One-Way Traffic

The Daily Reckoning Weekend Edition
November 20-21, 2004
Baltimore, Maryland
By Addison Wiggin and Tom Dyson

"Dollar moving in one direction only: Down"

This bold proclamation appeared as a headline on FT.com. For an instant we admired the confidence of the prediction, snickered at its foolishness, and then clicked away, not even bothering to read the article; we already knew what it said.

It would have informed readers of the dollar’s new four-and-a-half-year low against the Japanese yen. The dollar dipped briefly below the 103-yen handle, before closing Friday at 103.07. Same story against the euro, the article would have said. The common currency closed at $1.3024, having also set a new record.

Greenspan got the blame for Friday’s dollar dumping after making some disparaging comments about the trade deficit. "It seems persuasive that, given the size of the U.S. current account deficit, a diminished appetite for adding to dollar balances must occur at some point," Greenspan said. "But when, through what channels and from level of the dollar? Regrettably, no answer to those questions is convincing."

A second FT piece – this time we read it – interpreted the Chairman’s comments "as a broad hint" that the dollar would take the brunt of any current account adjustment. Investors and traders agreed. Your Baltimore-based junior editor did not…

On Friday, we started buying dollars in the futures markets, and selling gold.

We like our trades to be scary. The scarier the better. Friday’s trading was no exception…and after we’d finished executing the orders by phone, a small patch of cold sweat could have been seen glistening on the handset.

And just to make sure we wouldn’t sleep at night, we picked the weekend when 20 finance ministers were getting together to discuss international trade. It’s the G-20 meeting in Berlin. Long-time readers will remember the Plaza Accord, struck on September 22, 1985, and the dollar carnage that followed…The Economist recalls: "Each country made specific promises on economic policy: the United States pledged to cut the federal DEFICIT, Japan promised a looser MONETARY POLICY and a range of financial-sector reforms, and Germany proposed tax cuts. All countries agreed to intervene in currency markets as necessary to get the dollar down."

The plan to devalue the dollar was spectacularly successful…by the end of 1987 the dollar had fallen by 54% against both the D-mark and the yen. In fact, the devaluation was so ferocious that, by 1987, bankers were starting to fear an all out collapse and were forced to hatch a new plan altogether, the Louvre Accord, to stabilize the dollar. "The dollar promptly rose," adds the Economist.

Curiously, the current account balance continued to deteriorate for the entire duration of the dollar’s move lower, and only started to move back into the black after the dollar had stabilized. This observation leads us to think that, in the intermediate term, deficits have very little impact on dollar trading, and partially explains our willingness to own the U.S.’s ‘deeply flawed’ currency.

Regardless of the short-term swings we like to trade, there can be no doubt about the verity of gold’s bull market. On Friday, gold put in another strong performance, closing at $446.90, up $9 on the week, and carving out a new 16-year high.

Elsewhere in the markets, oil finished the week with strength, gaining over $2 on Friday. A barrel now goes for $48.44.

Bond yields jumped on Friday, following the Fed-head’s comments, but finished the week pretty much where they started. 10-year Treasuries offer 4.20% while, at the long end of the curve, 30-year bonds pay 4.88%.

The stock indexes were all down last week. The S&P fared worst, taking a 14-point loss, or 1.2%, to land at 1,170. The Dow was down 82, to 10,457, while the Nasdaq shed 15, to close the session at 2,071.

And if our trades turn out to be rotten, we may have a salvation: Internet poker. Yesterday we qualified – via a satellite game – for a Texas Hold ‘Em tournament with a guaranteed winner’s prize of at least $250,000.

The tournament’s tomorrow. Let’s hope that gnarly dollar position doesn’t stop us sleeping…

Tom Dyson,
The Daily Reckoning
November 20, 2004

P.S. Dan Denning has advised subscribers of his Strategic Options Alert to buy dollars and short the stock of a large gold mining company. "It goes against everything I have written for the last three and a half years," says Dan proudly. "But that’s what makes this game so interesting…the markets never do what they ought to."

Dan’s track record is excellent, and has lead his subscribers to some fat profits recently, including his call to buy semiconductor stocks just before the election. He wanted to prepare his readers for the ‘melt-up’ he felt was coming. He was right of course, and the options he recommended have nearly doubled in value!

— Daily Reckoning Book Of The Week —

Action! Nothing happens Until Something Moves – By Robert Ringer

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"This is the first book I have ever reviewed," writes a satisfied customer. "It’s also the first book I’ve ever read in one sitting. I simply could put it down because every sentence set off flashing bulbs in my head. Once you read the first chapter – perhaps the best insight into life I’ve ever read – you’re hooked. Everyone pays lip service to action, but Robert Ringer makes you see action in ways that are new and powerful."

THIS WEEK in THE DAILY RECKONING

STILL TRYING TO HUSTLE THE EAST
By Bill Bonner

"Iraqis are overwhelmingly outgunned. They are up against the world’s greatest military power. In comparison, they are practically unarmed. It is amazing they fight at all; for every one American they bring down, nearly 50 of their own men get stretched out. Newspaper photos typically show GIs in some compromising position. They are either torturing prisoners, kicking dead bodies, or shooting unarmed Arabs."

FAITH IN THE SYSTEM 11/18/04
By Irwin Greenstein

"In the summer of 1929, Livermore’s extensive analysis of the market pointed to a disastrous downturn. He just didn’t know exactly when it would happen. He started shorting the market, his positions growing increasingly larger as Wall Street collapsed around him. The results were amazing…"

ODDBALL INVESTING 11/17/04
By James Boric

"Bill Tweedy quickly became one of the only small- or micro-cap brokers in New York – the ‘broker of last resort,’ as he was called by the many shareholders who couldn’t trade their shares anywhere else."

THE GODDESS OF GOLD 11/16/04
By Sala Kannan

"How could my mother force me to wear ugly, ancient, gold jewelry? What will my friends think of me? ‘It is so uncomfortable,’ I tried to protest. ‘So what? Twenty years from now it will be worth so much more, and you will be glad you have it.’"

HOW DO YOU LIKE THEM APPLES? 11/15/04
By The Mogambo Guru

"In fact, the dollar has fallen to new lows against other currencies, as the laughably incompetent buttheads at the horrid Federal Reserve with their stupid little economic theories that are always wrong, keep creating more and more credit and money to try and keep this malignant economy from imploding on itself."

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HEADLINE, NEWS And INSIGHT:

Privatizing Social Security
by Doug Hornig

"Though everyone in Washington acknowledges the looming crisis, help is decidedly not on the way. Kerry liked the system just as it is, while Bush has proposed only a small tinkering with it. Neither is viable. Unless Social Security is completely overhauled, we will be forced to accept one or more of the following: higher taxes, reduced benefits, transfer of money from other programs, more and more debt."

A False Sense of Insecurity
by Bill Bonner

"All the terror incidents of the last 1,000 years have probably killed fewer people than the war George Bush launched against it three years ago. The most effective response to the terrorism is probably the one most likely to frustrate terrorists and least likely to become public policy: ignore it."