Talking Up the Dollar, Notes From Mumbai, $1,000 Is the New $900 and More!

by Addison Wiggin & Ian Mathias

  • What’s Geithner’s plan to protect the dollar? The amazing answer, below
  • Byron King on why “$1,000 is the new $900” for gold
  • U.S. stocks sell off… which foreign exchange is set to soar next week
  • Plus, Addison’s latest Indian dispatch: From Mumbai trading pits to India’s biggest market maker

 

  It’s Friday… let’s have some fun at someone else’s expense.

“So what have you done specifically to safeguard the dollar’s decline?” Maria Bartiromo asked Treasury Secretary Geithner last night. Get ready for this one…

Sec. Geithner: “Well, I think, Maria, if you look generally, you know, I don’t — I don’t talk about developments in the exchange markets, but — I generally don’t do that, but I think if you look at what’s happened over the last year, you’ve seen really a lot of confidence in the U.S. finance, a lot of confidence in the U.S. economy.”

Heh, we see you’ve been working with Sarah Palin’s interview coach, Mr. Geithner. Good choice. But we get your point… if there’s been a real underlying theme of the past year, it’s unwavering global confidence in American finance. Surely, there is no better gauge of that stalwart, badass, James Bond-meets-John Shaft confidence than the U.S. dollar. Behold, the mighty dollar index!

Perhaps the dollar and U.S. Treasuries were the investments du jour during the worst of the credit crisis in 2008. Was that thanks to confidence in the U.S., or simply the fact that there are lots of both and they are accepted anywhere? Either way, all this “strong dollar” talk sure isn’t speaking to the market.

  “A strong dollar is in our interest,” White House economic guru Larry Summers parroted yesterday. “That’s a true statement about America… and that’s our policy.” (What does that even mean?)

“It is extremely important,” added ECB President Trichet, perhaps looking to keep his export prices low, “that the U.S authorities, the secretary of the Treasury and the chairman of the Fed will pursue policies that are taking into account the fact that the strong dollar is in the interest of the United States of America, and I trust them to respond very clearly.”

  Thus, every dog has its day… the dollar finally stopped its fall this morning. Cheerleading both here and abroad and a stock sell-off (more on that in a minute) helped the dollar index up half a point, from its 12-month low yesterday, to 75.7

  That’ll spell the end of gold’s record winning streak, for now. The spot price rose as high as $1,070 earlier this week. Now it’s “just” $1,055 an ounce.

  “$1,000 gold is the new $900,” says Byron King.

“It’s not hard to understand why. For many years, American politicians have overspent the resources of the nation. It was one of the few bipartisan things that national leadership could agree on. Spend, spend, spend. No issue was too small for federal intervention and funding.

“The U.S. dodged the monetary bullet because a) the U.S. economy was big and resilient and it appeared like the economy could deal with the hit, b) the rest of the world didn’t have an alternative to the dollar and c) most of the world wasn’t really onto the monetary con job of the U.S. writing checks that never got cashed.

“The politicians spent money like it didn’t matter. Except… it did. We’ve been approaching some sort of monetary tipping point. Now it seems like we’re there. Information flows around the world in microseconds. So there’s no big con job anymore. People across the world are tired of getting jerked around by the U.S. dollar.

“Thus, now we’re watching the dollar melt down before our eyes, like the Wicked Witch at the end of The Wizard of Oz.

“Will the metals rally continue? Yes, the rally ought to carry forward. But don’t be surprised when traders take profits and policymakers intervene to protect the dollar at certain points. Rallies can end fast, like going from the monsoon to a dry sky in a matter of hours. Watch it like a hawk, and be grateful for every uptick. When you can’t sleep at night, sell.”

For more investment advice from Bryon, check out his latest special report, “The Strategic Summit: Decisions Made Here Could Deliver You 613% Gains By October 21, 2010

  Capacity utilization, one of our favorite recession-ending indicators, inched up to 70.5% in September, the Fed said today. As we’ve written before, upticks in utilization during downturns have marked the end of recessions past almost to the day.

But like many industrial numbers lately, this one’s been goosed by “cash for clunkers.” Industrial production ex-autos inched up just 0.3%, far off the headline improvement of 0.7%. Real, unmanipulated change in capacity utilization was likely nil.

  The stock market will end the week with a loss. The S&P barely managed a 0.4% gain yesterday, and this morning it opened down 1%. The same way banks led us up early this week, Bank of America and GE (as financial as an “electric” business can get) both soured the Street’s mood with not-so-hot earnings early this morning.

“Right now, risk appetites are near an all-time high relative to evidence-based fundamentals,” writes Dan Amoss. “For months, the stock market has shown higher and higher appetite for risk — despite continued deterioration of the labor markets and the prospects for long-term corporate profitability.

“Now we wait for earnings season to unfold — a season for which Wall Street has very high expectations. It remains to be seen if the Street will be satisfied by cost cutting alone. Sooner or later, equity investors will want to see revenue growth out of Corporate America — a prospect that still looks dim.”

  “We believe the Indian markets will rise very sharply in the next week,” writes our Indian partner Ajit Dayal, who’s country is just now at a encouraging nexus — springing back to life after a much belabored election as well as entering a historically bullish month for stocks. He tells us there might even be “a 20% bump in the course of next week. That bump would catch us up with Brazil, Russia and China, which against the lows of March 2009 and October 2008 have bounced up very sharply. India has been suppressed because of this big vote. But now that the vote is out of the way, and that the vote is coming with a nonleft government in power, we think the market will pop big-time.”

Ajit and his equitymaster.com crew will be our principal resources in India for BRIC by BRIC — our focused effort in helping you profit from the future drivers of global growth. Learn more here

“Funny story,” reports Addison Wiggin from India. “Before Chris and I arrived in Mumbai, we’d been invited to join a reader for dinner one evening. We did so on Tuesday. Today, we met the same guy, a former treasurer for the Indian stock exchange, it turns out, for lunch.

 

“He took us around to his office… a four-floor building that looked every bit third-world from the outside, but as nice as any office in Baltimore, New York or London within. We meet his technical analysts… his stock traders… his tech team… and finally his commodities guys.

 

“The room was full of 20-something men in high trading spirit; standing, sitting, lurching about their terminals shouting, etc. Jayesh, our host, introduced us to the head trader… about 28 or so… in Hindi.

 

“‘Ahhh…’ he immediately asked, in English: ‘Why are you shutting down the Rude Awakening?’… first question. No hello. Nothing. No kidding.

 

  “The gentleman, Chirag, turned out to be the gold trader for our friend Ajit Dayal’s Quantum Fund. They’ve developed an ETF in which each segment you buy is backed by 10 grams of gold. Unfortunately for U.S. investors, the ETF is available only to Indians here in country or those of Indian origin investing worldwide.

"‘It’s an auspicious day to buy gold,’ Chirag told us. Yesterday, the Hindu festival of lights known as Diwali commenced. By tradition, this is the day when Indians buy gold and property and open stock trading accounts. They believe the festival will bring them good luck throughout the year. In the office here at equitymaster.com, a pandit (local spiritual leader) set up shop with some candles and blessed each member of the staff, along with a curio from that person’s profession. On the shrine in front of the ceremony, Rahul, the firm’s CEO, has a copy of the Stock Market Yearbook 2009 — the flagship publication for the group. (Got some good video footage that I’ll be converting into some documentary shorts over the next few weeks.)

 

“Chirag then took us to see the largest market maker in physical gold in the country. We had to go down to the part of town where all the open-air jewelers display their wares. The streets were so crowded with foot traffic, merchants, beggars, fruit and fabric vendors we could barely get the car through to our destination. In through a tiny, dank and grungy side alley we went, up a 100-year-old iron elevator… through a couple locked doors through which we had to be buzzed… and into a room the size of a good walk-in closet, where sat four young guys trading bullion at computer terminals.

 

“The market maker entered, a big man wearing lots of gold himself, and explained for half an hour or so how his business works. India imports anywhere between 550-700 tons of gold per year. The big man sitting in front of us does the lion’s share of that business.

"‘Where do you expect gold prices to go over the next year?’ we asked him.

“He couched his answer very carefully but gave us an upside potential of $1,300 an ounce.”

 

Addison and Chris are leaving Mumbai as we write, en route to the Value Investing Congress in NYC. Not a bad gig, eh? Stayed tuned for more anecdotes and observations from “the New Silk Road” as well as the scoop on the brain-trust of value investors in NYC. Specifically, look for more on their Diwali visit to the gold souk in next week’s Daily Reckoning.

 

Have a great weekend,

Ian Mathias

The 5 Min. Forecast

 

P.S. If you haven’t heard, we’re consolidating our efforts. On Monday, Oct. 19, Rude Awakening’s Eric Fry and Joel Bowman will be ascending to the helm of The Daily Reckoning. Bill Bonner, of course, will continue his daily missive, but the Rude and DR will become one again. Don’t miss the fireworks… be sure to sign up for the Daily Reckoning here if you’re not already a reader.

P.P.S. Congratulations to Mayer’s Special Situations readers. Their three sells should all be settled by the time you read this, for a net 71% gain! If you want to be ringing the register the next time around, now is time to join Chris’ elite readership. Mayer’s Special Situations is currently on super sale for just $1 a month… details here.

rspertzel

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