Well, that pretty much seals the deal. I’m talking about the latest, lousy batch of employment data. The ADP Employer Services report out Wednesday showed the economy shedding 39,000 jobs in September — the biggest decline since January and far below the Bloomberg forecast for a gain of 20,000.

Barring some huge surprise from this morning’s Labor Department report, the QE2 is poised to set sail. That was only reinforced by Chicago Fed President Charles Evans, who said “unemployment is too high” and inflation is “low,” and by New York Fed President William Dudley, who late last week called current economic conditions “unacceptable.”

The Fed’s goal is clearly to debase the U.S. dollar in order to create inflation. Or in the infamous words of now-Chairman Ben Bernanke from November 2002 …

“U.S. dollars have value only to the extent that they are strictly limited in supply. But the U.S. government has a technology, called a printing press (or, today, its electronic equivalent), that allows it to produce as many U.S. dollars as it wishes at essentially no cost.

“By increasing the number of U.S. dollars in circulation, or even by credibly threatening to do so, the U.S. government can also reduce the value of a dollar in terms of goods and services, which is equivalent to raising the prices in dollars of those goods and services.

“We conclude that, under a paper-money system, a determined government can always generate higher spending and hence positive inflation.”

The Cost of Competitive Devaluation

The Fed would have you believe this is good for America. That a country whose massive debts are majority-held by foreigners will never have a problem selling bonds — even as its central bank drives down the value of those bonds (in foreign currency terms).

My take? Let’s look at what the Fed’s war on your wealth has accomplished …

In the past several weeks, soybeans have surged up to 23 percent, crude oil has gained 30 percent, copper has jumped up to 39 percent, and wheat prices have soared as much as 97 percent.

The dollar? It has dropped more than 12.5 percent since June, making it more expensive to buy foreign goods and travel overseas. And gold? It has surged about 17 percent.

The Fed’s policy has pushed the dollar down and gold up.

Yes, stocks have rallied — but only roughly as much as the dollar has declined. In other words, you’ve basically made no “real” gains in terms of purchasing power!

Stated another way, the Fed’s ridiculous monetary policy is creating “bad” inflation. Prices for many raw commodities are going up. So are costs for the companies you buy goods from. But your wages likely aren’t keeping pace because of the lousy labor market. And your savings accounts and fixed income securities aren’t yielding squat.

Or as Nobel Prize-winning economist Joseph Stiglitz recently told Bloomberg:

“Fed policy was supposed to reignite the American economy, but it’s not doing that … the flood of liquidity is going abroad and causing problems all over the world.”

Worse, We’re Not Alone!

It’s bad enough that our central bank is heading down the dangerous road to currency debasement. What’s worse is that other central banks are doing the same darn thing!

The Bank of Japan tried to suppress the yen by intervening massively in the currency markets a few weeks ago. Then this week, it lowered its benchmark interest rate to 0 percent from 0.1 percent and announced a new QE plan. It’s going to spend 5 trillion yen, or about $60 billion, to buy assets.

Not just any old assets like government bonds either. The BOJ said it will buy “long-term government bonds, treasury discount bills, commercial paper (CP), asset-backed CP (ABCP), corporate bonds, exchange-traded funds (ETFs), and Japan real estate investment trusts (J-REITs).”

Yes, you read that right …

The BOJ is now going to start indirectly buying commercial real estate and stocks. I have to wonder, are Beanie Babies next? What about iPods? Or hey, if tuna prices plunge, maybe BOJ policy makers could show up at the famous Tsukiji Fish Market and go nuts buying there!

Don’t forget the Bank of England either. BOE policymaker Adam Posen advocated for more QE there in late September. The Brits are currently buying 200 billion pounds (about $317 billion) worth of government bonds to artificially prop up the market and suppress the value of the pound.

Meanwhile, central bankers in other Asian countries outside of Japan are selling the heck out of their own currencies to try to keep them from appreciating rapidly against the buck.

That’s happening in Brazil, too …

A weaker real makes Brazilian exports more competitive.

Brazil’s finance minister Guido Mantega just warned of a global “currency war,” and doubled the tax on foreign purchases of Brazilian bonds in an attempt to stem the flood of hot money into Brazil’s markets and currency, the real.

Lastly, there’s China, perhaps the world’s biggest currency manipulator. It’s continuing to hold down the yuan despite intense international pressure.

Chinese Premier Wen Jiabao just told a business conference that “if the yuan isn’t stable, it will bring disaster to China and the world.” He added that European officials should quit bugging him, saying “Europe shouldn’t join the choir to press China to allow more yuan appreciation.”

Protecting Yourself from the Fed’s War on Your Wealth!

Bottom line? Practically every central banker in the world wants to drive his currency into the gutter. I’ve never seen anything like it — and mark my words, it isn’t going to end well!

In the meantime, you can protect yourself by continuing to hold contra-dollar hedges like those recommended in Safe Money Report.

I’d avoid long-term bonds, preferring instead to keep my maturities short. And gold? I’m a bull long-term. But I’d look to take some profits here given the massive, recent run and the risk that other countries will push back aggressively at the Fed’s dollar-debasement strategy.

Until next time,

Mike

http://www.moneyandmarkets.com

by Jeff Manera 09-25-10

China has perpetually managed its currency, the yuan, to be undervalued. Estimates range from 30 percent to 40 percent on the amount the currency would appreciate if it was allowed to freely float with market forces.

This “management” has given China’s exporters an unfair advantage over other export-driven countries, such as Japan and South Korea, and has provided much of the rocket fuel that made China’s incredible expansion and growth possible.

Until recently China had been extremely stubborn about keeping its currency weak. But of late it has allowed the yuan to start ticking higher, although it’s clear the currency is still being managed.

A stronger yuan gives China a buyer’s advantage over weaker currencies.

Don’t think for one minute, though, that this turnaround is because the U.S. and other world governments have finally worn China down with repeated requests for appreciation — or that China has suddenly decided to be nice and play fair in the global marketplace.

You see, China is beginning to shift from a pure “low-cost” exporter to a more balanced society, with rapidly growing domestic consumption and a burgeoning middle-class. These factors drive up the country’s need for imports. And those imports will cost less if the Chinese are purchasing them with a stronger currency.

But there is more than consumer consumption to the China story. China must also import an immense amount of raw materials. For example:

• Fuel to feed its voracious energy appetite.
• Construction supplies and materials to build its massive expansion and infrastructure projects.
• Raw materials to produce the finished goods it ultimately exports.

China Is Setting Itself Up to Become the Dominant M&A Player

Another benefit of a strong yuan would be China’s purchasing power clout in foreign mergers and acquisitions (M&A) …

China has been buying up key companies across the globe, even though it has effectively been paying much more than the stated value due to its discounted currency.

According to an August report by accounting firm PricewaterhouseCoopers, 99 deals were announced in China foreign M&A, representing a 50 percent spike during the first six months of 2010. Seven of these were valued at more than $1 billion. The biggest was the $4.7 billion deal by China Petroleum & Chemical Corp. or “Sinopec,” of ConocoPhillips.

Natural resources remain the main focus of these acquisitions. This multi-year buying spree by China’s state-owned companies of metals companies and oil fields helps ensure the country’s continuing industrial and economic growth.

And as China allows the yuan to appreciate, you can bet it will start to ramp up acquisitions of key foreign natural resource companies.

China’s demand for uranium will be like the world has never seen before.

However, there is one natural resource China requires that isn’t being as widely discussed as much as the others. And that is uranium.

As the country slowly starts to shift from dirty energy, such as coal and oil, there are big plans for nuclear energy and a growing requirement for uranium to fuel those reactors.

Nuclear energy only accounts for about 2 percent of China’s installed energy capacity. But that’s expected to grow substantially in the coming years …

Right now China has 11 reactors up and running. Twenty-four more are under construction and a whopping 120 more proposed. So you can easily understand why China’s demand for uranium is bound to skyrocket!

Where will China get all this uranium? I expect we’ll see some strategic acquisitions to supplement the agreements China already has with Kazakhstan and other uranium producing countries.

Who are the big players in uranium mining that could profit most?

Areva SA and Cameco Corp. are the world’s largest, with Rio Tinto Group the next in line. Of the three, I think Cameco (U.S. symbol CCJ) offers the best potential as a Chinese takeover target.

Best wishes,

Jeff

About Money and Markets

For more information and archived issues, visit http://www.moneyandmarkets.com

Money and Markets (MaM) is published by Weiss Research, Inc. and written by Martin D. Weiss along with Nilus Mattive, Claus Vogt, Ron Rowland, Michael Larson and Bryan Rich. To avoid conflicts of interest, Weiss Research and its staff do not hold positions in companies recommended in MaM, nor do we accept any compensation for such recommendations. The comments, graphs, forecasts, and indices published in MaM are based upon data whose accuracy is deemed reliable but not guaranteed. Performance returns cited are derived from our best estimates but must be considered hypothetical in as much as we do not track the actual prices investors pay or receive. Regular contributors and staff include Andrea Baumwald, John Burke, Marci Campbell, Selene Ceballo, Amber Dakar, Maryellen Murphy, Jennifer Newman-Amos, Adam Shafer, Julie Trudeau, Jill Umiker, Leslie Underwood and Michelle Zausnig.

Attention editors and publishers! Money and Markets issues can be republished. Republished issues MUST include attribution of the author(s) and the following short paragraph:

This investment news is brought to you by Money and Markets. Money and Markets is a free daily investment newsletter from Martin D. Weiss and Weiss Research analysts offering the latest investing news and financial insights for the stock market, including tips and advice on investing in gold, energy and oil. Dr. Weiss is a leader in the fields of investing, interest rates, financial safety and economic forecasting. To view archives or subscribe, visithttp://www.moneyandmarkets.com.

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Last week, I pointed to the challenges facing Switzerland and Japan’s currencies. As for the yen, I said that nothing short of actual intervention would relieve the pressure on its exporters. I also said that I expected it to happen.

And it did.

Japan intervened this week to stop the ever-rising yen, its biggest one-day intervention on record. But many in the foreign exchange market believe the effort will fail — and ultimately a strong yen will win out.

I disagree.

First, I can’t think of one fundamental argument that would support the case for a stronger yen.

Second, Japan has every incentive to keep intervening.

Remember, this is a country attempting to weaken its currency, not save it from a death spiral of weakness.

Given that fact, unilateral currency market intervention by Japan works in their favor in several ways …

It softens the currency burden for its all-important exporters.

And it requires Japan to print more and more yen, ultimately easing monetary policy even further. Indeed, a move needed in Japan’s fight against another round of deflation.

So what do they do with all of the freshly printed yen?

They sell it and buy U.S. dollars. That means they stockpile currency reserves … an area commonly perceived to be a gauge of a country’s financial wealth and stability.

Perhaps even more favorable: It’s a politically-positive move. For a country that’s had six prime ministers in the past five years — nearly seven in the wake of last week’s elections — stepping up to the plate to weaken the yen is a political win.

Why Japan’s Intervention Will Work

Because of the incentives I discussed above, I expect Japan’s efforts to persist and pay off. But when you add in four more pieces of supportive evidence, the case is even stronger that we may have seen a long-term top in the yen.

Supportive Evidence A: The yen is way overvalued

Below is the OECD’s measure of the most overvalued currencies based on Purchasing Price Parity (PPP). As you can see the yen is among the most overvalued currencies in the world, more than 25 percent too rich against the dollar.

Supportive Evidence B: The long yen trade is overcrowded

The chart below shows the massive build up of long positions in the yen, a dynamic that typically doesn’t end well for those on the side of an extremely overcrowded position once the selling begins.

Source: Bloomberg

Supportive Evidence C: History of successful intervention

The only other time the yen was this strong against the dollar was in 1995. The yen traded as high as 79.75 against the dollar before the Bank of Japan stepped in, sending it 46 percent lower over the next three years … and in the process marking the all-time high for the yen.

Supportive Evidence D: Debt, debt and more debt

Japan’s debt load is twice the size of its economy. The Bank of International Settlements projects that by 2040 it will reach 400 percent of GDP.

As I detailed in my May 15 Money and Markets column, Japan: The Sleeping Sovereign Debt Giant, Japan faces big structural shifts that will likely make it difficult to internally finance its debt much longer. It will soon have to start competing for international capital to fund its debt. And given its non-competitive interest rates, that raises the specter of default.

A weaker yen could force other nations to follow.

In fact, Standard and Poor’s said this week the risk of a sovereign debt default in Japan is “slowly increasing.” This fundamental problem in Japan will ultimately result in a much weaker yen.

What Does this Mean For the Rest of the World?

Japan’s intervention could be just the first step in a long, sharp devaluation of the yen. And in a world where unsustainable debt and deficits are prevalent and economies are fragile, this could ignite a wave of currency devaluations in other countries.

Already, Japan’s move has started speculation that countries like South Korea, Singapore and Thailand could follow suit.

Bottom line: This intervention could mark the beginning of increased global currency risk, another round of capital flight from high-risk currencies and another, more sustained, period of global risk-aversion.

Regards,

Bryan

P.S. For more news on what’s going on in the currency markets, be sure to check out my blog, Currencies Corner. You can follow me on Twitter, too, and get notified the moment I post a new message.

Source: http://www.moneyandmarkets.com/government-defaults-and-inflation-are-the-norm-not-the-exception-40017

The past 15 years have certainly been exciting for investors. During the second half of the 1990s we experienced one of the largest stock market bubbles of all times … and its bursting. Then, only a few years later, one of the biggest real estate bubbles … and its bursting.

In the aftermath of these events the world stumbled into the most severe economic downturn since the Great Depression of the 1930s. And the banking system came to the brink of a total collapse.

Unprecedented government interventions in the U.S., the UK, and continental Europe were implemented to prevent the breakdown of the financial system. Naturally these interventions came with a price: Ballooning budget deficits.

Now we’re witnessing a veritable debt explosion in the developed world …

Never before, aside from times of major war efforts, have governments amassed as much debt as during the past years. And this debt binge comes atop a decades-long trend of ever higher indebtedness.

Then, seemingly out of the blue, interest rates for Greek government bonds started to rise drastically. Suddenly the Greek state was at the brink of default, and other European countries like Spain, Ireland, Portugal, and Italy were also in jeopardy.

Stronger European countries and the International Monetary Fund (IMF) stepped in with a $1 trillion rescue package to prevent this crisis from running its natural course — that is massive government defaults.

Historically, Greece’s De Facto
Bankruptcy Is All too Common

When examining the current predicament, you could easily conclude that we’re living in extraordinary times. But looking through a historical lens immediately shows that what seems to be extraordinary is in effect somewhat normal …

Sovereign debt defaults and sovereign debt crises are nothing new at all, but as old as the government bond market. Financial history is fraught with examples of government bond investors losing big time.

In their book, This Time Is Different, Carmen M. Reinhart and Kenneth S. Rogoff give dozens and dozens of examples from 1802 Austria-Hungary until 2002 Indonesia, including countries like France, Germany, Argentina, Russia, Turkey, Sweden, Mexico, China, India, and Japan.

Government bond defaults are nothing new.

Now our leaders have set us up for the same fall by accumulating a debt problem so large …

There Is No
Easy Way Out!

In theory there are six ways out of government debt:

Option #1—
Stimulate economic growth

A growth miracle is highly unlikely here. If anything, history tells us to expect subdued growth in the aftermath of a burst housing bubble.

Option #2—
Cut interest rates

Declining interest rates are already behind us. The Fed is done, interest rates are just about as low as they get.

Option #3—
Bailouts by other governments

Bailouts by other governments are not an option for major economies, and totally impossible for the world’s largest economy and the world’s largest debtor, the U.S.

Since the above three options, let’s call them the easy ones, are not available for the U.S., government officials are left with the remaining three. All of them come with lots of pain …

Option #4—
Implement austerity policies

Higher taxes and reduced government benefits can be a tough pill to swallow.

Austerity policies mean tax hikes and spending cuts. Greece can be seen as a test of this agenda. And its citizens have responded with strikes and social unrest.

Option #5—
Crank up the printing presses

Although time lags are long, money printing is probably the most alluring path for politicians. And there’s always the hope to get away with offering scapegoats, because the mechanics of inflation are difficult to understand.

The Bernanke Fed has often made clear that it strongly prefers an inflationary policy to cope with the effects of the burst bubble and the Great Recession.

That is, however, a very risky undertaking …

In fact, history shows inflation can easily get out of hand and destroy the very fabric of a society. The most prominent example was Germany in 1923 when one U.S. dollar was worth 4 trillion German marks.

And the most recent case was Zimbabwe a few years ago when at one point inflation was estimated at 6.5 quindecillion novemdecillion percent (65 followed by 107 zeros). The country has even issued the world’s first 100-trillion dollar note.

Option #6—
Default

Outright default is what happens if our leaders keep doing what they’ve been doing for the past several years. And for now, they seem determined to continue the very policies that got us into the current mess in the first place.

There are many names or euphemisms for default: Restructuring, rescheduling, repudiation, or moratorium to name just a few. But they all mean the same sad thing: Breaching the terms of debt contracts, such as bonds.

Which One Will They Choose?

So what will it be? Which way will our leaders choose to dig us out of this mountain of debt?

I think we’ll see all three in the coming years: Austerity policies, money printing, and default. It may very well differ from country to country, and it may even come as a succession.

For instance, like was done in Greece, they might first try some tax hikes and spending cuts …

But as soon as the public outcry becomes too loud to bear, politicians will quickly retreat and start money printing instead. Then the bond market could rebel forcing a return to austerity, and so on. Until, in the end, either hyperinflation or outright default terminates the whole cycle.

What Can You Do to
Protect Your Wealth?

Unfortunately there is no easy answer. In my mind, though, one thing is certain: You must be as flexible as never before to act early on initial signs of important policy shifts.

Right now, my cyclical model is giving clear signals of a coming recession or another down leg in a running depression. The right thing to consider doing in this phase of the cycle is avoiding risk, especially stocks and junk bonds.

Best wishes,

Claus

About Money and Markets

For more information and archived issues, visit http://www.moneyandmarkets.com

Money and Markets (MaM) is published by Weiss Research, Inc. and written by Martin D. Weiss along with Nilus Mattive, Claus Vogt, Ron Rowland, Michael Larson and Bryan Rich. To avoid conflicts of interest, Weiss Research and its staff do not hold positions in companies recommended in MaM, nor do we accept any compensation for such recommendations. The comments, graphs, forecasts, and indices published in MaM are based upon data whose accuracy is deemed reliable but not guaranteed. Performance returns cited are derived from our best estimates but must be considered hypothetical in as much as we do not track the actual prices investors pay or receive. Regular contributors and staff include Andrea Baumwald, John Burke, Marci Campbell, Selene Ceballo, Amber Dakar, Maryellen Murphy, Jennifer Newman-Amos, Adam Shafer, Julie Trudeau, Jill Umiker, Leslie Underwood and Michelle Zausnig.

Attention editors and publishers! Money and Markets issues can be republished. Republished issues MUST include attribution of the author(s) and the following short paragraph:

This investment news is brought to you by Money and Markets. Money and Markets is a free daily investment newsletter from Martin D. Weiss and Weiss Research analysts offering the latest investing news and financial insights for the stock market, including tips and advice on investing in gold, energy and oil. Dr. Weiss is a leader in the fields of investing, interest rates, financial safety and economic forecasting. To view archives or subscribe, visithttp://www.moneyandmarkets.com.

From time to time, Money and Markets may have information from select third-party advertisers known as “external sponsorships.” We cannot guarantee the accuracy of these ads. In addition, these ads do not necessarily express the viewpoints of Money and Markets or its editors. For more information, see our terms and conditions.

by Martin D. Weiss, Ph.D. 08-30-10

http://www.moneyandmarkets.com/bernanke-hallucinating-40007

If Fed Chairman Ben Bernanke honestly believes what he said at Jackson Hole on Friday — that he can save the economy by printing more money and buying more bonds — he’s hallucinating.

Through the first quarter of this year, he printed $1.5 trillion of paper money and promptly bought $1.5 trillion in mortgage bonds, government agency bonds, and Treasury bonds.

But the entire effort was a dismal failure; the U.S. economy is still sinking and most large American banks are still weak.

The underlying reason: While the government has been borrowing massively, nearly everyone else has embarked on unprecedented debt LIQUIDATIONS.

In other words …

While Washington is gorging itself on new debts, nearly every other sector is undergoing massive liposuctions.

How do we know? Because that’s what the Federal Reserve itself is reporting — unambiguously and conclusively.

Based on the Fed’s latest Flow of Funds report (Table F4, “Credit Market Borrowing”), governments are borrowing massively.

But the collapse in private sector credit is so dramatic that among ALL the major categories the Fed tracks, NOT ONE is expanding its debts. Rather, every single sector is in advanced stages of unprecedented and massive debt liquidations!

Specifically, as you can see in the chart above …

• Corporations are cutting back on their bonds at a record pace of $355 billion per year …
• Banks are cutting back on their lending at the yearly rate of $273 billion, and …
• Worst of all, mortgages are being liquidated at a record-smashing pace of $560 billion annually.

In addition, the Fed is reporting net cutbacks in consumer credit ($39 billion), open market paper ($154 billion), agency bonds ($16 billion), and other loans ($174 billion).

And remember: We’re not just talking about a slowdown in the pace of new borrowing — the pattern we used to see in typical recessions of the past. No! These are actual netreductions in debts outstanding — the basic stuff that depressions are made of.

In sum, nearly all the money Bernanke has printed — plus all the money he has supposedly poured into the economy — is going nowhere, except perhaps down the drain. He’s clearly running on a treadmill … pushing on a string.

Whatever you do, do not underestimate the potential impact of this situation. It is …

Huge! Including both the government and private sectors, the total new credit created in 2007 was $4.5 trillion. Now, it’s running at an annual pace of about ZERO! That $4.5 trillion was LOT of money — and it’s all money that’s NOT pouring into the economy any more.

Unprecedented! This has never happened before in modern times — not even during the deepest recession of the postwar era. During the Great Depression? Yes. But in proportion to GDP, the debt buildup before the Depression — as well as the debt liquidations duringthe Depression — were not as large as they are now.

Getting worse! Despite everything Bernanke has done to try to stop it, the debt liquidations are accelerating — especially in the mortgage area. Consider these basic facts:

Back in 2005, lenders issued $1.4 trillion in new mortgages over and above those that were paid off or went bad — a fantastic amount of fresh new money pouring into the housing and construction markets.

But by 2008, they had cut back their new mortgage lending by a whopping 94 percent. The industry virtually died — an unmitigated disaster for the economy.

At that point, pundits assumed it was the end of the decline. On a net basis, the creation of mortgages in the U.S. was practically down to zero. “So how much further could it possibly fall?” they asked.

Meanwhile, Bernanke apparently assumed that, by buying crazy, unprecedented amounts of mortgage bonds, he could somehow stop the decline — or at least offset its impact. But the decline in the mortgage market didn’t end there in 2008 …

In 2009, it got worse — a lot worse! Not only was new mortgage money largely unavailable but OLD mortgage money was pulled out. Result: We saw net mortgageliquidations of $283 billion!

And for the first quarter of 2010, as I highlighted earlier, the Fed reports net liquidations running at an annual pace of $560 billion, the worst in history.

The Unavoidable Consequences

These forces are more enduring than any monetary policy, bigger than any government. They are unmistakable, unavoidable, and overwhelming.

Bernanke can try to make believe they don’t exist. But you cannot afford to take that risk. You must recognize the truth and consequences that he’s not talking about …

Consequence #1. Bernanke’s nearly powerless. No matter how many more bonds he buys, Bernanke cannot save the recovery. Sure, he could push 30-year fixed mortgage rates down some more. But even the lowest mortgage rates in recorded history haven’t made a bit of difference. In fact, despite low rates, mortgages are being liquidated at an even FASTER clip. Home sales falling even MORE rapidly.

Consequence #2. Double dip. The double-dip recession we’ve been warning you about is now on its way. Meanwhile, administration economists still swear on a stack of Bibles that the double dip is not in the cards; and private economists think the probability of a double dip is only 20 to 30 percent. They must be getting their hallucinogens from the same source as Bernanke.

Consequence #3. More bank failures! As a whole, despite government bailouts and regulatory reform, the nation’s banks and thrifts are no healthier today than they were before the onset of the debt crisis. The big difference: This time the government is unlikely to have nearly as much political or financial capital to bail them out.

What To Do

First, reduce your risk exposure. Sell any stock or investment that may be vulnerable to a double-dip recession and all its probable consequences.

Second, hedge. If you are unable or unwilling to sell, buy some protection. The most convenient vehicle: Inverse ETFs — exchange traded funds that are designed to rise in value as markets decline.

Third, get your money to safety. Despite the near-zero yields, short-term U.S. Treasury bills or Treasury-only money market funds are still the safest parking place.

Fourth, check your bank. Click this link to review our list of the Weakest Banks and Thrifts in the U.S.

This list includes only institutions with a Weiss Rating of D+ (weak) or lower — institutions we believe to be vulnerable to future financial difficulties or even failure. To be sure, many vulnerable institutions will NOT ultimately fail. However, we believe that their risk of failure is high.

For your convenience, we’ve listed them by state, then in alphabetical order. Plus, with each institution, we provide not only the company name, but also their state of domicile and their total assets.

This extra information is important because there are many banks in different states that have very similar names, and we don’t want you to make a critical decision based on a case of mistaken identity. So make sure you’ve got the exact name of your institution. And if you’re still not certain, double-check by asking your banker to identify their state of domicile.

So … is your bank on our Weakest list? Or not?

• If your bank is NOT on Weakest list, it’s because it has received a rating of AT LEAST C- (fair). Now, C is not a good rating. But it means that we believe your bank is stable and not currently vulnerable.
• If your bank IS on the Weakest list, it means we believe your bank is vulnerable.

If so, we recommend you click here to review our list of the Strongest Banks and Thrifts in the U.S.

This list includes only institutions with a Weiss Rating of B+ (good) or higher. We do not guarantee that all of these institutions are completely safe. However, we believe that their risk of failure is very low.

At the top of the page, click on your state. Then, shop among the listed banks in your area.

Finally, above all …

Do not believe Bernanke! Given all the facts he has at his fingertips — the same ones I’ve just presented here this morning — I doubt he even believes himself.

Good luck and God bless!

Martin

About Money and Markets

For more information and archived issues, visit http://www.moneyandmarkets.com

Money and Markets (MaM) is published by Weiss Research, Inc. and written by Martin D. Weiss along with Nilus Mattive, Claus Vogt, Ron Rowland, Michael Larson and Bryan Rich. To avoid conflicts of interest, Weiss Research and its staff do not hold positions in companies recommended in MaM, nor do we accept any compensation for such recommendations. The comments, graphs, forecasts, and indices published in MaM are based upon data whose accuracy is deemed reliable but not guaranteed. Performance returns cited are derived from our best estimates but must be considered hypothetical in as much as we do not track the actual prices investors pay or receive. Regular contributors and staff include Andrea Baumwald, John Burke, Marci Campbell, Selene Ceballo, Amber Dakar, Maryellen Murphy, Jennifer Newman-Amos, Adam Shafer, Julie Trudeau, Jill Umiker, Leslie Underwood and Michelle Zausnig.

Attention editors and publishers! Money and Markets issues can be republished. Republished issues MUST include attribution of the author(s) and the following short paragraph:

This investment news is brought to you by Money and Markets. Money and Markets is a free daily investment newsletter from Martin D. Weiss and Weiss Research analysts offering the latest investing news and financial insights for the stock market, including tips and advice on investing in gold, energy and oil. Dr. Weiss is a leader in the fields of investing, interest rates, financial safety and economic forecasting. To view archives or subscribe, visithttp://www.moneyandmarkets.com.

From time to time, Money and Markets may have information from select third-party advertisers known as “external sponsorships.” We cannot guarantee the accuracy of these ads. In addition, these ads do not necessarily express the viewpoints of Money and Markets or its editors. For more information, see our terms and conditions.

Mike Burnick, Director of Research and Client Communications — Weiss Capital Management

Since Bryan is on vacation this week, Martin asked me to pinch-hit as a guest editor today. And it couldn’t come at a better time, because at present, the Weiss Capital Management^† investment team is on high alert for a potential market sell-off.

We’ve had a nearly uninterrupted market rally over the past 12 months, but now we believe it’s time to play good defense … and take steps to help protect your gains. Let me explain why …

Naturally, the bulls are quick to point out the 70 percent surge in stocks since the March 2009 lows … they’ll tell you this is a sure sign the economy is recovering … and that we’re back to business as usual.

But don’t believe it! If anything, this rally should give you even more reason to be vigilant right now.

After all, stocks certainly can’t be considered bargains anymore. Based on measures of long-term price-to-earnings ratios, the S&P 500 is as much as 25 percent overvalued now.¹ [Editor's note: To learn more about a Weiss Capital Management strategy that's designed for both bull and bear markets, go here.]

Stocks have gone nowhere but up for over a year, and now they’re trading at expensive valuations, just like in 2007 … and, needless to say, you know what happened next …

Nevertheless, true believers in the recovery continue to ignore valuation while driving share prices even higher. In our view, the rally could come to a crashing end at any time.

What Happens When the Bailout Recovery Ends?

Our biggest concern is that this is not a “normal” recovery at all and our economy remains highly susceptible to a relapse at any time.

The so-called recovery, along with the rally in financial markets, has been largely bought-and-paid-for with taxpayer dollars … with TRILLIONS doled out by Washington for various stimulus and bailout efforts.

• In fact, federal government spending and transfer payments now account for nearlyONE FOURTH of our entire economy! ²
• To put this in perspective, even during the Great Depression — with FDR’s massive New Deal costs — government spending to GDP peaked at just over 10 percent.
• That’s less than HALF of where we are now — with federal spending today closer to 25 percent of GDP! ³

This deficit spending is simply unprecedented and it carries dangerous unintended consequences. Once this government stimulus is withdrawn … what then?

Can the economy — and especially the weak financial sector — sustain a rhythm of growth, without even more massive bailouts? Or, will it be right back to the emergency room for life support?

Only time will tell. But since the government is already winding down support, we may not need to wait much longer to find out what’s next.

Three Key Indicators Forewarn Potential Market Sell-off

Warning Flag #1: Leading Indicators Are Lagging Again: The first cause for concern is a sharp divergence in the indicators that predict the direction of the economy.

Take a look at the index of leading economic indicators, which appears to be clearly rolling over, a sign our economy may be contracting again.

This gauge tends to foreshadow broader moves in the economy.

• It correctly forecast the beginning of the Great Recession in mid-2007 — several months ahead of time.
• This indicator bottomed in late 2008, correctly signaling the bounce back we witnessed last year.
• Now, as the chart above clearly illustrates, the growth rate in the leading indicators has been falling for 10 weeks in a row! ⁴

This tells me that the recovery may be slowing substantially. Could it be foretelling a double-dip market decline ahead?

To answer that, you need to look closely at stock statistics.

Warning Flag #2: Risky Stocks Leading Rally

Watch which types of stocks are performing best. Indeed since last month’s low, trash has been making investors the most cash lately!

Translation: The riskier, lower-quality stocks seem to be back in favor in recent weeks, leading the market advance.

Market researchers at Bespoke Investment Group rank the quality of stocks in the S&P 500 based on their market size, valuation and credit ratings. ⁵

They found that since the recent market lows in early February, investors are walking on the wild side again … favoring poor-quality stocks over more defensive, dividend-paying blue chips.

In many cases, these poor-quality stocks are the same “junk stocks” that led the big market rally in 2009. Small-cap shares — often considered more speculative — are also favored more than blue chips.

• The Russell 2000, a benchmark for small-cap U.S. stocks, is up 15 percent since early February …
• Meanwhile the Dow Industrials, the blue chip index, gained less than HALF as much, or just 7 percent ⁶…
• Plus, the Russell 2000 is trading at over 50-times trailing earnings now … more thanTWICE as expensive as the S&P 500. ⁷

Of course, there may be perfectly rational reasons why investors prefer small caps over blue chips. For one thing, some analysts believe small caps have stronger profit growth potential.

On the other hand, junk stocks are the same stocks that could prove most vulnerable should the economy relapse into a double-dip recession later this year or next.

Warning Flag #3: Cycle Research Suggests Trouble Ahead

We’re also in the midst of two ominous historical market cycles.

Two of the more popular historic market cycles are the decennial (10-year) market cycle and the quadrennial — or presidential election cycle. This year, we have a convergence of the two, which suggests 2010 may not turn out to be a smooth ride for investors. Consider this …

The decennial cycle indicates that years ending in zero tend to be the absolute worst stock market performers of the decade, at least historically. In fact, from the 1880s through the year 2000, the tenth year of the decade has produced an average LOSS of 7.2 percent annually. ⁸

At the same time, 2010 is a midterm election year, and according to the presidential cycle, midterm years have posted the second worst performance of the four-year cycle and they have also been turbulent years.

Considering the partisan squabbling coming out of Washington these days, I’m convinced the 2010 midterm election could be especially contentious, adding more uncertainty to the mix as the year goes on.

Since 1930, stock market corrections have averaged nearly 21 percent at some point during midterm years! That’s a sizeable decline … especially when you consider that market declines have so far been relatively mild during the current rally … such as the 8 percent pull back in January and early February. ⁹

What do these cycles mean? They could indicate a double whammy for markets this year, especially if history repeats itself.

Three Key Steps You Need to Defend Your Portfolio

So, what’s the best way to prepare for potential market volatility ahead?

First, consider paring down your most vulnerable securities holdings — especially if you have profits from this rally. In other words, look at your smallest, most vulnerable stocks carefully. Jettison the riskiest.

Second, consider adding hedges, perhaps using inverse mutual funds or ETFs that short the S&P 500 or the Russell, but stick with single-beta inverse funds only!

That’s because some ETFs should be handled with extreme care, especially the leveraged or inverse funds. These funds don’t always track their index as advertised, and should be monitored carefully. [Editor's note: For more details, see this recent Weiss Advice^† article.]

Third, contact your financial advisor to seek professional guidance in turbulent markets.

At Weiss Capital Management, our goal is to grow and protect our clients’ wealth in strong markets and turbulent ones. As a result, these recent trends have us on alert. We have been reducing positions in higher risk investments and raising extra cash in our managed strategies.

Many of our strategies, including the Weiss All Weather Managed Account, have the ability to proactively hedge against a sell-off in either stocks or bonds, using inverse index funds and ETFs.

This strategy is one of several we offer that gives us maximum flexibility in all market conditions … both good and bad. To learn more about this innovative strategy, we’ve put together a special report for you with more details. You can get a free copy here.

Remember: A sudden market plunge of 20 percent or more this summer or sometime this fall would not surprise us at all, but it could prove to be a jarring wake-up call for unsuspecting investors.

Taking proactive risk control measures now within your portfolio may prove valuable in helping protect your wealth during a cycle of more pronounced market turmoil ahead.

Good investing,

Mike Burnick

Director of Research & Client Communications

Weiss Capital Management

^†Weiss Capital Management (an SEC-Registered Investment Adviser) is a separate but affiliated entity of Weiss Research, the publisher of Money and Markets. Both entities are owned by Weiss Group, LLC. Weiss Advice is a publication of Weiss Capital Management.

¹ Wall Street Journal: Worries Rebound on Bull’s Birthday, 3/10/09

² Gluskin Sheff Economic Commentary, 3/1/10

³ Ibid.

⁴ Gluskin Sheff Economic Commentary, 3/1/10

⁵ Wall Street Journal: Rally Is a Tale of Wounded Stocks, 3/15/10

⁶ Ibid.

⁷ Ibid.

⁸ Hirsch; Stock Trader’s Almanac, John Wiley & Sons, Inc. 2005

⁹ Merrill Lynch Market Analysis Comment, 1/5/10

For more information and archived issues, visit http://www.moneyandmarkets.com

Money and Markets (MaM) is published by Weiss Research, Inc. and written by Martin D. Weiss along with Nilus Mattive, Claus Vogt, Ron Rowland, Michael Larson and Bryan Rich. To avoid conflicts of interest, Weiss Research and its staff do not hold positions in companies recommended in MaM, nor do we accept any compensation for such recommendations. The comments, graphs, forecasts, and indices published in MaM are based upon data whose accuracy is deemed reliable but not guaranteed. Performance returns cited are derived from our best estimates but must be considered hypothetical in as much as we do not track the actual prices investors pay or receive. Regular contributors and staff include Andrea Baumwald, John Burke, Marci Campbell, Amy Carlino, Selene Ceballo, Amber Dakar, Dinesh Kalera, Red Morgan, Maryellen Murphy, Jennifer Newman-Amos, Adam Shafer, Julie Trudeau, Jill Umiker, Leslie Underwood and Michelle Zausnig.

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It should be pretty clear that I’m bearish on the bond market. The massive budget deficits and debts we’re racking up should hammer Treasury prices. So should the steadily growing concern about the credit quality of sovereign debts.

In fact, Moody’s Investors Service just weighed in again on that front. It warned that both the U.S. and the U.K. are “substantially” closer to losing their AAA debt ratings. A key reason? Debt servicing costs — ongoing interest and principal payments — are surging!

By 2013, the U.S. will have to spend more than $1 of every $10 in revenue on debt service under Moody’s “baseline scenario.” The agency’s “adverse” scenario is even worse — calling for 15 percent of revenue going towards covering our debts. And we all know the ratings agencies have historically been too timid when it comes to their predictions. If anything, things will turn out worse than projected!

Now I want to talk about yet another challenge for the bond market. It’s a traditional one — better economic data.

Recovery May Be Bought and Paid for in
Washington … but It’s Gathering Steam

Let’s be up front about one thing: This is not the kind of blockbuster economy we had in the late 1990s. It’s an economy whose growth has been bought and paid for in Washington — using borrowed money! That means it will eventually collapse under its own weight.

But that hasn’t happened yet. Instead, all the latest data suggests the recovery is gathering steam …

• Housing starts and building permits are holding steady in the 550,000 to 650,000 range, rather than deteriorating further. This fits with the major housing market bottom call I made almost a year ago.
• Industrial production rose 0.1 percent in February, while capacity utilization rose to 72.7 percent. That was the eighth month in a row of improvement in the utilization rate. It’s now at a 14-month high.
• Retail sales rose 0.3 percent, while “core” sales excluding autos climbed 0.8 percent. Both figures topped estimates.
• Even consumer credit rose by $5 billion in January, the first monthly rise in a year.

So on TOP of massive budget deficits … on TOP of the biggest rise in U.S. debt ever … and on TOP of increasing sovereign credit risk, you have an economic rebound underway. That’s going to put even more pressure on bond prices, and help to push interest rates higher.

Pressures on bond prices are building and bound to force interest rates higher.

I think that’s especially true now that the Federal Reserve has just weighed in AGAIN with a pledge to keep short-term rates at “exceptionally low levels” for an “extended period.” When the economy recovers, the Fed is expected to start normalizing policy. It’s not — and it won’t do so anytime soon. So I believe the bond market will do it for Chairman Bernanke instead, by driving long-term rates higher!

Some Bond Market Targets

Just exactly what kind of move in bonds do I foresee? Let’s put some targets out there!

Long bond futures were recently trading around the 119 price level. I think we’re headed to the low 100s by the end of 2010.

What about the benchmark 10-year Treasury Note? The yield there has been hanging out in the 3.6 percent – 3.7 percent area for a while. That won’t last. I expect to see the high 4s later this year.

As for other long-term rates, like those charged on 30-year fixed mortgages, they’re going up, too. I’d lock in the 5 percent-and-change rates available right now … before they’re gone! You’re going to be looking at something in the 6s by this time next year.

Bottom line: The days of cheap, ultra-low rates are behind us. It’s time to pay the fiddler!

Until next time,

Mike

Shorter term, economic development and corporate earnings are often relatively inconsequential for the stock market. Why? Economic changes are superimposed by changes in the fundamental valuation of the stock market. That means investors’ perceptions and their willingness to pay for risk and income streams are unsteady. Over time, investors are paying very different prices for the same earnings or dividend streams.

Fundamental Valuations Are Fluctuating Wildly

Look at the following charts showing the S&P 500 since 1926, the Price-Earnings-Ratio (PER) and the Dividend Yield. As you can see, both fundamental ratios have been fluctuating wildly. The PER was as low as 7 and as high as 20-something.

During the stock market bubble of the late 1990s the PER even rose to more than 40. And during the past quarters the PER rose significantly higher. Obviously investors came to the conclusion that the dramatic slump in corporate earnings, especially in the financial sector, was an extreme outlier which should not be taken into account to value the stock market.

S&P 500 Index, Kurs-Gewinn-Verhältnis, Dividendenrendite, 1926 bis 2010

Source: www.decisionpoint.com

These severe fluctuations mean that dividends, earnings, and cash flows are fetching very different price tags in different times. A simple example may demonstrate my point: Suppose the PER is as low as 7 and the stock market index is at 100 points. Keep earnings constant, but let the PER rise to its upper range at 21. Now the index rises from 100 points to 300 points. Let’s go a step further to a bubble PER of 42. In this case, the index doubles to 600 points. Same index, same companies, same earnings, but very different Price-Earnings-Ratios lead to this bandwidth of 100 to 600 points. And this bandwidth has been a reality in the past 30 years!

This example makes clear how secondary the economic background and even corporate earnings are to analyze and evaluate the stock market. But there is one major exception to this rule: Recession.

You Better See Recessions Coming

Whenever a recession is in the offing, you have invaluable economic information at your hand. This information is extremely important for the stock market and for your investment strategy. Why? Every recession has been accompanied by a severe stock bear market. That’s why I constantly look at my leading economic indicators, which enabled me to predict the recessions of 2001 and 2007-2009.

Right now they do not yet forecast an imminent recession. Hence, in the current situation it is ideal to painstakingly analyze the latest economic data release du jour. It may be fun to do so for those inclined. But it doesn’t help you in forecasting the stock market. I rate this regular data release ballyhoo as noise you can easily ignore.

History tells us that the economy is vulnerable to a renewed and relatively swift turn for the worse.

That doesn’t mean I do not follow economic development. But I am only interested in deciding whether the incoming data is starting to point to the end of the current economic rebound or not. Everything else is inconsequential.

We are living in a post bubble world. And history tells us that the economy is vulnerable to a renewed and relatively swift turn for the worse in this environment. After all, this rebound is the result of massive governmental stimulus, bail outs and market manipulation by the Fed.

It follows that this rebound is dubious and fragile. But even in this scenario the leading economic indicators will pick up some deterioration before the next down wave gets started. Currently, they are doing nothing of the sort.

Best wishes,

Claus

About Money and Markets

For more information and archived issues, visit http://www.moneyandmarkets.com

Money and Markets (MaM) is published by Weiss Research, Inc. and written by Martin D. Weiss along with Nilus Mattive, Claus Vogt, Ron Rowland, Michael Larson and Bryan Rich. To avoid conflicts of interest, Weiss Research and its staff do not hold positions in companies recommended in MaM, nor do we accept any compensation for such recommendations. The comments, graphs, forecasts, and indices published in MaM are based upon data whose accuracy is deemed reliable but not guaranteed. Performance returns cited are derived from our best estimates but must be considered hypothetical in as much as we do not track the actual prices investors pay or receive. Regular contributors and staff include Andrea Baumwald, John Burke, Marci Campbell, Amy Carlino, Selene Ceballo, Amber Dakar, Dinesh Kalera, Red Morgan, Maryellen Murphy, Jennifer Newman-Amos, Adam Shafer, Julie Trudeau, Jill Umiker, Leslie Underwood and Michelle Zausnig.

If you think that the sovereign debt crisis is mostly behind us … that America’s federal deficit is turning into a non-issue … or that we can just go back to business as usual … you’d better consider the drama now unfolding in the hard numbers just released last week:

February deficit: In February alone, the official U.S. federal deficit was a monstrous $221 billion, far greater than anything we have ever experienced in history.

Back in the 1980s, for example, President Reagan was plagued with the worst string of federal deficits ever recorded until that time. But with February’s deficit, Washington has managed to run up just as much red ink as it did in all of 1986, the single worst deficit year under Reagan.

Going back further, to the 1970s under President Nixon, we also had a rash of deficit spending that sent chills up the spines of economists. But last month’s deficit of $221 billion was more than TRIPLE the sum total of ALL deficits during the six years under Nixon.

Ever since America’s Declaration of Independence, deficit spending has been a recurring theme in Washington that invariably returns with a vengeance, especially during wartime. But it took 169 long years and seven major wars — from 1776 to 1945 — to rack up a cumulative deficit that matches the gaping budget hole of just 28 short days in February.

What does the government resort to in order to finance these humongous deficits? The answer is obvious …

Unprecedented borrowing: In just one week last month (ending 2/26), the U.S. Treasury issued …

• $32 billion in 7-year Treasury notes,
• $42 billion in 5-year notes,
• $44 billion in 2-year notes,
• $8 billion in 30-year TIPS bonds,
• $26 billion of 3-month bills,
• $28 billion of 6-month bills,
• $31 billion of 4-week bills, and
• $25 billion of cash management bills.

Grand total: $236 billion in government debt issued in a single week, the most in the history of the world.

This means that Uncle Sam borrowed new money — and replaced old debt — at the rate of $390,212 per second … $23.4 million per minute … and $1.4 billion per hour — around the clock!

It is a pace of debt issuance that simply cannot be sustained without disastrous consequences.

Why not? One reason is because of …

Dreadful crowding out of the private sector: As long as Uncle Sam is continuing to hog most of the available credit, it’s going to be increasingly difficult — sometimes nearly impossible — for most businesses and consumers to get their share of desperately needed funds.

Consider the fourth quarter of last year, for example. The Fed’s Flow of Funds report, just released on Thursday, tells the story …

Government borrowing was massive: The U.S. Treasury jumped into the credit markets and grabbed up new funds at an annual pace of $954.7 billion, while local and state governments raised $114.2 billion. Total government borrowing (after some reduction in gov’t agency bonds): $1,040.4 billion.

In contrast …

Most business borrowers were shoved out of the credit markets: Not only did they have a tough time getting new loans, they also cut down their EXISTING debts — either voluntarily or not — at the breakneck annual pace of $1,097.5 billion.

Millions of consumers were virtually ostracized from the credit market: They were forced to cut their existing mortgages at the annual rate of $365.1 billion and their consumer credit at the rate of $145.3 billion — a total annualized cutback of $510.4 billion.

Don’t underestimate the potential impact of this phenomenon on the economy and your investments.

Remember: We are not just witnessing a decline in new business and consumer borrowing — a trend that typically signals economic weakness. Rather, what we have here is …

• A decline to ZERO on a net basis! Plus …
• Massive pressure on consumers and businesses to actually PAY DOWN debts outstanding! Plus …
• Widespread defaults and foreclosures forcing the lenders to WRITE OFF massive amounts of debts.

My main point: It’s bad enough when you see credit flowing to consumers and corporations at a slower pace. But what’s happening now is far, far worse! Credit is actually being sucked OUT of the consumer and corporate economy at a torrid pace.

In fact, if you step back from the trees, you see an even uglier picture:

Huge amounts of credit being denied — or even taken away from — those who could fuel a recovery … plus, at the same time, huge amounts of credit being grabbed by federal and local governments to finance their giant deficits.

Now do you see why we’ve been saying all along that this recovery is bought and paid for by Washington?

Now do you see why a sovereign debt crisis — and future difficulties by governments to continue borrowing — is such a threat?

Heck! If the U.S. economy is just limping along even with massive government support, imagine the paralysis that’s likely if the government cuts back that support to curtail out-of-control deficits!

Bottom line:

First, the massive supply of government bonds on the way will drive their prices down and long-term interest rates up. Short of a miracle, we see little hope to avoid this outcome.

Second, as the federal deficit continues to grow out of control, the Great Credit Crunch is going to get even worse.

Third, don’t jump to the conclusion that the credit crunch will immediately topple the U.S. economy or stock market. With all the money that Washington has pumped in, a weak recovery can continue and stocks could still enjoy an extension of their rally.

But it cannot last. In the long term, corporate profits cannot be sustained without credit. If credit remains scarce, forget about a long, multi-year recovery … and brace yourself for a violent double-dip recession beginning later this year.

Good luck and God bless!

Martin

Warning: Enrollment to our Million-Dollar Rapid Growth Portfolio ends for good on Monday, March 22 — so that we can start allocating the $1 million the next morning, March 23. If you’re already on board, great! Or for more info, visit our brand new Rapid Growth website by clicking here.

About Money and Markets

For more information and archived issues, visit http://www.moneyandmarkets.com

Money and Markets (MaM) is published by Weiss Research, Inc. and written by Martin D. Weiss along with Nilus Mattive, Claus Vogt, Ron Rowland, Michael Larson and Bryan Rich. To avoid conflicts of interest, Weiss Research and its staff do not hold positions in companies recommended in MaM, nor do we accept any compensation for such recommendations. The comments, graphs, forecasts, and indices published in MaM are based upon data whose accuracy is deemed reliable but not guaranteed. Performance returns cited are derived from our best estimates but must be considered hypothetical in as much as we do not track the actual prices investors pay or receive. Regular contributors and staff include Andrea Baumwald, John Burke, Marci Campbell, Amy Carlino, Selene Ceballo, Amber Dakar, Dinesh Kalera, Red Morgan, Maryellen Murphy, Jennifer Newman-Amos, Adam Shafer, Julie Trudeau, Jill Umiker, Leslie Underwood and Michelle Zausnig.

This investment news is brought to you by Money and Markets. Money and Markets is a free daily investment newsletter from Martin D. Weiss and Weiss Research analysts offering the latest investing news and financial insights for the stock market, including tips and advice on investing in gold, energy and oil. Dr. Weiss is a leader in the fields of investing, interest rates, financial safety and economic forecasting. To view archives or subscribe, visit http://www.moneyandmarkets.com.

Since last November, the dollar has climbed steadily against a basket of currencies — most notably against the euro. And based on my analysis, I think it’s just the early stages of this trend.

In fact, for many of the reasons I’ve discussed in past Money and Markets columns, the weight of evidence suggests that we’ve likely seen the bottom in the dollar, with a multi-year bull market ahead.

That’s a high level view. But how are things shaping up on a shorter term outlook for the buck?

Let’s take a look at the four stages of this prospective dollar bull market and the immediate catalysts that should underpin its continued strength …

Stage 1:

Marking the Bottom

My analysis of the seven-year cycles in the dollar index suggests a cyclical bottom was marked when the dollar rallied sharply off of its all-time lows in 2008 driven by the uncertainty surrounding a growing financial and economic crisis.

Back then, capital fled all areas of the world in search of safety. And the dollar represented a safe parking place.

Stage 2:

Retracement Period

Investors shunned the dollar in search of bigger returns.

Then we had the deep retracement of 2009. The global economy was showing signs of stabilization that encouraged global investors to start dipping their toes back in the water … i.e. taking risk again. That’s when capital was reversed out of the dollar in search of higher risk, higher return assets.

And just when sentiment was about as negative toward the dollar as it could possibly get, we were introduced to the first sign of collateral damage from the financial/economic crisis and the unprecedented government responses: Crumbling government finances.

The first wobbling sovereign nation, Dubai, quickly splashed water on the face of an increasingly optimistic global investment community. All of the sudden the theories of a V-shaped recovery became fractured by the realization that the widespread economic crisis could run deeper — a scenario that many had conveniently and complacently dismissed.

Stage 3:

More Fear; More Risk Aversion

The dollar has benefited from weakness in the pound.

In recent months much of the dollar strength has been driven by fears of a sovereign debt crisis. And much of that strength has come at the expense of the euro and the British pound.

We’ve seen the dominos of a potential sovereign debt crisis line up, as I detailed in last week’s column. The tremors that started in Dubai, quickly turned scrutiny toward Greece and the other weak spots in the euro zone (Portugal, Italy, Ireland and Spain). And it appears increasingly likely to soon weigh on the UK economy and the British pound.

As we know, currencies don’t operate in a vacuum. They’re valued relative to the value of another currency. So, given the recent concerns about the future of the euro and the increasing spotlight on the next sovereign debt domino, the UK, the dollar is benefiting primarily because of the weakness of other major currencies.

And there’s another developing situation that should offer more fuel for the dollar …

Stage 4:

A Falling Yen

The euro, the British pound and the Japanese yen make up 83 percent of the dollar index, the often quoted proxy for the economic firepower of the U.S. dollar on a global level.

Japan’s deflation has taken a toll on the yen.

While the pound and the euro have been under assault in recent weeks, the yen has been pushed and pulled in a tug of war: Strengthening as capital flows out of risky euro/yen and pound/yen positions, and weakening on the basis of fundamental divergences between the recovering U.S. economy and the deflation-burdened Japanese economy.

But the fundamental evidence has been clearly favoring the dollar relative to the yen for some time. What’s been lacking is a catalyst to send it higher.

Well, over the past two weeks we’ve finally gotten a clear catalyst to sell the yen against the dollar.

Catalyst for Yen Weakness

Back in August 2009, it became cheaper to borrow dollars (compared to borrowing yen) for the first time in sixteen years. In the chart below, you can see when the short-term interbank borrowing rate for dollars (Dollar Libor, the blue line) crossed below the equivalent interbank borrowing rate for yen (Yen Libor, the red line).

Source: Bloomberg

What looks like a minor rate differential can have a major impact on market perception. Since that cross occurred, the dollar lost as much as 13 percent against the yen as global investors began favoring dollars, as opposed to yen, to fund carry trades … i.e. selling dollars to fund the purchase of high yielding currencies.

But as of last week, this differential has crossed back, once again making the Japanese yen the cheapest currency in the world to borrow. And based on the diverging policy paths of the U.S. and Japanese central banks, this differential should continue to widen in favor of U.S. rates and dollar strength relative to the yen.

So given the ongoing crisis surrounding the euro, the vulnerability of the British pound from a continued spread of sovereign debt concerns AND the catalyst for a weakening yen, I’m expecting the dollar to continue its upward path against major currencies both in the short-term and longer-term.

Regards,

Bryan

About Money and Markets

For more information and archived issues, visit http://www.moneyandmarkets.com

Money and Markets (MaM) is published by Weiss Research, Inc. and written by Martin D. Weiss along with Nilus Mattive, Claus Vogt, Ron Rowland, Michael Larson and Bryan Rich. To avoid conflicts of interest, Weiss Research and its staff do not hold positions in companies recommended in MaM, nor do we accept any compensation for such recommendations. The comments, graphs, forecasts, and indices published in MaM are based upon data whose accuracy is deemed reliable but not guaranteed. Performance returns cited are derived from our best estimates but must be considered hypothetical in as much as we do not track the actual prices investors pay or receive. Regular contributors and staff include Andrea Baumwald, John Burke, Marci Campbell, Amy Carlino, Selene Ceballo, Amber Dakar, Dinesh Kalera, Red Morgan, Maryellen Murphy, Jennifer Newman-Amos, Adam Shafer, Julie Trudeau, Jill Umiker, Leslie Underwood and Michelle Zausnig.

This investment news is brought to you by Money and Markets. Money and Markets is a free daily investment newsletter from Martin D. Weiss and Weiss Research analysts offering the latest investing news and financial insights for the stock market, including tips and advice on investing in gold, energy and oil. Dr. Weiss is a leader in the fields of investing, interest rates, financial safety and economic forecasting. To view archives or subscribe, visit http://www.moneyandmarkets.com.