Jan 14, 2005

"I place economy among the first and most important virtues, and the public debt as the greatest of dangers to be feared...To preserve our independence, we must not let our rulers load us with perpetual debt."

-Thomas Jefferson

MARKET NEWS DIGEST

U.S. Trade Gap Widened to Record $60.3B -BL

Jan. 12 (Bloomberg) -- The U.S. trade deficit unexpectedly grew to $60.3 billion in November, the widest ever, as demand for oil and consumer goods drove imports to a record. Exports fell.

The trade gap increased 7.7 percent from the previous record of $56 billion in October, the Commerce Department said in Washington. The trade gap with China held close to the previous month's record.

The $561.3 billion deficit through November exceeds the record for all of 2003. A rebound in consumer spending during the second half of last year boosted demand for imported products in the world's largest economy. Slower growth in Japan and Europe than in the U.S. may have limited demand for American goods, economists said.

``The U.S. is growing faster than nearly everyone else, and that kind of dynamic means that imports will be growing faster than exports for some time, despite a weaker dollar,'' said Nariman Behravesh, chief economist at Global Insight Inc. in Lexington, Massachusetts.

The dollar weakened against the euro and yen after the report. The euro climbed to $1.3205 at 8:42 a.m. Washington time from $1.3107, and the yen to 102.57 per dollar from 103.32.

Imports rose 1.3 percent for the month to $155.8 billion. Exports fell 2.3 percent, the first decline since June, to $95.6 billion. Exports were a record $97.8 billion in October.

The trade deficit is a negative in the Commerce Department's estimates of U.S. gross domestic product. A Bloomberg News survey before today's report called for the economy to grow at a 3.9 percent annual rate in the final three months of 2004, compared with 4 percent in July-September.

Behravesh said the trade deficit will ``shave a few tenths of a percent'' from fourth-quarter growth.

Expectations

Economists expected the deficit to narrow to $54 billion for the month compared with a previously reported $55.5 billion gap in October, according to the median estimate of 70 forecasts in a Bloomberg News survey.

The value of oil imports rose in November to a record $13.4 billion from $13.2 billion. The U.S. imported 326.5 million barrels in November, compared with 315.8 million in October, when the futures price climbed to a record. The average price of imported oil dropped to $41.15 a barrel from $41.79.

Consumer goods imports rose 1.1 percent to a record $32.4 billion. Food imports and imports of industrial supplies, which include oil, also were the highest ever.

Imports of autos and parts fell 2.3 percent to $19 billion in November. Capital goods imports were little changed at $29.7 billion.

Exports

Wholesalers rebuilt inventories at a stepped-up pace in October and November after consumer spending grew in the third quarter at a 5.1 percent annual rate, the fastest in almost three years, up from 1.6 percent in the second.

U.S. exports of consumer goods fell 2.6 percent to $8.6 billion. Foreign businesses also bought 5.1 percent less of capital goods. Services were a strong point, with exports rising to a record $29 billion.

Rising imports from China have added to the U.S. trade deficit and caused friction between the two countries.

The trade deficit with China narrowed to $16.6 billion from a record $16.8 billion. For the year, the trade gap with China is $147.7 billion, about one-fourth the U.S. deficit with all countries.

China

The U.S. is pressing China to change the yuan's decade-old peg of about 8.3 to the dollar, saying the fixed rate depresses the yuan's value, giving Chinese manufacturers an unfair advantage by making their goods cheaper abroad.

A congressionally mandated commission reported yesterday that China's growing trade surplus with the U.S. has cost 1.5 million U.S. jobs since 1989.

Lawmakers and manufacturers are also urging China's government to curb subsidies and clamp down on counterfeiting of trademarked goods.

``When China's leaders fail to produce results on the points of friction in our trading relationship, their failure only empowers those critics within the U.S. political system,'' Commerce Secretary Donald Evans said today in a speech to the American Chamber of Commerce in Beijing.

Other Countries, Regions

The shortfall with Japan, at $7.3 billion, was the highest since October 2000.

The deficit with Canada, the largest U.S. trading partner, widened to a record $7.3 billion from $5.7 billion. The gap with Mexico narrowed to $3.9 billion from $4.4 billion.

The deficit with the European Union widened to $10 billion from $8.9 billion.

A decline in the value of the U.S. dollar and slower growth in consumer spending may trim the U.S. trade deficit by the end of this year, economists said.

The dollar lost 4.6 percent of its value against a basket of currencies from major trading partners in 2004, making imports more expensive and U.S. exports cheaper.

``From the perspective of a manufacturer in North America, a somewhat weaker dollar makes us more competitive, and it's going to be favorable for the manufacturing economy into 2005,'' John Surma, chief executive of U.S. Steel Corp., said in an interview last week. The Pittsburgh company is the largest steelmaker in the Americas.

Through November, U.S. exports of iron and steel mill products were $4.6 billion, up $774 million from the same period a year earlier. Semiconductor exports were up $2.2 billion to $44.1 billion.

``In general, it was strength throughout the quarter, throughout the world across most products,'' Andy Bryant, chief financial officer of Intel Corp., said yesterday. The company, the world's largest maker of computer chips, said sales exceeded $9 billion in the fourth quarter and revenue was a record.

http://www.bloomberg.com

Wall Street bounces -CBSMW
Tame inflation report inspires buying; Disney climbs
By Susan Lerner, CBS.MarketWatch.com
January 14, 2005

NEW YORK (CBS.MW) - Stocks rallied Friday morning as investors found encouragement from news of the biggest monthly drop in wholesale prices in nearly two years in the face of steep losses that have gripped the market since the start of the year.

The Dow Jones Industrial Average rose 42 points, or 0.4 percent, to 10,548 while the Nasdaq Composite Index climbed 14 points, or 0.7 percent, to 2,084 and the S&P 500 added 5 points, or 0.4 percent, to 1,182.

On Thursday, the Dow closed at its lowest level in five weeks and the Nasdaq at its lowest point in eight weeks.

U.S. markets will be closed Monday in observance of the Martin Luther King Day holiday. Bonds and commodities market will hold abbreviated trading sessions Friday ahead of the holiday.

Traders weren't confident Friday's gains would hold, however.

"The market's been pretty much in a tailspin and I don't think the wholesale inflation number is going to be the thing that gives you a big bounce," said Stephen Massocca, president and head of trading at Pacific Growth Equities.

What Massocca does think could turn market momentum around are more and more reports of outperformance as earnings season unfolds but on Friday Wall Street was faced with more disappointment.

"It looks like there's some concern, at least as evidenced by the bond market, that the economy's not as strong as everybody thinks -- and I think that's the real, sort of, sneaky surprise in the background here," said Michael Metz chief investment strategist at Oppenheimer & Co.

http://www.cbs.marketwatch.com

Dollar Falls on Snow `Market Forces' Comment -BL

Jan. 11 (Bloomberg) -- The dollar weakened for a second day in Asia after Treasury Secretary John Snow said in a Reuters interview currency rates are best left to ``market forces.''

The U.S. currency dropped for a third year in 2004 in part on speculation the Bush administration endorsed a weaker currency to offset its record trade and budget deficits. Snow's remarks on Jan. 7 that U.S. policy makers ``want to do things to sustain the strength'' of the dollar, helped the currency to its second- biggest weekly climb ever against the euro.

``The comments on Friday alerted the market that there may be some subtle shift in dollar policy,'' said Robert Rennie, a currency strategist in Sydney at Westpac Banking Corp. ``The repetition of `market forces' sounds likes nothing's changed, so the dollar goes down.''

Against the euro, the dollar dropped to $1.3113 at 8:46 a.m. in Tokyo, from $1.3073 late yesterday in New York, according to currency-trading system EBS. It was also at 104.19 yen, from 104.34 yen. The dollar may fall to $1.3150 today, Rennie said.

``Just because I don't say something doesn't mean it's not part of our policy,'' Snow was quoted as saying in response to a question in an interview with Reuters Television. ``We believe in market forces and free capital flows.''

http://www.bloomberg.com

Latest...
Dollar Rises as Fed's Poole Says `Measured' Pace May Be Dropped -BL Jan. 14 (Bloomberg) -- The dollar rose more than a cent against the euro, the most in a week, after a Federal Reserve official said policy makers may drop their plan to lift interest rates at a ``measured'' pace ``at some point.'' Some traders and analysts said the remarks, by St. Louis Fed bank President William Poole late yesterday, may mean the central bank will accelerate the pace of rate increases, widening a gap with Europe. The dollar also gained after European Central Bank council member Axel Weber said higher U.S. rates and faster U.S. growth may support the currency.

Analysts see year of gold -Bloomberg
By Stephen Voss
Jan 11, 2005

Gold prices will outperform energy and industrial metals this year as the greenback weakens and slowing growth in demand hurts crude oil markets, Morgan Chase says.

Gold is likely to average $US435 an ounce this year, up about 5 per cent from 2004, and $US450 in 2006, as China's growing middle classes seek more luxury goods, following a trend set by India, the world's biggest gold consumer, the bank says.

Oil, already down from October's record, will start to fall next quarter, Morgan analysts say.

"Many investors look at the strong returns generated on commodity positions in 2004 and wonder whether these markets will stand above other asset classes again in 2005," Morgan foreign exchange and global fixed income strategist John Normand says.

Raw-material prices, as measured by the Reuters Commodity Research Bureau index, rose 11 per cent in 2004 to conclude the first three-year rally since 1993-1995.

Led by China, demand for oil, copper and other goods surged last year, while investors raised their bets on commodity markets.

"In 2005, global demand will be solid, but not as strong as last year, yet the dollar should continue to weaken," Normand says.

"In that environment, cyclical commodities should under-perform, but those assets most leveraged to the dollar view should do well; that's why we think gold will rally, at least early on."

Besides a weaker US dollar, which increases demand for gold, bullion prices may also be boosted by a "peaking" level of supply from gold mines and a more predictable rate of supply from gold sales by central banks, the report says.

http://www.bloomberg.com

Latest Gold News:
1-12-05 -- Gold Up Over $4 On Dollar Fall - DJ NEW YORK (Dow Jones)--Comex gold futures rallied more than $4 an ounce Wednesday after news of an unexpected widening in the U.S. trade deficit dispatched the U.S. dollar sharply lower and spurred speculators and investors into dollar-alternatives such as gold.

Central banks count the cost of weak dollar -AFP
Mon Jan 10, 2005

FRANKFURT (AFP) - The weak dollar appears to be tearing holes in the annual accounts of central banks both in Europe and elsewhere around the world, with many banks considering reducing their official holdings in the US greenback.

The German business daily Handelsblatt reported that the European Central Bank, which booked a 2003 loss of 477 million euros (625 million dollars), saw its net loss widen to at least one billion euros last year as a result of the weak dollar.

The newspaper did not reveal its sources and said that the guardian of the euro had refused to comment on the information.

But already last week, the Bundesbank had conceded that press reports were "more or less accurate" when they claimed that the German central bank's annual profit had been whittled down to next to nothing as a result of the sharp fall in the value of the dollar.

Already in 2003, the Bundesbank saw its profit fall to just 248 million euros in 2003, its lowest level in 17 years as a result of the weak dollar.

And because the Bundesbank holds vast reserves of dollars, it was compelled to make heavy writedowns against its holdings of the greenback again in 2004, the reports said.

The ECB faces the same problem. The Handelsblatt said in its Monday edition that the world's second most powerful central bank, after the US Federal Reserve, was compelled to make 1.6 billion euros in writedowns against its dollar holdings.

Last year, the euro rose by 16 percent against the dollar, representing an increase of more than 60 percent compared with the historic lows it posted in autumn of 2000.

In addition, the ECB's earnings have dwindled because of the low level of interest rates around the world.

Central banks earn income from interest rates as well as from its activities in gold, foreign currency and securities trading.

Handelsblatt said the low level of interest rates alone knocked around 700 million euros off the ECB's net interest income.

If the Handelsblatt figures are correct, it will be the third annual loss posted by the ECB in the first few years of its existence.

In addition to the loss in 2003, it also booked a shortfall of 247.3 million euros in 1999.

According to data compiled by the International Monetary Fund, the dollar accounted for nearly 64 percent of central banks' foreign currency reserves worldwide at the end of 2003.

But the euro's role is strengthening -- it saw its share of the world's foreign currency reserves rise from 16.3 percent at the end of 2000 to 19.7 percent at the end of 2003.

And that trend looks set to continue.

FULL STORY

For Commodities, Hope Is Rising -CONRAD de AENLLE, NYT
The New York Times
January 3, 2005

COMMODITIES are likely to resume multiyear rallies once a retrenchment that has gripped many markets runs its course, giving investors an opportunity to profit, analysts, economists and fund managers say.

"Commodity prices are likely to be firmer in the future than most people until recently have been expecting," said Stuart Schweitzer, a commodity strategist at J. P. Morgan Fleming Asset Management. "They will be volatile, but they will be relatively firm on a sustained basis for some time to come."

Such volatility has been especially evident in the last few months. Gold and silver prices continued to rise in 2004, but less than in the previous two years. And in December they lost some ground, especially silver. Crude oil and refined energy products followed similar paths.

The picture for agricultural products is mixed. Coffee and sugar prices are up nearly 60 percent. Cattle gained almost 19 percent, but corn, wheat, cotton and soybeans fell last year, with cotton down 40 percent.

Industrial metals are proving more durable in every respect. Aluminum, copper, lead and steel and its related materials have risen sharply and held their gains. Copper, for instance, was up 40 percent on the year and double its price of early 2003.

Despite his optimism on the markets, Mr. Schweitzer added that "the global economy has hit a soft patch that probably has somewhat further to run, so this may not be the best entry point" for investors interested in playing commodity markets.

Charles Ober, manager of the T. Rowe Price New Era fund, is willing to take his chances. He foresees higher prices for several sectors where supplies are tight, including precious and industrial metals and agricultural commodities.

"I'm particularly intrigued by the metals," Mr. Ober said. "There has been a lack of major discoveries for a significant amount of time" for the raw materials used to make steel and aluminum. Similarly, he said, "The long-term outlook for farm commodities is pretty good." He cited a lack of investment in new production for 20 years.

Mr. Schweitzer agrees. Traditionally, "high commodity prices are their own worst enemy in a sense," he explained. "When prices go up, producers have an incentive to build additional capacity."

But recently they have grown cautious. "Companies, having been burned in the past by adding capacity prematurely, are showing greater spending discipline," Mr. Schweitzer said. He added that "growth in many areas around the world has cooled," but there is "unusually robust growth in resource-intensive economies."

Above all others, that is true of China, said Jerome Booth, research director at Ashmore Investment Management, a London firm specializing in emerging markets.

"The story of Chinese demand is driving hydrocarbons and metals," Mr. Booth said. "China remains key over the next year to sustaining demand" globally for industrial commodities.

http://www.nytimes.com

A heart of gold gives portfolios a natural edge -FT
By Jennifer Hughes in New York
January 10 2005

"You should always, always, keep 10 per cent of your portfolio in gold," says Frank Holmes, chief investment officer of US Global Investors, a Texas-based group of funds.

It sounds like an advertisement for one of the group's many natural resource-based funds but there is sound reasoning, too.

"It's a natural hedge, uncorrelated with other asset classes. At the moment, you will have a profit that can then be reinvested elsewhere. If you had stuck to it during the dotcom boom [when gold was falling] and kept re-topping it to 10 per cent each year, you would have had fewer, and lost less on, tech stocks," he explains.

Gold prices troughed during the late 1990s when the focus was firmly on spectacular equity market growth. The subsequent slide in stocks shifted attention to alternative assets while, more recently, the dollar's fall has helped boost gold, which tends to move in the opposite direction. Spot prices for the metal have risen 57 per cent since January 2002 and now stand at more than $414 a troy ounce from $278.7 three years ago.

Commodity prices more generally have risen sharply as a result of increased demand, particularly from China, as part of the global recovery. Stocks linked to natural resources, in which Mr Holmes specialises, have also outperformed. Last year the materials sector of the S&P Global 1200 rose 16.2 per cent compared with 12.5 per cent for the whole index.

The group's flagship funds, Global Resources and World Precious Minerals, are well placed to capitalise on this. Global Resources has returned 30.4 per cent last year and almost 24 per cent annualised over the past five years. In 2003 it was ranked first in its category by Morningstar but slipped to 35th last year as others enjoyed the commodities boom.

World Precious Minerals has returned 18.9 per cent each year over five years. Over three years it is ranked the best performing fund in its sector by Morningstar. The group's Gold Shares fund was the first precious metals fund in the US, evolving out of a fund that was the company's first offering in 1968. The fund is down 6.4 per cent in 2004 but has returned 17.2 per cent on an annualised basis since 1999.

FULL STORY

COMMENTARY

SHARING THE WEALTH: Historic Quotables -Craig R. Smith, SATC
A collection of quotes from America’s Founding Fathers, selected economists and a few notable contemporary leaders from Rediscoveringgold
Jan. 10, 2005

INTRODUCTION
Last week the Heritage Foundation and WSJ reported that "For the first time ever, the U.S. does not rank among the world's 10 freest economies in the Index of Economic Freedom."

How is it that while economic freedom is growing in many parts of the world, it is shrinking here in America? Could it be that we are not as free as we once were? Could it be that we have accepted gradual changes in the definition of freedom, money and wealth?

Our Founding Fathers knew the connection between our money system and our moral system. They would never have allowed the massive government debt that is accepted today. They knew the difference between having an "intrinsic" money system (based on gold and silver) and an "extrinsic" money system (based on confidence in paper/credit/debt).

Will Rogers is famous for saying, "I'm more concerned about the return OF my money, than the return ON my money!" This truism have never been more accurate in a world that measures the value of "money" in U.S dollars.

While the dollar has been rallying lately, I don’t think it’s the end of the dollar bear market. I expect the Chinese renminbi could start to appreciate against the dollar in conjunction with the yen and all the other South East Asian currencies.

For the past four years the US gold price has reflected the dollar-to-euro exchange rate. That, too, could change as we see the dollar-to-gold price start tracking the dollar’s exchange rate against other currencies. In the meantime, this is an excellent time to pick up more gold-related assets.

Bottom line, we can all learn a thing or two by studying the words of our Founders on the subjects of paper money and debt. Here is a sample of some of the best quotes in the Appendix of my book. I hope they can help shed some light into the 21st century as the gold rush continues and we learn to live with a declining dollar.

AMERICA’S FOUNDING FATHERS

"All the perplexities confusion and distress in America arise not from defects of the Constitution, not from want of honor or virtue, so much as from downright ignorance of the nature of coin, credit and circulation."
-John Adams, in a letter to Thomas Jefferson in l787

"If the American people ever allow private banks to control the issue of their currency, first by inflation and then by deflation, the banks and corporations that will grow up around them will deprive the people of all property until their children wake up homeless on the continent their fathers conquered."
-Thomas Jefferson

"Of all the contrivances devised for cheating the laboring classes of mankind, none has been more effective than that which deludes him with paper money."
-Daniel Webster

"The colonies would have gladly born the little tax on tea, and other matters, had it not been that England took away from the colonies their money."
-Benjamin Franklin

"This is a favorable moment to shut and bar the door against paper money. The mischief of the various experiments which have been made are now fresh in the public mind and have excited the disgust of all the respectable parts of America."
-Oliver Ellsworth, a delegate from Connecticut, who later became this nation's third Chief Justice of the Supreme Court.

"I believe that banking institutions are more dangerous to our liberties than standing armies. Already they have raised up a money aristocracy that has set the government at defiance."
-Thomas Jefferson, at the Constitutional Convention (1787)

"It's apparent from the whole context of the Constitution as well as the history of the times which gave birth to it, that it was the purpose of the Convention to establish a currency consisting of the precious metals. These were adopted by a permanent rule excluding the use of a perishable medium of exchange, such as of certain agricultural commodities recognized by the statutes of some States as tender for debts, or the still more pernicious expedient of paper currency."
-President Andrew Jackson, 8th Annual Message to Congress (December 5, 1836)

"If what is used as a Medium of exchange is fluctuating in its Value it is no better than unjust Weights and measures, both which are condemned by the laws of GOD and Man, and therefore the longest and most universal Custom could never make the Use of such a Medium either lawful or reasonable."
-Roger Sherman, a delegate from Connecticut and author of the gold and silver coin provision of the Constitution, wrote a scathing condemnation of paper money entitled "A Caveat (caveat means warning) Against Injustice"

CURRENCY/CREDIT

"What is robbing a bank compared with founding a bank?"
-Bertolt Brecht, The Threepenny Opera

"Man can live and satisfy his wants only by ceaseless labor; by the ceaseless application of his faculties to natural resources. This process is the origin of property. But it is also true that a man may live and satisfy his wants by seizing and consuming the products of the labor of others. This process is the origin of plunder. Now since man is naturally inclined to avoid pain - and since labor is pain in itself - it follows that men will resort to plunder whenever plunder is easier than work. When plunder becomes a way of life for a group of men living in society, they create for themselves, in the course of time, a legal system that authorizes it and a moral code that glorifies it."
-Frederick Bastiat, Economist, Statesman

"Give me control over a nation's currency and I care not who makes its laws."
-Baron M.A. Rothschild

"Whoever controls the money in any country is master of all its legislation and commerce."
-President James Garfield

"Centralization of credit in the hands of the state, by means of a national bank with state capital and an exclusive monopoly."
-Karl Marx, 5th Plank of the Communist Manifesto (1848)

"We have in this country one of the most corrupt institutions the world has ever known. I refer to the Federal Reserve Board and the Federal Reserve Banks. Some people think the Federal Reserve Banks are U.S. government institutions. They are not government institutions. They are private credit monopolies; domestic swindlers, rich and predatory money lenders which prey up on the people of the United States for the benefit of themselves and their foreign customers. The Federal Reserve Banks are the agents of the foreign central banks. The truth is the Federal Reserve Board has usurped the Government of the United States by the arrogant credit monopoly which operates the Federal Reserve Board."
-75th Congressional Record 12595-12603

"It is well enough that the people of the nation do not understand our banking and monetary system, for if they did, I believe there would be a revolution before tomorrow morning."
-Henry Ford

More Quotables on Money

What Mr. Market can learn from Mother Nature -Bill Fleckenstein, MSN
Financial insanity is gripping the country. We’re speculating on everything from stocks and bonds to houses. When a dislocation comes -- and it will -- watch out.
JAN 5, 2005

The murderous, devastating, epochal tsunami was not a financial event. But -- to those of us who make our living in markets -- it could not help but provoke thoughts about financial risk.

Richard A. Posner, a judge of the U.S. Court of Appeals for the Seventh Circuit, in a fine op-ed piece in The Wall Street Journal last Tuesday, put his finger on what the new year may hold for our overextended markets: "A disaster that has a very low probability of occurring, but that if it does occur, creates enormous losses."

The judge was alluding to geological events, but he might as well have been talking about financial ones.

The insanity is everywhere

Financial insanity is rampant. Folks are speculating in houses, with many having more than one real estate investment due to the financing that’s available and the belief that real estate is now bulletproof. Insanity pervades the stock market generally, and Internuts/single-digit midgets (with no real businesses) specifically. The fact that Google could have a $50 billion valuation is one sign of the times.

If one looks at credit spreads, they are also at record lows. And then I see Fannie Mae trading at around $70, barely flinching despite the discovery that the company manipulated its earnings. Whatever people think of the mortgage giant’s business prospectively, it won’t be the same as it’s been in the past. So, I just shake my head and say, there’s not one pocket of insanity -- it’s everywhere.

Coming back to the earthquake/tsunami analogy, I continue to believe that our stock market is the financial equivalent of an 8.0-plus earthquake waiting to happen. The fact that it has not happened doesn’t mean it won’t, any more than the fact that the Indian Ocean was earthquake-free for so long meant it was immune to this enormous tragedy. Furthermore, I also believe that the speculation I have been detailing over the course of the last couple of years has only guaranteed that whatever damage is slated to befall the stock market has only gotten bigger by the month.

So, the question you have to ask yourself is: If I knew that a place was vulnerable in the not-too-distant future to an earthquake and tsunami, would I go there? Most likely, the answer would be: “Of course not.” Similarly: If I knew that a financial market was prone to epic dislocation, would I aggressively allocate money to that market? My guess would be “No.”

However, the timing of such events is very hard to predict. The longer markets do well (especially in the face of bad news), the more people believe that nothing bad can ever happen. (Of course, sometimes markets “defying” bad news means the news is going to get better. However, when the news doesn’t improve after a market has gone up, the stage is set for disaster.)

All risk, all the time

That is where we find ourselves today with our stock market and, by extension, our real estate market and the economy. I don’t believe that there has been a moment in time in the last 50 years where the stock market has been more lopsidedly tilted toward all risk and no reward. And I believe this is the most attractive period to be a short-seller that I have witnessed in my career.

FULL STORY

The 97-cent weakling -MSN
By Philipp Harper

You might not know a euro from a yuan, and chatter about international currency markets probably makes your eyes glaze over. But if you live in the United States, you care about your dollar and how much muscle it has.

That's because the greenback's strength relative to other currencies directly affects your economic life. Currently, with the dollar each day seeming to hit new lows against the European Community's euro and Japan's yen, the news for U.S. consumers is uniformly bad.

Here are the four main ways you're likely to suffer, and why:

Imported goods will cost more
This is a no-brainer. As the dollar loses value against a particular currency, goods produced in that same country rise in price for anyone buying with dollars.

The price of some goods, such as European wines for which connoisseurs are willing to pay top dollar, has soared more than 45% over the last three years.

Yet the price of other imports remains fairly flat. A BMW car that cost Americans $40,000 when a euro was worth only 82 U.S. cents should by all appearances cost more than $65,000 when the euro fetches $1.36. Yet it doesn't. Contracts that lock in exchange rates (called "hedging") and the ultra-competitive marketplace for luxury cars have kept prices relatively stable.

"Some of the increase has to do with a realignment of global supply and demand, and some of it has to do with the weakness of the dollar," says Scott Hoyt, an economist with Economy.com. "The two are difficult to separate."

For at least the time being, while consumer prices generally are higher than they were a year ago, they are not dramatically higher. At least part of the reason is that an increasing share of U.S. imports comes from Asian countries with currencies that have not risen sharply against the dollar. Many of those countries actively intervene to keep their currencies in step with the dollar by buying the greenback in currency markets.

The effect of a weak dollar has been muted so far, Hoyt says, because a major U.S. trading partner, China, has pegged its currency, the yuan, to the dollar through a series of central bank interventions. Should the Chinese let the yuan trade freely, and there are signs they will, you will feel the pinch. Economists, bankers and currency traders believe that the yuan, allowed to float, would rise 15% to 40% against the dollar.

How would that affect you? Wal-Mart alone bought more than $18 billion in goods from Chinese manufacturers in 2004: electronics, clothes, toys. Add 15% to 40% to their prices and you've got an idea.

Prices of goods produced domestically will rise as well
If the effect of a weak dollar on the cost of imports is crystal clear, not so the effect on domestic prices. There's nothing intuitive about this at all. What gives?

As explained by Wake Forest University finance professor Bill Marcum, two motives will drive U.S.-based companies to raise their prices:

First, price increases by foreign competitors give U.S. producers the cover to raise their own prices without suffering a competitive disadvantage. Who wouldn't want to increase the bottom line, especially if it didn't cost anything? Maybe this is a no-brainer after all.

Second, prices will rise domestically to cover the cost of increasingly expensive "import inputs" into domestic production. Remember, just because a product is Made in America doesn't mean that all its components are as well.

Interest rates will rise, causing calamity for some
If certain other factors come into play -- including a general dumping of dollars by foreign investors, and the federal government's increased reliance on borrowing to finance the national debt -- the result could be significantly higher interest rates across the board. Many consumers then would find their credit positions had been made more tenuous, in some cases to the point where bankruptcy was the inevitable result.

Wake Forest's Marcum says the conditions for this "nightmare scenario" are far from being met and may well be prevented by America's continuing status as the world's safest haven for investment. "From the safe-market perspective, there's no place else to put money," Marcum says.

The joker in the deck is China, which has intervened to keep its currency, the yuan, in balance with the dollar. However, Beijing has signaled its intention to decouple the currencies for competitive reasons, and when it does, the trillions of dollars in U.S. Treasurys it holds will begin to lose value.

To minimize that loss, Marcum says, the Chinese almost certainly will sell off some of their U.S. holdings. The question is: How much and how fast, and will the other Asian countries that have copied China's dollar-propping moves also ape its move out of dollar-denominated investments?

If there is a stampede away from greenbacks, and other "perfect storm" conditions develop, Marcum says he would not be surprised to see mortgage rates rise by two full points over the next 24 to 30 months. The rate increase would be more exaggerated with riskier types of loans, and credit card rates could be expected to rise sharply.

For consumers who already are overextended, the consequences could be dire. "If they're maxed out on their credit cards and home-equity loans and are barely making their monthly payments, this could put them over the top" into insolvency, Marcum says.

FULL STORY

Reacting to a Dollar With No Muscle -FLOYD NORRIS, NYT
The New York Times
January 3, 2005

THIS is going to be the year the world learns to live with a cheaper dollar. How well it does that may have a profound effect on prospects for continued world growth. That, at least, is the predominant opinion as 2005 begins.

The dollar's travails dominated the market news in the year just ended and were all the more important because they influenced perceptions of other events. The big rises in gold and oil seemed larger when measured in dollars than they did when calculated in euros or yen.

But the most important fact about currency markets in 2004 was that the dollar did not budge against the Chinese yuan, or against other Asian currencies that are effectively tied to the dollar. The big issue this year will be whether those ties are broken, and, if so, how markets and economies will react.

The dollar's weakness stemmed from the continued worsening of the huge trade deficits the United States was running at a time when foreigners were less than enchanted by investment opportunities in America. Still, foreigners continued to buy American bonds, and their purchases helped hold down interest rates and support share prices.

The American stock market, which had begun a powerful recovery in October 2002, saw the momentum fade away in the spring of 2004. But it returned at the end of the year, carrying the major averages to new post-2000 highs.

By year's end, the Standard & Poor's 500-stock index was up 8.99 percent for 2004, and the Nasdaq composite had gained 8.59 percent.

The Dow Jones industrial average was the laggard, rising only 3.15 percent. It was held back by four of its members, which lost more than 20 percent of their values. Two were drug stocks, Merck and Pfizer, whose painkillers were linked to heart problems. The others were Intel, which seemed to stumble while rivals prospered, and General Motors, which continues to lose market share and faces huge bills for health care costs for retirees.

Most American stocks are now well above their levels of March 2000, when the records were being set. That the major indexes are well below those highs is a testament to just how far the stock darlings - largely in technology and telecommunications - of that bull market fell in the following years.

Barring a dollar crisis, the economy seems likely to keep growing, and that should support share prices in 2005. For numerologists, there is the Rule of Five, which holds that the market always goes up in years ending in 5. The Dow industrials have risen more than 20 percent in every such year since the index began in 1896, with the exception of 1965, when the rise was a still respectable 10.9 percent.

Most indexes are well below the peaks they reached in 2000, but many investors are nonetheless sitting pretty. Most stocks in the S.& P. 500 are higher than they were when the index peaked on March 24, 2000. So are most stocks in the broader Russell 1000 index - the 1,000 most valuable stocks in the country - and in the Russell 2000 index - the next 2,000 stocks in terms of capitalization.

Standard & Poor's computes its S.& P. 500 on the basis of market capitalization, so that Microsoft and General Electric, neither of which is close to returning to its 2000 high, are the most important stocks. But if the index were computed instead on an equal-weighted basis - that is as if an investor put an equal amount of money into each of the 500 stocks -a very different picture would emerge.

By that measure, the index set a record in the final week of 2003, and was onward and up this year, rising 15.2 percent, significantly better than the official index's 9 percent gain.

Some of those gains are reduced or even eliminated if an investor's holdings are converted from dollars into measures of value. The 9 percent gain for the S.& P. 500 would be just 4.3 percent computed in Japanese yen, or 1.3 percent in euros. And measured in the amount of gold needed to buy a basket of stocks, the gain was only 3.4 percent.

The currency movements also mean that for American investors overseas markets generally did better than American ones. While leading European markets were up less than 10 percent in euro terms, because of the euro's appreciation they showed double-digit gains when measured in dollars.

Even so, American investors were less interested in European stocks in the past year than in Chinese ones - or at least in companies that could claim to benefit from the Chinese boom. Those chasing that boom in 2005 may be risking getting in at the top, but there is little indication that the urge to buy Chinese will stop.

FULL STORY

A Word From A Dollar Bear -Forbes
By Robert Lenzner and Daniel Kruger
Dec 27, 2004

Since January 2002 the dollar has fallen 33% against the euro. Buffett blames that on bad policy, coming from both the White House and Congress. It does appear that forex speculators are no big fans of George Bush or his Treasury secretary, John Snow. Since Nov. 2 the dollar has fallen 4.4% against the euro.

Says Buffett: "The rest of the world owns $10 trillion of us, or $3 trillion net." That is, U.S. claims on foreign assets run to only $7 trillion. "If lots of people try to leave the market, we'll have chaos because they won't get through the door." In a nutshell, the trade deficit is forcing foreign central banks to ingest U.S. currency at a rate approaching $2 billion a day. Buffett continues: "If we have the same policies, the dollar will go down."

The $20 billion bet has to be put in context. Berkshire has a huge portfolio of investments that includes $40 billion of Treasury securities. Budget and trade deficits are likely to make dollars worth less and bonds worth less. So the currency play is a partial hedge of a large position that can be read as bullish on the U.S.

Still, that Buffett is making a currency bet at all is striking given that this investor has, in his 74 years, rarely made macroeconomic bets. He built Berkshire to a $130 billion market value by acquiring parts or all of lots of businesses, primarily in the insurance sector and primarily in the U.S. Now some of those assets are antidollar assets. Example: In 2002 he bought bonds of Level 3, a telecom company, that were denominated in euros. In 2000 Berkshire picked up MidAmerican Energy, a gas pipeline company. By doing so, Berkshire indirectly acquired the assets of Northern Electric, a utility in England, at a time when the pound was worth $1.58. Now it's worth $1.94, so Berkshire has a paper gain irrespective of any appreciation in the electric company's pound-denominated earning power.

A continuing fall in the dollar "could cause major disruptions in financial markets. There could be unpredictable side effects. It could be precipitated by some exogenous event like a Long-Term Capital Management," Buffett says, referring to the 1998 collapse of a steeply leveraged hedge fund.

How about a soft landing for our deficit-addicted economy? Don't count on it. We're running $100 billion a year in the hole against China, but Buffett doesn't expect that an upward revaluation of the renminbi (stoutly resisted, in any event, by the Chinese government) would greatly reduce this number.

How about a rise in short-term interest rates? They used to say on Wall Street, "Six percent interest will draw money from the moon." Buffett is skeptical, though, that the recent tightening by Fed Chairman Alan Greenspan will do much more than "put off the day of reckoning."

FULL STORY

Related Story:
12-27-04 -- Warren Buffett Warns of Financial 'Chaos' -Jon E. Dougherty, NewsMax.com Tuesday, Dec. 28, 2004 ... The Sage of Omaha has real worries about the U.S. dollar. It is no surprise that billionaire stock investor Warren Buffett continues to flee the U.S. dollar as he pours billions into foreign currencies.

UNDER THE TOP -Bill Bonner, DailyReckoning
Jan 6, 2005

Kiplinger magazine aimed a soft glove at us. Here, we pause to see what else is between the covers of the January issue... and look for some brass knuckles.

Kiplinger's complaint was that some of the things we say are "over the top." We do not deny it. Rather, we protest that we can never seem to get over the top enough. Nature, the markets, and the world itself are simply too... too... over the top themselves. Life is full of surprises, absurdities, and humbuggeries. We have only words to describe them. Our words never seem to be enough. Catastrophe, disaster, horror... where is the word that measures up to the "Death Wave" in the Indian Ocean, for example?

Kiplinger, on the other hand, lives in a different world. It is a world, as near as we can tell, where every thought is commonplace... every idea is convenient... and every stock always goes up. We say that not as a calumny. There is no shame in it. But neither is there any glory. Instead, Kiplinger must live day to day in the dreary dust of following the crowd... painting smiley faces on public buildings.

We stand still in awe and wonder. What beautiful minds construct such a happy, unclouded world? A dear friend of ours believes different areas of the brain control optimism and pessismism. A stroke many years ago changed his personality, he says. Before, he had been evenly balanced between lightness and dark. After the stroke, the windows were always open and the sun always shone. What has happened to the staff at Kiplinger, we ask? Someone should check the water in their Washington, DC headquarters. Maybe it could be bottled.

We look on the masthead, expecting to find Abby Joseph Cohen as Editor-in-Chief. But no. Instead, there is a Mr. Fred W. Frailey, who begins his opening letter with these intriguing words: "You hate me."

In truth, it had never occurred to us to hate Mr. Frailey. We never even met the man. We read on with interest to find out what the source of our animosity was meant to be.

"Just six months ago, I declared on this page that I would not buy Google's initial public offering because I didn't have the stomach for the risk that would come with paying so much for the Internet stock," he writes. So far, so good. But he figures readers are pretty mad, since Google went straight up afterwards.

Mr. Frailey's mea culpa included an admission that Google's P/E of 118 "freaked me out." There is nothing particularly astonishing about this. It should have freaked him out, in our opinion. Unless you really understood the business, which neither he nor we did, buying Google shares was pure gambling - hoping that they would go up for reasons that you could neither fathom nor control. Not buying a stock that would take 118 years' of earnings to pay you back... about whose business model you don't have a clue... whose managers you've never met and whose product you barely comprehend... does not sound dumb to us.

But not buying Google had a strange effect on the Kiplinger editor. It made him feel "stupid," he says. Why? Because the shares went up! How would he feel if the shares had gone down - smart? As far as we know no actual connection has ever been discovered between financial publishers' intelligence and stock market movements, but Mr. Frailey seems to think there is some link. He is so disturbed by it that it leads him to a breathtaking turnaround. In "atonement," he tells us that he is buying the shares now - at $181!

What kind of investment method is this, we wonder? Wait 'til shares go up in price - and then buy them? We have no Googles in our portfolio to prove we are smart. And we certainly have no idea where Google shares will go from here. But we offer this free advice to Mr. Frailey: Think again. Chasing tech shares up to extraordinary levels does not sound to us like a winning formula. Crowd following rarely is rewarding - especially when you're at the tail end of the group.

Mr. Frailey's photo suggests a man with the normal cares of middle age. But on the cover is a young couple without a care in the world. Man and wife smile broadly. They're "looking to buy great stocks at good prices." That certainly sets them apart, doesn't it?

"Where to put your money now," the headline promises. It's a question loaded with traps and troubles; but it seems so innocent... so easy... so risk-free in the pages of Kiplinger. For there on page 21, we learn that all is well in the economy. "Back into balance," says the headline. "Steady growth - more jobs, low inflation and slightly higher interest rates in 2005." How Kiplinger knows these things, we cannot tell you. But they report them in such a matter-of-fact style, you almost believe they are true, rather than mere wild guesses. Of course, they are not. Kiplinger editors are merely reporting a consensus view - one which is likely to be right, wrong, or somewhere in the middle. One thing it is not likely to be is profitable for investors, since everyone and his half-wit brother reads forecasts like this and invests accordingly.

But we push on... why not? It is all in good fun.

"The lackluster market for most of 2004 has set the stage for superb returns in 2005," says old Kip. "Confidence in the economy will grow... gains of 10% are achievable in the coming year."

Then, the magazine brings out its cover stars for the month - a doctor from Rockville, Maryland, and his wife, Jessica.

"This is a moment of opportunity," says the sawbones-cum-market-seer, who "sees opportunity in technology and biotechnology... "

"Given today's interest rates, stocks are, at worst, fairly priced and perhaps even undervalued," the magazine continues.

Nowhere do the editors admit that they have no more idea than anyone else. Nowhere do they say... well... at least that's one guess. Nowhere do they have the modest grace to warn readers that the exact opposite of what they forecast could also come to pass... and that readers ought to at least take a few precautions. Instead, they've got the poor schmucks chasing "great stocks at good prices" at the beginning of what could turn out to be a 15-year bear market!

But what the heck, it's just money.

And over on page 40, they do acknowledge that things might not go entirely as planned. "Some professionals believe corporate profits could actually decline in 2006(!)," they allow. Then, they turn to their handy rolodex to call up some Wall Street shill pretending to be a pessimist. Stocks, says David Durst of Morgan Stanley in New York City, may return "half of what many people think," - or 6%! Wow... what a bear! Won't someone please stop that man before he cuts his wrists?

We searched all 108 pages of Kiplinger's January issue; we could find no clouds bigger or darker than Mr. Durst's pathetic little wisp.

Au contraire, the sun is shining everywhere. On page 32, James K. Glassman tells us it is time to reconsider technology. Growth funds, too, are "ripe for a comeback" on page 54. Meanwhile, real estate will have "no bubble trouble," it says on page 67. Instead, "look for another year of strong home prices." And here we have another insight into Kiplinger's strange world; it is a world with only buyers. People never sell. "The youngest baby-boomers are buying up," says the magazine, "and the oldest are buying up or buying second homes."

What happens when the oldest of the oldest die? What happens when the sun goes down?

What happens when they switch water companies at the Kiplinger's headquarters?

Bill Bonner, The Daily Reckoning

Editor's Note: Bill Bonner is the founder and editor of The Daily Reckoning. He is also the author, with Addison Wiggin, of The Wall Street Journal best seller Financial Reckoning Day: Surviving the Soft Depression of the 21st Century (John Wiley & Sons). The Best Investment Book I've Ever Read!

Passion of the Christ Wins People's Choice Award -Tribune
By Jason Moir
Jan 10, 2005

Pasadena, Ca. - Two films that some dubbed "most controversial" in 2004 showed they were also the favorites of fans. At the 31st Annual People's Choice Awards, Mel Gibson's "The Passion of the Christ" and Michael Moore's "Fahrenheit 9/11" were winners at last night's award ceremony in Pasadena, California.

Favorite Movie Drama award went to Mel Gibson. Speaking through continuous audience cheering, Gibson accepted the award. "Thank you. I was hoping to break even. Really, more than anything I depended on you. This means alot more to me than anything else. If not for you guys we would have been dead in the waters. Thanks to the blue states and red states and everyone. God Bless you ALL!"

Favorite Film award went to Moore for his film, "Fahrenheit 9/11". Moore took the opportunity to dedicate the film to American troops seeing combat in Iraq and was encouraged by the award to produce more films. ''I love making movies and I'll take this as an invitation to make more 'Fahrenheit 9/11s,''' Moore said.

Other winners included television shows: "Will & Grace", "Desperate Housewives", ''CSI: Crime Scene Investigation'', and "Joey".

"Shrek 2" won awards for favorite comedy, favorite animation, and favorite sequel.

http://www.tribune.com

ARCHIVES ...
(2004 news/views weekly summary

David M. Bradshaw is Editor of Real Money Perspectives, publisher of Rediscovering Gold in the 21st Century: The Complete Guide to the Next Gold Rush (7/01) and has been an economic commentator since 1987, when he produced the World Economic Perspectives radio show. In 1997, he produced a one-hour TV documentary, "Preparing Wisely for the Next Millennium," which was distributed free of charge at Blockbuster Video nationally. In 1999, he produced a one-hour radio special, "The Big Picture: The Shape of Things to Come" discussing geopolitical, economic and spiritual trends in the 21st Century. MORE ... 2004 Reflections: A Year of New Beginnings...and Answered Prayer! NOTE: Youngest daughter Braida Zoe (11-mo old) is now WALKING, clapping, waiving, says her name, "mama" & "dada" to the correct parent.