The Dollar Dump, Buy Methanol, Wall Street’s New Scheme and More!

by Addison Wiggin & Ian Mathias

  • Gold soars, greenback slumps… what’s behind the latest dollar dump
  • Stocks climbing too… Dan Amoss on the divergence of economic reality and equity prices
  • Bullish on emerging markets? Buy methanol, says Chris Mayer
  • Could Wall Street be any more hated? New securities profit when you die sooner than expected
  • Plus, readers weigh in on booming college tuition costs… in short, thank Uncle Sam

 

  The story Friday was gold, on the verge of $1,000 an ounce. Now well rested, thanks to our holiday weekend, we focus on the larger issue — in part, the cause of $1,000 gold: the dollar.

At 77 and change as we write, the dollar index is at a 2009 low and about a point shy of a 52-week low. But as you can see above, while we appear on our way back down to historic lows, the dollar is still a ways away from 71. In more tangible terms, the euro is as high as $1.45 today, its priciest of 2009.

(By the way, if you haven’t made a few bucks from the dollar’s decline, don’t blame The 5 or Chuck Butler. As silly as it seems, those 200-day moving averages have proved worth watching.)

Ironically, we’re not as enthused about the dollar’s decline this time around. As the Bloomberg explained this morning, “The dollar declined to the lowest level this year against the euro as equity markets rose on speculation the global recession is easing, sapping demand for the currency as a haven.”

That’s the best reason to sell the ol’ greenback? We could think of better… like voracious money printing at the Federal Reserve, a national debt like no nation has ever suffered in history or this:

  “An initiative equivalent to Bretton Woods or the European Monetary System is needed,” said Heiner Flassbeck over the weekend, director of the United Nations Conference on Trade and Development. Essentially, the U.N. has called for a new global reserve currency. Here’s the money shot from the new report… brace yourself for Ph.D.-speak:

"An economy whose currency is used as a reserve currency is not under the same obligation as others to make the necessary macroeconomic or exchange-rate adjustments for avoiding continuing current account deficits. Thus, the dominance of the dollar as the main means of international payments also played an important role in the build-up of the global imbalances in the run-up to the financial crisis.”

The U.N. wants for a new reserve currency that’s composed of many worldly monies — a complicated array of currencies with adjustable pegs and variable exchange rates. It isn’t clear exaclty what they would want, but it’s quite clear what they don’t… dollar watchers, take note.

  Meanwhile, gold has breached $1,000 an ounce for the third time. Silver is up 30 cents from Friday, to $16.68 an ounce… still a far cry from its crisis high of $21.

  Stocks are soaring too. The S&P ended Friday up 1.3% and opened 0.8% higher today. That’s odd, given the “flight to saftey” rush in gold… even more odd, given another lousy employment report Friday… really freakin’ odd

But hey, why not buy stocks today? There’s a biding war brewing over Cadbury (right, the choclatier), and GE got an upgrade from their friends at JP Morgan — which their subsidary CNBC has been dutifially regurgifaing every 20 minutes.

  “Out in the real economy, conditions remain weak,” explains Dan Amoss. “Yet the stock market chooses to anticipate a roaring recovery, instead.

“We saw economic weakness reflected in Friday’s payroll report, with a headline of 217,000 job losses in August and a negative revision of 49,000 to the June and July figures. That degree of error in the headline numbers, plus the huge amount of phantom jobs coming from the birth/death model — which claims that new small businesses added 118,000 jobs in August — should inspire little confidence that the labor market is turning around.

“We also see the impending economic weakness that will result from strained state government budgets. More and more states are instituting unpaid furloughs for workers that they hired aggressively during the boom, but can no longer afford to pay. We see it in the rising length of unemployment, which is in record postwar territory. And we see it in August retail sales figures, where outside of ‘cash for clunkers,’ the only bright spots are at discount retailers.

“This new money has temporarily bid up the prices of assets like stocks and junk bonds, but as this new money works its way out into the real economy, it will not bid up the price of labor, but could easily bid up the prices of food and energy. This week, the Fed’s inflation has bid up the price of gold and gold stocks. Strategic Short Report readers own GDX call options, which have sprung to life. Hold your gold positions, because I expect continued buying pressure from large investors seeking insurance against dollar debasement.”

You read that right. Dan also recommends call options on occasion to his Strategic Short Report readers — like his gold play, which is currently up 51%. This is actually SSR readers’ second foray into calls on GDX… earlier this year they pocketed 334% profits using the same strategy. That’s just one of many reasons to check out Strategic Short Report… find some more details here.

  Oil’s up today, along with the hopes of a global rebound. The front-month contract is up over 5%, to $71 a barrel.

  If you’re betting on emerging market growth, you should be investing in methanol, Chris Mayer tells us.

“China is the largest producer and consumer of methanol. The Chinese blended nearly 1 billion gallons of methanol in gasoline last year. Taxi and bus fleets already run on high-blend methanol. Gasoline stations sell low-blend methanol at the pump, just as U.S. stations sell low-blend ethanol.

“The stakes are high for China, as the country makes methanol from coal — which it has plenty of — and reduces its dependence on foreign oil. Between 2008-2012, Chinese methanol demand will increase at a 16% annual rate.

“The Chinese also use blended methanol (called DME) for home heating and cooking — a demand that is growing at double-digit rates. You can use up to 20% without changing equipment. The biggest hurdles are in the distribution network. China makes methanol in the central part of the country and must get it to the coast by truck or rail. But clearly, methanol use is growing rapidly and has much government support.

“Globally, these are the primary energy applications for methanol, and they are growing rapidly.

“Other countries looking at methanol include India and Malaysia. There are no technical hurdles to make the switch to methanol and many positives for doing so — there is a large and varied feedstock available, plus the technology is mature, efficient and inexpensive.

“I won’t bother with a prediction on methanol prices, which is like trying to figure out a Chinese film without subtitles. But the long-term demand looks secure and upward leaning — usually supportive of good prices. And methanol prices usually track oil prices, also on a long-term upward trajectory. That makes methanol a big opportunity for the low-cost producers.”

How should the everyday investor capitalize on this trend? Look no further than Chris’ Capital & Crisis.

  “By the way,” Chris adds, “too bad the U.S. does not use methanol more. It makes a lot more sense than ethanol. We’d be making methanol from abundant and cheap natural gas, rather than competing with food crops. (Alas, the corn lobby is strong in America.) And it’d be cheaper.

“Blending gasoline with 15% methanol to produce M-85 is also cheaper than regular gasoline. Even after adjusting for methanol’s lower energy content, it would cost a consumer $1.98 per gallon at the pump, versus $2.46 for regular gasoline (these are based on nationwide averages). I don’t expect the U.S. to adopt methanol anytime soon, but it’s interesting to think about how political the fuel standards debate is.”

  Five banks failed over the weekend, bringing the 2009 total to 89. The FDIC closed up shop on relatively small banks in Iowa, Missouri, Arizona and Illinois, which cost the FDIC’s insurance fund an estimated $401 million.

  Another brick in the wall of worry over commercial real estate: Facing a record $6 billion loss this year, the U.S. Postal Service said this weekend it might close 413 locations around the country. Half of these locations are rented, which will add a whole other layer of fun to this fiasco. It’ll be a real hit with local residents too, we imagine… nothing like humping an extra mile to buy some stamps, not to mention the effect on your property value with an abandoned post office next door.

  Last today, we’re shaking our heads…

Since it worked so well the first time around, Wall Street has spawned a new age of securitization — instead of mortgages, this time it’s life insurance policies. Before we spit on this one, here’s how it works:

  • A senior with high-premium life insurance policies, for one reason or another, chose to cash out
  • Instead of taking a “cash surrender” directly from the insurance company, the old fella sells his policy to a “life settlement company”
  • That company pays him a larger amount than the “cash surrender” would pay, but not nearly the totality of the policy’s value. The company keeps paying the premiums. When he kicks the bucket, the company collects the insurance policy.

That’s where the story would normally be over. But now, just like pools of subprime, Alt-A and prime mortgages, investment bankers are crafting securitized pools of these insurance polices. Basically, they pool together a bunch of beneficiaries that will likely die around the same time, buy up their policies from life settlement companies, package them into securities and sell them to investors around the world.

Heh. Really, could the idea of “Wall Street” be any more evil right now? Not only are they rehashing the same schemes that triggered the credit crisis in the first place, but think about it… they will make more money the sooner you die! If policyholders die sooner than expected, there will be no monthly premiums left to pay and the investors get a bigger share of the insurance payout. (And if people like our tech analyst Patrick Cox are right, a sudden surge in life expectancies could blow up these new funds… another crisis! Hooray!)

It’s no wonder Michael Moore has set his sights on lower Manhattan… we couldn’t think of an easier target. They deserve each other.

  “College tuition has risen faster than inflation due to student loans,” a reader opines in response to our discussion Friday. “It’s the same as housing. Blame Sallie Mae — another idiotic government program.”

  “I heard Walter Williams quote a college president,” adds another, “who said that he couldn’t lower tuition very much because then he would be below the limit at which his university would be eligible for government funding. So once again, government funding is the culprit and driving prices up, much as in the housing industry.”

  “I did pay for my kids’ college with gold (and silver),” explains the last, turning our advice on its head. “Every time a tuition bill came, I sold some Central Fund of Canada.”

Cheers,

Ian Mathias

The 5 Min. Forecast

P.S. Have you checked out Chris Mayer’s new “Primeval Portfolio” yet? This thing is still shiny new, but garnering more and more attention every day. You can still be among the first to invest, right here.

rspertzel

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