Paul Samuelson Warns: China will turn pessimistic on the U.S. dollar

These are sobering words from renowned economist Paul Samuelson.

Some day -- maybe even soon -- China will turn pessimistic on the U.S. dollar.

That means lethal troubles for the future U.S. economy.

When a disorderly run against the dollar occurs, I believe a truly global financial panic is to be feared. China, Japan and Korea now hold dollars not because they think dollars will stay safe.

Why then?.....

The threat that China and others might divest the dollar is starting to cause jitters in the Treasury market. If the countries he mentions held on to their dollar assets --but cut back on their purchases of U.S. Treasuries-- interest rates would spike straight up over a short period of time. The given in this equation is that the amounts of Treasuries coming on the market in the years ahead is enormous.

Growing supply, and the likelihood that U. S. Treasury debt will get downgraded, means that the risk premium for owning longer dated treasuries is likely to rise and rise sharply. During that early 1990s this risk premium rose to more than five percent.

So lets say we find ourselves with a three percent inflation rate in the next 12-18 months. What is the rate we could see in the ten years treasury?

8-11 percent. Inflation, inflation expectation, dollar risk, supply, plus a fair rate of interest. It is not hard to envision five or more points of risk premium.

Does it make good sense in this environment to be fully invested in stocks?

My guess is that we are going to see a sharp uptick in inflation in the next 12-18 months. Given the enormous expansion in the money supply it is not hard to envision three percent inflation. Add in the necessary risk premium for owning longer dated securities, and it is not hard to envision sharply higher rates.

Right now most analysts continue to mention how inflation is not a problem. In 1980, when inflation was hitting 1.5 percent per month analysts were forecasting higher inflation and higher interest rates right into the peak.

Are we at the trough in inflation now? Is inflation bottoming?

Anybody old enough to remember when the ten year treasury yield was above 15 percent?

Three month treasury bill at 14 percent?

It is time to be risk adverse. Not the time to be betting the ranch in the stock market.

To read the entire Samuelson article go here.

Subscribe to EF Hutton via Email

Bob DeMarco is a citizen journalist and twenty year Wall Street veteran. Bob has written more than 500 articles with more than 11,000 links to his work on the Internet. Content from All American Investor has been syndicated on Reuters, the Wall Street Journal, Fox News, Pluck, Blog Critics, and a growing list of newspaper websites. Bob is actively seeking syndication and writing assignments.

Follow E F Hutton on Twitter

Kindle: Amazon's 6" Wireless Reading Device

Gold | Fourth Time Up the Charm (Chart)

Gold, Cash, Monthly, Chart


There is a saying in technical trading that the fourth time up is the charm.

As you can see by looking at the Gold Chart, this is the fourth time up.

I am a little surprised by the rise in Gold at this time of year.

• The more normal seasonal pattern is for Gold to peak in February - March.
• After the seasonal peak, Gold normally trades down into the August - October period.
• The strongest trading period for Gold normally occurs from October into March.
• The seasonal pattern tells me that Gold is likely to take a rest.
• On the other hand, the market looks very strong, technically, right now.

Previously, we mentioned the strong support in the 865-875 area. The market found willing buyers at that level and an interim low was made. We then mentioned that a close over the 927.50 area would likely send the market higher. This happened.

A close in Gold over 1,067.50 is likely to lead to an explosive up leg in gold. I am expecting this to happen, and the rise could very well be much higher than is currently being forecast by most.

I wrote previously about how I expect the buying of Gold out of Hong Kong to be enormous once the bull leg gets underway.

Back in the bull market of 1978 - 1980, Gold was often up sharply at the U.S. open based on large buying out of Hong Kong. Buying power from the China mainland should be a major factor in the price of gold in the year ahead. The buying is already picking up some momentum.

My experience tells me Gold is due for another correction back toward the 925 area -- the typical seasonal pattern. On the other hand, a break above this existing top could lead to a monster rally.

Long term gold traders should be patient and let it happen. Buyers of Gold stocks should see gains like they have rarely seen in the year ahead.

Subscribe to All American Investor via Email

Bob DeMarco is a citizen journalist and twenty year Wall Street veteran. Bob has written more than 500 articles with more than 11,000 links to his work on the Internet. Content from All American Investor has been syndicated on Reuters, the Wall Street Journal, Fox News, Pluck, Blog Critics, and a growing list of newspaper websites. Bob is actively seeking syndication and writing assignments.

More from All American Investor

Top Hedge Fund Managers Make Billions in 2008

Systemic Risk Defined--Too Big to Fail

Ray Dalio on the current state of affairs in the market

Roubini Predicts U.S. Losses May Reach $3.6 Trillion

Option ARM--The Toxic Mortgage

Warren Buffett's Annual Letter to Investors (Cliff Notes Version)

Kindle: Amazon's Wireless Reading Device (Latest Generation)

Roubini on Gold

Gold is a special commodity in that the fundamentals of physical supply and demand are minor influences on its price. Gold’s price is most often driven by speculative demand for a hedge against inflation or economic uncertainty. Many investors see gold as a substitute for fiat currencies. Consequently, gold prices sometimes track changes in central bank holdings of gold.

Gold markets largely ignored China’s surprise revelation that it had increased its gold reserves as much of this had already been priced in by speculators. Moreover, China produces its own gold. The increase in China's gold holdings is just a mere drop in the bucket of its total $1.9 trillion in foreign exchange reserves. Gold's share in China's foreign exchange reserves remains much lower than the global average and well below the U.S. share. But China's interest in gold is consistent with its taste for real assets to gradually diversify from its U.S. bond-heavy portfolio. If other central banks followed suit, gold demand could increase sharply.

IMF gold sales will likely have little impact on gold prices if it sells its gold to central banks rather than the free market. The European Central Bank Gold Agreement’s expiration in September 2009 may have more impact. The signatories are likely to renew the agreement and continue limiting central bank gold sales. Fears that monetization of rising public debts will erode currency values may spark demand for gold as an inflation hedge.

Source RGE Monitor Newsletter and RGE Monitor

Subscribe to EF Hutton via Email

Roubini on the U.S. Dollar and the Chinese Yuan

The Almighty Renminbi?

Now, imagine a world in which China could borrow and lend internationally in its own currency. The renminbi, rather than the dollar, could eventually become a means of payment in trade and a unit of account in pricing imports and exports, as well as a store of value for wealth by international investors. Americans would pay the price. We would have to shell out more for imported goods, and interest rates on both private and public debt would rise. The higher private cost of borrowing could lead to weaker consumption and investment, and slower growth.

Also see Roubini vs. Zhou on the U.S. Dollar and the Chinese Yuan

Subscribe to EF Hutton via Email

Bob DeMarco is a citizen journalist and twenty year Wall Street veteran. Bob has written more than 500 articles with more than 11,000 links to his work on the Internet. Content from All American Investor has been syndicated on Reuters, the Wall Street Journal, Fox News, Pluck, Blog Critics, and a growing list of newspaper websites. Bob is actively seeking syndication and writing assignments.

Follow E F Hutton on Twitter

Is Gold Ready to Soar? (Outlook, Chart)

June Gold, Bar, Chart


Gold has a tendency to be seasonally week from March through August. As a result, it is always risky to speculate in gold during this time frame.

In April, we wrote that gold was likely to test the 865 - 875 area. This happened, the market held, and made a very nice double bottom. This is now an area of major support.

Right now gold is running into resistance in the 827 area.

Any close over 827.50 would indicate that gold is ready to move higher.

Subscribe to All American Investor via Email

The market place is now starting to focus on the potential inflationary impact of the policies being carried out by the Federal Reserve and Treasury. The money supply, Fed balance sheet, and reserve balances are all soaring. The Treasury is buying mortgage backed securities and treasuries in an attempt to keep interest rates artificially low.

This is a big positive for gold. The marketplace is beginning to sense that a major increase in inflation is on the horizon. Gold is likely to discount this phenomena well in advance.

Gold, like all commodities, goes up when demand increases and supplies get tight. Both are happening right now.

What to watch:

• Purchases of gold by the SPDR Gold Shares -- GLD. The ETF is now the sixth largest holder of gold in the world. When demand for the shares increase their purchases of physical gold increase.
  
• Demand out of China. This includes buys by the Central Bank and demand for jewelry. Sooner or later demand from China is going to be explosive. While it is not well known, during the last big bull market in gold, much of the upside was fueled by purchases out of Hong Kong.
• Any close over 827.50 basis June Gold.
  

Background:

• Gold has a tendency to be weak on a seasonal basis at this time of year. This pattern usually persists until summer.
• Industrial and jewelry demand for gold has been slow due to the weakness in the global economy.
• The market experienced some jitters on a rumor of IMF gold sales. This is not happening.
• The market also sold off on news out of India that demand for gold was dropping.
  
• Seasonal demand patterns in gold are sometimes offset by investor demand for physical gold and ETFs.
  
• Central banks continue to be large net sellers of Gold. Central banks have been net sellers of gold sales since 1999. Obviously, investor demand has been offsetting these large sales.

Here is some history on gold since 1980.

• Gold rallied from $135 an ounce in 1978 to $860 an ounce in 1980.
• The late 70s-80s gold rush was caused by consumer fears about inflation. The monthly CPI reading reached 1.5 percent in 1980. Gold peaked along with the inflation rate.
• From 1980 until late 1999 gold prices trended down.
• Gold bottomed near $250 an ounce in 1999.
• When gold was making its lows in 1999, most of the major Central Banks around the world announced they intended to sell-off a large fraction of their gold reserves (400 tonnes a year, 2000 tonnes total).
  
• Central banks are still selling their gold reserves in 2009 (500 tonnes a year, 2500 tonnes total).
  
• Central banks continue to sell gold and the price continues to rise.
• Since the late 1980s the purchases of gold by institutional investors has been rising. This trend continues and seems to be picking up momentum.
  
• Demand for gold rose sharply in the fourth quarter of 2008, up 27 percent to $26.7 billion (year over year, Q4-2007 versus Q4- 2008).
  
  
  

  Bob DeMarco is a citizen journalist and twenty year Wall Street veteran. Bob has written more than 500 articles with more than 11,000 links to his work on the Internet. Content from All American Investor has been syndicated on Reuters, the Wall Street Journal, Fox News, Pluck, Blog Critics, and a growing list of newspaper websites. Bob is actively seeking syndication and writing assignments.

  
  
  
  
  Follow All American Investor on Twitter

China Buying Copper (Chart)

China is on a buying spree in copper. China State Reserves Bureau bought up 329,000 tonnes of copper in February and 375,000 tonnes in March. This explains in part the 70% surge in copper prices since the lows were made in December.

There is saying in copper -- buy on Thanksgiving, sell on Easter. Worked pretty good this year. Although, it was a little hair raising from Thanksgiving to the December low.

China has also been a big buyer of metals like aluminum, nickel, zinc, and tin.



Chart Notes:

• Copper was overbought at the rally highs.
• Copper traded above the red line (two standard deviations above the mean) and was due for a correction.
• The market is currently testing the green line and 2.00.
• The trend is up and the short, intermediate, and long term averages are all pointing up.
• First support is around 2.00 and major support is in a band from 1.80 to 1.90.
• Resistance is at the current highs around 2.23.
• Technicals point to higher prices.

Subscribe to All American Investor via Email

Bob DeMarco is a citizen journalist and twenty year Wall Street veteran. Bob has written more than 500 articles with more than 11,000 links to his work on the Internet. Content from All American Investor has been syndicated on Reuters, the Wall Street Journal, Fox News, Pluck, Blog Critics, and a growing list of newspaper websites. Bob is actively seeking syndication and writing assignments.

More from All American Investor

30 Year Conventional Mortgage Rate (Chart)

Top Hedge Fund Managers Make Billions in 2008

Systemic Risk Defined--Too Big to Fail

Ray Dalio on the current state of affairs in the market

Roubini Predicts U.S. Losses May Reach $3.6 Trillion

Option ARM--The Toxic Mortgage

Warren Buffett's Annual Letter to Investors (Cliff Notes Version)

Follow All American Investor on Twitter

Copper Soaring, China Buying (Chart)

Cash Copper, Daily Price Mark



The chart contains a single price (dot) for each trading day.

Notes:

• The price of copper is moving up fast. This is being caused by buying out of China.
• China is a large importer of cooper. They import about 85 percent of their need.
• On December 24, copper traded at the low price of 124.75.
• Today the price was marked at 212.55.
• The price of copper has risen 70 percent in the last 4 months.

You should be looking at Freeport McMoran (FCX). Freeport benefits from rises in the price of copper. The company is also a large producer of gold. We will cover Freeport McMoran tommorow.

You should note the effect that demand from China can have on commodity prices. One theme that should become evident is that when China starts to demand the supply of a commodity its price is likely to rise dramatically. This will create lots of opportunites for smart investors.

There are several ways to take advantage of thirsty demand for commodities from China. These include: sector stocks, ETFs, options, and commodity futures contracts.

We will be honing in on these opportunities in the days and weeks ahead.

So stay tuned daily.

Subscribe to EF Hutton via Email

Bob DeMarco is a citizen journalist and twenty year Wall Street veteran. Bob has written more than 500 articles with more than 11,000 links to his work on the Internet. Content from All American Investor has been syndicated on Reuters, the Wall Street Journal, Fox News, Pluck, Blog Critics, and a growing list of newspaper websites. Bob is actively seeking syndication and writing assignments.

Kindle 2: Amazon's New Wireless Reading Device (Latest Generation)

Is Chinese Drywall Making People and Homes Sick--Mold?

The building industry is being hit by a bevy of lawsuits over drywall, manufactured in China, that appears to be emitting nasty smelling, corrosive gases into people’s homes.

In Florida's builders are facing a new problem--the Chinese-made drywall they used in new construction is causing unpleasant odors and possibly leading to electric problems.

Homeowners in Lennar's Woodfield development in Port St. Lucie have received letters stating that they can temporarily move out of their homes while Lennar guts the walls and installs new drywall for free.

Real estate agent Felix Martinez thought he'd found his dream house when he bought the 3,500-square-foot beauty in Homestead, Fla., two years ago.

Then, he says, his large-screen TV mysteriously failed. Next, the air conditioner went. His bath towels smelled like rotten eggs. Visitors noted an odor in the house. Martinez says he's suffered new sinus problems and sleep apnea. His wife and son sneeze a lot.

The walls in the home, a recently filed class-action lawsuit alleges, were built with the same kind of Chinese-made drywall that tests have shown emit sulfur gases that corrode copper coils and electrical and plumbing components.

The problem has now spread to Louisiana.

Note to investors. This story is likely to get more traction and is likely to impact the bottom line at any home builder that used Chinese dry wall. The attorney's are out in force here in Florida and this is a trend that is just picking up momentum.

Note to home buyers. Do your due diligence before purchasing a home.

Sources of Information:
Drywall from China blamed for problems in homes
Is Chinese Drywall the New Mold?
Builders removing Chinese drywall from two Port St. Lucie developments

Subscribe to EF Hutton via Email

Rogers Bullish on China, Bearish on the Dollar

China to Overcome Global Recession First, Rogers Says

China’s stimulus spending will help its economy overcome the global recession sooner than the U.S. and other countries, investor Jim Rogers said.

“I certainly expect China to come out of it sooner than the U.S.,” Rogers, chairman of Singapore-based Rogers Holdings, said in a Bloomberg TV interview in the city-state. “They seem to be spending the money on the right things. China is doing a far better job than the others.”

“I plan later this year to get out of the rest of my U.S. dollars,” he said. “It’s had an artificial rally too but it’s a terribly flawed currency. The U.S. is printing money as fast as it can and that’s always throughout history led to currency problems down the road.”

Subscribe to EF Hutton via Email