U.S. Dollar on a Foreign Currency Seesaw

We’re on vacation. Really. Officially. And actually – until the end of the month. We always take off from the Feast of the Assumption until the beginning of the ninth month.

But there are things to be reckoned with, and we’re not going to abandon our dear readers. Besides, we can’t stay away.

Today, we note only that the Dow took another dip downwards. The index opened this morning at 12,861 – a 5-month low. Market technicians tell us that the action looks bad – like bear market action. And our old friend Harry Schultz says that fear has now replaced greed as the underlying emotion in the marketplace.

We’re not so sure. But we’ve had our Crash Alert flag flying for months…and we’ll keep it up until this market resolves itself. Despite the anxiety expressed thus far, the Dow is still up for the year. Which means it has a long, long way to fall. Some day, stocks will be a bargain again. But the Dow would have to be cut in half, roughly, before that day arrives. Between that day and this, we’d rather watch the game than play it.

“Please beware of charlatans saying the markets must bounce because they are so oversold,” Mike “Mish” Shedlock advised his Survival Report readers today. “In bull markets, stocks can get overbought and stay overbought for long periods of time, but in bear markets, stocks can get oversold and stay oversold. This is a bear market, so the markets might bounce or not. But nothing says they have to.”

Meanwhile, the dollar is going up against the euro (EUR) and down against yen (JPY). Why? A hypothesis: Because speculators are growing fearful…and because they need dollars to pay their debts and their bills.

People have fewer euro-denominated debts than dollar-denominated debts, so the dollar rises against the euro. On the other hand, speculators in the carry trade have huge yen debts. They borrowed at low yen rates in order to buy higher-yielding investments – including subprime CDOs. Now, they’ve got to sell their dollar positions and buy yen in order to repay their yen loans. So the yen rises against the dollar.

On another note, we got a panicked call from our lawyer yesterday. This was the gist of his comments:

“You must be crazy to tell the whole world that you’re not really going to move to Florida. If your move is just a sham it won’t work. And you could have to pay fines and penalties. You have to actually move your permanent home to Florida in order to file your taxes as a Florida resident.”

“But wait a minute,” we replied. “We’ve been paying taxes to the state of Maryland for 10 years without being a real resident of the state. We can darned well pay taxes to Florida without being a real resident.”

“No you can’t. You pay where you are deemed…by law…to be a resident. You’re deemed a Maryland resident because your attachments to the state, as thin as they are, are stronger than to any other state. It’s your permanent home in the United States, even though you don’t really live here. If you want to file taxes as a Florida resident, you have to change that…so that Florida is the state where you are considered most closely connected. It just happens that you don’t have many connections, so it should be fairly easy to do. But please don’t tell the whole world that you’re just pretending to be a Florida resident or we’ll end up in court for sure.”

Well, okay…

Later in the day…

“Kids, we really are moving to Florida. This time I really mean it. Our lawyer says we have to. We’re moving to Florida in the full, legal sense in which people who don’t really live in the Sunshine State, but in fact make their residence in a foreign country, move there. So pack your bags. Buy some suntan lotion. We’re going to Flawda!”

Over and out…for the first day of our vacation…

Bill Bonner,
The Daily Reckoning
August 16, 2007

P.S. One more note…our new book, Mobs, Messiahs, and Markets, is said to be out. We haven’t seen a copy of it yet. But the word on the street is that it has turned out pretty well.

This is the book in which your author, and his co-author Lila Rajiva, reveal how the world really works. It’s the untold story of how people, in groups, go about setting market prices…making war…electing presidents and other acts of folly and insanity.

It’s going to be available very soon. Watch this space…

And now…

…for the news, from Short Fuse in Baltimore:


Views from the Fuse:

*** The St. Louis Fed president William Poole said in an interview yesterday that the subprime market tumult doesn’t pose a threat to the U.S.’s “real economy” or economic growth – and only a “calamity” would justify an interest rate cut.

“I don’t see any impact as yet on the real economy or on the inflation rate,” he said in an interview in the bank’s boardroom. “Obviously, there could be an impact, but we have to rely on some real evidence.”

We were looking around on prudentbear.com, and while we realize that it is not the “cheeriest” of news aggregators, if you go to the site, you’ll see that 29 out of the 45 headlines have to do with the housing market downturn, or the subprime debacle. But hey – none of this will impact the “real economy”, right?

We wonder if Americans are ready for the end of this bubble…

Probably not, opines Eric Fry in today’s guest essay. “Based on America’s limited capacity to absorb a substantial bear market in housing, we fear that very few homeowners will find salvation in the afterlife of the bubble. A select few of us might achieve a partial salvation, provided we have not committed the mortal sins of borrowing too much or saving too little.

“Real estate, both as an asset class and as an industry, has assumed such an outsized share of U.S. economic activity, that the entire economy would mourn the passing of the housing boom.”

*** And, as if you need more evidence that the housing market is in the toilet, here’s Addison and Ian, reporting from The 5 Min. Forecast:

“Homebuilder confidence slumped to a 16-year low yesterday, according to the National Association of Home Builders. With a score of 22, homebuilders haven’t been this depressed about the housing market since 1991. In fact, 22 is the second lowest score since the survey was incepted in 1985. All told, confidence has dropped 2% since July.

“And who can blame home builders for their currently low self-esteem? U.S. home prices dropped for the fourth straight quarter in Q2 of 2007, said yesterday’s report from the National Association of REALTORS. Currently, the median single family home in the U.S. will set you back $223,800 – 1.5% less than this time last year.”

*** Looks like the country’s biggest U.S. mortgage lender may be going the way of New Century Financial (OTC:NEWC) and American Home Mortgage (NYSE:AHM), RIP.

Countrywide Financial (NYSE:CFC) got an “emergency loan” today, along with Australia’s RAMS Home Loans (ASX:RHG) and Canada’s Coventree Inc. (TSE:COF). And we’re not talking about borrowing a few bucks because they are in a pickle…Countrywide borrowed the full $11.5 billion available to them.

“When a company draws on its bank lines, it just basically gives off the impression that it has run out of options,” said Christopher Wolfe, managing director at Fitch Ratings, which today dropped Countrywide to BBB+, its third-lowest investment-grade rating. “Typically these bank lines are there but not really meant to be used.”

Moody’s downgraded Countrywide’s credit rating to the lowest investment grade level, Baa3. Bloomberg reports that the “rating company said it may lower the debt to junk status, or below its investment grade, ‘should its available liquidity come under further stress.'”

Short Fuse
The Daily Reckoning