely a huge boom or even a large bubble – but the mother of a whole tribe of bubbles…dripping little big bubbles throughout the entire financial sector. Bill Bonner explores…”

A Day That Will Go Down in History             11/30/06
by James Boric

“Two days ago, India opened its $300 billion retail sector to a foreign mega-retailer. While this may cause howls of indignation from mom and pop store owners and politicians, James Boric explains that they need to get over it.”

A Future So Bright                                                 11/29/06
by James Turk

“Between sky-high U.S. debt levels and the Fed’s knee-jerk reaction to flood the world with dollars, it’s not hard to see a bright future for our favorite yellow metal. But what about in the near term? James Turk explores…”

Bretton Woods                                                 11/28/06
by Addison Wiggin

“1944’s Bretton Woods Agreement had the original intention of smoothing out economic conflict after World War II. However, the actual outcome – replacing of the gold standard with the dollar standard – ended up causing far more problems throughout the years, as today’s falling dollar will show. Addison Wiggin explores…”

Reverting to the Mean                                     11/27/06
by The Mogambo Guru

“Somewhere along the line, the high price of gold fell to its theoretical value, and then overshot on the downside. And that’s where we are now. And now the actual price is 300% below its theoretical value! The Mogambo explores…”

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FLOTSAM AND JETSAM: How can a country encourage its own people to make things that are better than Wal-Mart’s if it doesn’t put their feet to the coals – just like we do here in America? James Boric’s recent essay in Thursday’s DR sparked some debate…and James aims to shed some light on the situation, below…

Should India Open Its Retail Sector Up to Foreign Competitors?
by James Boric

I am NOT making the case that Wal-Mart is going to radically change India for the better. Just because it is opening hundreds of stores in India does not mean I think the country’s standard of living will improve. And I think that what could (or will) happen when Wal-Mart does start to impose its will on the mom and pop shop-keepers is that there will be some folks (maybe even a lot) who suffer.

But, this is not a story about Wal-Mart…or Target…or any other individual retail outfit. It is about allowing competition into a country that wants to emerge as a superpower. The question is: should India open its retail sector up to foreign competition?

My answer is a resounding yes.

How can a country hope to improve (on a grand scale) if it doesn’t allow its own citizens (consumers) to make their own choices? How can a country hope to grow? How can it promote ingenuity? How can it encourage its own people to make things that are better than Wal-Mart’s if it doesn’t put their feet to the coals – just like we do here in America?

What would have happened here in America if our government decided not to allow any competition to – lets say – the auto sector? Every one of us would be driving Ford’s and Chevy’s. We wouldn’t have the chance to buy a more mechanically sound Toyota or Honda. Thus, the American auto-makers would have NO reason to make a better car or truck. So they would go on selling us whatever they make – knowing we have to buy it regardless of the quality.

Is that the kind of an economy we want to see?

I don’t think so.

And if you want to take it a step further, let’s talk about outsourcing. So often you hear cries from State governments (like in Indiana) that say we should outlaw outsourcing to India and other countries. After all, it takes jobs away from Americans.

Come on! While I agree it stinks that we may lose our job to someone overseas, that’s also the way the world works. If someone can do something better than us for a cheaper price, good for them. They deserve more business. And hopefully, we (Americans) will figure out how to come up with a better product that warrants higher margins.

At the end of the day, I’m not saying Wal-Mart is going to be good or bad for Indians, per se. But what I do applaud is that India’s government is allowing competition to work its magic. Over time, that will have a good impact for Indians. Just you watch…

Keep the discussion going. This is a good one. And I enjoy hearing your thoughts.

Editor’s Note: James Boric is Small-Cap Strategy Report’s editor in chief. Throughout his career, he has focused on fundamentally sound small-cap companies with market capitalizations of $1.5 billion or less.

Thanks to his renowned insights into the small-cap market, Boric has been featured in John Mauldin’s best-selling book Bull’s Eye Investing. He’s also been published on dozens of well-known investment sites, including The Daily Reckoning, Rude Awakening,, and

Today, Boric travels the world searching for the finest investment opportunities for his readers and writes about them in Small-Cap Strategy Report, Sleuth and Small-Cap Insider.