Financial writer and best-selling author Peter Sander sits down with portfolio manager Axel Merk for insights on investment considerations in light of the risks posed to the greenback.

Peter: A lot of talk about a “dollar crash” keeps coming up in the blogosphere. Is it a serious threat, and if so, what should an investor do about it?

Axel: A “dollar crash” is what we call a “tail risk” event. It’s something that may or may not happen, but would have a large impact if it did happen. “Black Swan” author Nassim Nicholas Taleb calls such events “so rare as to be beyond the normal expectations in the history of finance.” Not everyone thinks the threats to the dollar are so remote, but that’s ultimately up to each investor to assess for himself or herself. My view is that if an investor believes a risk is non-negligible, it may be prudent to take it into account in one’s portfolio allocation; investment professionals may even have a fiduciary duty to do so.

Peter: Let’s dig a little deeper. Why are investors concerned about a “dollar crash,” and are those concerns justified?

Axel: The “dollar crash” scenario starts with news we’re all familiar with about unsustainable deficits. The current deficit and Congressional gridlock is the short-term story; the real long-term story is entitlements and the future trajectory of the deficit. Without entitlement reform, we may go broke.

…..read more HERE

It was just about this time last year, in my columns inUncommon Wisdom, that I started warning …

 That we’d see a short-term rally in the dollar, mainly against the euro.

 That Europe would kick the sovereign debt can down the road.

 That the U.S. economy would start to look a bit better.

 That China would largely engineer a soft landing, and the yuan would appreciate.

 And that commodities would enter an interim period of disinflation.

Let’s see how things have panned out so far …

U.S. Dollar Leaping Higher

Since March of last year, the U.S. dollar, judging by the U.S. Dollar Index that’s traded on the New York Board of Trade, has gained nearly 4 percent.

That’s not a lot. But the latest in the dollar is telling. It’s starting to rally strongly, mainly as the euro starts to tumble again due to Europe’s sovereign debt crisis.

The dollar, on my system, has much more to go on the upside over the next few months, as Europe and Japan begin to devalue their currencies.

Mind you, currencies are a relative gain. The dollar is going to rally, but it too remains in a long-term bear market. It’s only a matter of time before the dollar succumbs to Fed money-printing and Washington’s fiscal follies.

As for Europe, it indeed did kick its sovereign debt can of worms down the road a bit over the past year. But the latest results and stalemate in the recent Italian elections has renewed Europe’s crisis, and now, the euro is plunging anew.

As to the U.S. economy, I said it would start looking better. And indeed, it has, with unemployment coming down a tad, corporate earnings surging, durable goods orders robust, and more.

But don’t kid yourself. The U.S. economy is improving a bit mainly because it’s bottom-bouncing and because Europe’s economy is looking so bad.

Don’t get too used to it, though. While there may be further improvement coming, I don’t think the U.S. economy will get back to where it was pre-financial crisis anytime soon, perhaps not even in my lifetime.

As for China, woe to all those China pundits who predicted a crash in China’s economy. It didn’t happen, and it won’t happen.

Instead, China’s economy put in a soft landing, and started taking off again, with full year 2012 GDP coming in at 7.8 percent.

What about the latest fears on China’s economy, due to Beijing clamping down in property speculation again?

No, China’s economy is not going to implode. It’s not even going to slow down. Beijing’s efforts to reign in property speculation are largely targeting second home purchases, not the entire property market. China’s economy is going to pick up further steam.

Commodities Hit Hard

Now, to that sector that we all love so much, commodities. Since my warnings of just about a year ago …

•  Coffee prices have fallen a whopping 30.14 percent

•  Cocoa prices are down 15.69 percent

•  The price of sugar is down 21.78 percent

•  Cattle prices are down 17.59 percent

•  Copper is down 10.46 percent

•  Platinum is down 8 percent

•  Silver is down 16.89 percent

•  Crude oil has fallen more than 19 percent

•  Gold is down 9.23 percent

I say this not to boast, by any means, but to prove to you one major point: There can be big disinflationary waves in commodities, even when there’s massive money-printing going on.

Why’s that important? Because nine out of 10 investors (and analysts) think all too linearly about the markets.

They think that, if there’s money-printing happening, in any part of the developed world, it’s inflationary. And that commodity prices must therefore go up.

Not true. The markets are dynamic, complex systems. If you’re to get the big picture right, you simply have to throw out all of the old rules you’ve been taught or told — and stop thinking about the markets linearly.

Instead, you have to realize that markets can do anything at any time. They can defy linear logic … they can defy the fundamentals … they can defy the news. They can also defy the authorities.

Just consider gold. It’s down $343 since its record high of $1,925 in September 2011, a whopping 17.8 percent decline. This, despite massive European money-printing … continual bad news out of Europe … alleged buying of gold by Beijing and other central banks … money-printing in Japan …

And the biggest money-printing of all time by our own Federal Reserve!

Silver’s down even more — a whopping 41.1 percent since its high in April 2011!

Look. The markets take no prisoners. Be the least bit stubborn or biased, and the markets take your money.

That’s why I always stress being open-minded when it comes to markets and to investments and trading …

Why I always stress that you question everything and everyone, myself included.

And why I think it’s imperative that you throw all of the old rules out, and instead, think dynamically.

My Forecast for the Dow

Many readers have recently emailed me questioning my long-term forecast for the Dow, wondering how the heck the Dow Industrials could ever run to substantial new record highs if the U.S. economy is never going to fully recover and even lose its status as the world’s largest economy, falling behind China.

But here we are, at new record highs. My answer is the same as before. Just go back to the 1932 to 1937 period. The U.S. economy sank deeper and deeper into depression, yet the Dow Industrials soared 287 percent.

Why? Because even though the U.S. economy was sinking, Europe’s economy was sinking even more. Capital fled the European stock and bond markets in droves, pushing the Dow substantially higher.

The thing is, this time around, the flight of capital out of sovereign bond markets will be worse. Not only is Europe in trouble, so is Japan and the United States. Therefore, the gains in the Dow — despite the economy and what else you might throw at it — could soar even more.

What about the disinflation we’re seeing in commodities? It’s bound to continue. Right now, savvy money and investors want their capital out of bonds and into something that is more liquid than commodities, so they are putting their money largely to work in the equity markets, where they can buy great companies with great balance sheets, not to mention all the great income producing stocks out there.

Later, when the sovereign debt crisis fully infects Washington, you will see commodities bottom and stocks and commodities go up together hand-in-hand. Even if the economy looks bad, and even if interest rates are rising.

I’ll go on the record right now: We are now entering a period in the financial markets unlike anything we’ve seen before in our lifetime. One that will require new ways of thinking about the world.

Stay tuned …

Best wishes,

Larry

P.S. The March issue of my Real Wealth Report publishes this Friday. Don’t miss it! If you’re not a subscriber, simply click here now to join. At a mere $89 for an annual subscription, it’s a bargain

The world may not be engaged in a currency war yet, but it is engaged in a growth war.

With domestic demand in most home countries anemic to moderate, the universal objective is growth by exports.

Unfortunately, countries doing battle in the growth-by-exports wars end up skirmishing in the foreign exchange markets. That’s because every country that wants to export its goods and services wants them to be relatively cheap compared to its global competitors.

Driving down your home currency relative to the currencies of the buyers of your products is a way of implementing a “cover all bases” export growth strategy.

Of course, as countries trade blows in this “beggar thy neighbor” strategy, besides the danger of a debilitating currency war breaking out, rough and tumble currency manipulation leads to disruptive volatility in stocks, commodities, and bonds.

But while you personally can’t do anything about currency battles or a full-blown currency war, it doesn’t mean you can’t profit from all the volatility.

Here are some simple ways to hedge your portfolio and have fun trading the markets to profit from bickering neighbors throwing currency Molotov cocktails at each other.

In a Currency War, All Is Not What It Seems

First, you’ve got to take a hard look at the stocks you own. If you have big U.S. multinationals that garner a lot of revenues from overseas, watch out.

Companies like McDonalds (NYSE: MCD) or IBM (NYSE: IBM) that generate a lot of their earnings from overseas operations and sales are paid in local currencies wherever they do business. When it comes time to translate their overseas earnings into U.S. dollars, because that’s the language we speak here in America, companies have two options.

In this case, you’d better know which option they use.

…..read more HERE

Big changes in the currency markets are  roiling all financial markets…and even greater volatility looms on the horizon as “struggling” countries decide to devalue their currencies… hoping to revive their economies… to become more competitive… to earn export revenues… to generate jobs. Currency devaluations (currency wars) are “beggar thy neighbour” policies…they are a sub-set of trade wars…and they can definitely become contagious.

If I had to limit my trading to just one market for the next few years, I’d chose the currency markets…that’s where the action is going to be.

Everyone knows that the Japanese Yen has fallen sharply against other currencies since mid-November…as the new Prime Minister, Mr. Abe, has pushed the Central Bank to “print” Yen in an attempt to stimulate the domestic economy… knowing full well that the “printing” would also cause the Yen to decline on the foreign exchange markets. But while the Yen has been falling the unemployment rate in Korea has been rising… how long will it take before the new Korean government decides to devalue their currency to regain market share lost the Japanese?

When countries “struggle” economically their governments may try to “stimulate” the economy with deficit spending… their central banks may try to stimulate the economy with “easy money” policies… but if that isn’t getting the job done then governments may decide to restrict imports and increase exports… using trade barriers… tariffs… currency devaluations… in an attempt to boost their domestic economy… to “create” jobs… and to get re-elected.

If global economies fall into a recession then “currency wars” (competitive devaluation) may become widespread…a “race to the bottom” as paper currencies compete with one another to become worth-less. But while getting your currency down may help your export industry and create domestic jobs, it’s a double-edged sword…the Japanese, for instance, shut down their nuclear plants after the tsunami in 2011, and now with the Yen down ~20% against the US Dollar they are paying a lot more for imported oil.

Here is Ambrose Evans-Pritchard’s take on the coming global trade war  …with a reference to “The Great Rebalancing: Trade, Conflict, and the Perilous Road Ahead” by Michael Pettis.

Trading Currencies:

It’s all about the relative values of different currencies. For instance, you might think that the US Dollar is losing its purchasing power…and that may be true…but in the world of currency trading the “least ugly” wins the beauty contest! The currency markets are driven by “Market Psychology” more than any other market. They tend to get more overvalued and more undervalued than other markets…and therefore make “V” shaped turns…trends in the currency markets can easily go on far longer than you think is possible or reasonable. The FX markets trade 24 hours a day with London, England as the global hub.

Speculative trade volumes far exceed commercial trade volumes in most currencies. Retail traders can easily access the FX markets via online spot trading platforms, ETFs and the futures and options markets. The leverage available can be dangerously high…my advice is to not use all the leverage available.

Call 604-664-2842 to talk with a futures broker about trading FX.

SIGNS OF THE TIMES

“The lone dissenting voice on the Federal Open Market Committee defended her hawkish philosophy.”

“Possible risks and costs of these [easy money] policies may be exceeding their benefits.”

– Dow Jones, February 12

“India’s industrial output unexpectedly slid in December for a second month as demand falters in an economy expanding at the weakest pace in a decade.”

– Bloomberg, February 12

“Europe’s brittle economies shrank at their fastest rate since the collapse of Lehman four years ago.”

– Financial Times, February 14

“Wal-Mart had the worst sales start to a month in seven years as payroll-tax increases hit shoppers.”

– Bloomberg, February 15

White House strategists are probably thinking: “Good, more on food stamps and on disability compensation”. The Alinsky theory of revolution has been to collapse the detestable American economy by overwhelming the welfare system.

“Bank of England Governor Outvoted in Bid to Launch Fresh QE Boost”

– The Guardian, February 20 Oooops! This could be defining a new financial term – “Recklessness Off”.

*****

PERSPECTIVE

Somewhere around noon yesterday, New York time, a story started the rounds about a hedge fund having some troubles with a position in commodities. In looking at what could be basing action in agriculturals, the problem is in metal prices. Mainly silver with the biggest decline (-3%), gold (-2.5%) and to a lesser degree base metals (-0.9%). Then, mid-day “they” took out crude oil (-2.2%), which could be Mr. Margin hitting whatever bids were around.

In the excitement, crude set an outside reversal, to the downside. As did the DJIA, the yen and lumber. The British pound did the reversal on Tuesday. Going the other way, the Dollar Index did the outside reversal – to the upside.

As we note, such reversals do not necessarily mark a trend change, but often indicate that the action has become excessive. Perhaps preliminary to an important change.

STOCK MARKETS

Over the past three weeks our theme has been that the general stock market was working on a rounding top. Within this, some sectors such as Forestry, Homebuilders and Airlines reached sentiment and momentum levels usually seen at important tops. Last week we concluded that these excesses were “providing some good trading opportunities”.

The DJIA rose to a new high for the move, yesterday, and then accomplished the full outside reversal. As did the Dow Transports. The S&P also achieved a new high and reversed as well, but with Wednesday’s high the same as Tuesday’s. For technicians such big reversals from new highs are fascinating.

For the general stock market, the rounding top would lead to an intermediate decline. This seems to be working out. A little more development on the change and the Chartworks can provide a downside target.

CREDIT MARKETS

On the 13th, Bloomberg reported:

“The collapse of two junk-bond offerings in Brazil shows that Latin America’s largest economy is getting hurt from the global pullback in high-yield demand.”

Representing action in the high-yield sector, junk (JNK) accomplished the full reversal yesterday. The high price, with good momentum, was 41.21 in January. The initial decline was to 40.40 a couple of weeks ago and the rebound high was 40.84 yesterday.

Taking out 40.40 sets the downtrend.

In September the Fed announced it was going to buy sub-prime mortgage bonds. The price rose from 56 to 61 on the news. Then it drifted down to 58 in early November and with the revival in animated spirits it jumped to 68.5 at the end of December.

Out of the gloom of the 2008 Crash the representative bond almost doubled from 38. Perhaps the best is in.

It is worth noting that while the Fed plan has been to buy $40 billion of mortgage-backed bonds each month the price action has been sympathetic to market forces. Down into November and up into December. And then drifting down.

It seems that the Fed and European Central Bank have been anxious to get aboard the last stagecoach into Dodge City.

Long Treasuries became oversold a few weeks ago and the price has based at the 142 level. We have been looking for a rally as other assets weakened. Rising above 143.5 will set the uptrend. It’s up to 144.21 today.

CURRENCIES

Following the modest concerns into early November the dollar was likely to decline into January as stocks, corporate bonds and commodities rose. The high was 81.46 in mid- November and the low was 78.92 at the first of this month.

It was a modest move, but hot action in popular assets was inspired by the 16% plunge in the yen against the euro, which reached a very oversold condition. Since last week the yen has been basing.

Last week we thought that the C$ could roll into a “modest decline”. The 99 support level was taken out on Tuesday. There is another level of support at 98 and the daily RSI is down to 26, which is close limiting the decline.

The USD has jumped from 78.92 to 81 in three weeks. There is resistance at 81.5 and the daily RSI is near the level that would suggest a pause in the rise.

However, the move in the yen was “wild” and it is uncertain as to where the “wild” could next appear. We will stay with our methods of watching for trend changes and trend durations, but with an eye for “wild”.

COMMODITIES

On February 15 CBS Detroit reported:

“Left in the Dark: Copper Thieves Rob Detroit Freeways of Light”

This is anecdotal evidence that copper’s real price is still high. The nearby chart of copper deflated by the PPI shows that it has been unusually high for some 6 years. The last such example prevailed from 1966 until 1974 and was followed by a bear market that endured to 2001. This could be attributed to increases in productivity in finding and mining copper.

Today’s high prices have been essentially due to demand from China. The reformation from Communism to the prosperity of a country enjoying less intrusive central planning has prompted a remarkable increase in demand. As with the earlier example, today’s high prices has prompted a massive increase in mine capacity.

A long bear market would be natural. That the world is in another post-bubble contraction provides confirmation. This would be the case for all base metals.

Our data only goes back to 1825 and the record has been that copper’s real price has declined through each post-bubble contraction. This compares to gold’s real price as it generally increases. Both are characteristic of the long contractions that have run for some twenty years.

On the nearer-term, March copper was trading at 3.75 on Friday and dropped 5.4% to 3.54 today. This is a serious break and with it the base metal index (GYX) has dropped from 405 to 382, or 6%.

On the same move mining stocks (SPTMN) have dropped 8%. From the high of 1050 at the first of the year they are down 16% to 903. Mining stocks have again led what could be at least an intermediate decline for the sector.

Two weeks ago crude oil registered a Sequential Sell and the high was 98.24 on January 28. Today it’s been as low as 92.63. There is minor support and this level and stronger support at 85.

Other than agriculturals, most commodities seem to have started an intermediate decline.

In the latter part of the day, agricultural prices rolled over. Cotton was down 1.18%, sugar down 1.26%, corn down 1.54% and wheat plunged 2.34%.

Chart action on the index (GKX) became moderately oversold at 437 in early January and bounced to 469 a few weeks later. A test was needed and the low was 439 last week. It rose to 448 yesterday and fell to 441 today.

Recent action seemed to be preparing for an intermediate rally. However, the slump in so many other asset sectors and a firming dollar suggests this could take some time.

Agricultural prices could be vulnerable to further declines. Breaking through 439 would be the indicator.

Gold/Commodities: Our Proxy for the Real Price

Link to February 21, 2013 ‘Bob and Phil Show’ on TalkDigitalNetwork.com:

http://talkdigitalnetwork.com/2013/02/a-week-of-reversals/

BOB HOYE, INSTITUTIONAL ADVISORS

E-MAIL bhoye.institutionaladvisors@telus.net

WEBSITE: www.institutionaladvisors.com