The big news today will be the Federal Reserves interest rate decision of course, but some other big news has been released yesterday and today which I want to review. First off yesterday’s current account deficit and TICS data did little to inspire confidence in the dollar. The net figure was once again very weak and not nearly strong enough to fund the capital account deficit which came in at an eye popping -$172.9 billion in the fourth quarter or -$57.6 billion per month. If you add -57.6 to +  37.4 you come up with a -$20.2 billion dollar deficit. So not only are we giving our money to foreigners but they are no longer reinvesting all that money in America. So the only logical conclusion is a decline in the wealth of the U.S.A. Three things that really jump out at you when you look at the TICS report are; one that many official foreign investors put their money in stocks not bonds such as France,  and unless they like losing money my guess is they already sold a bunch of what they bought. The second and more disturbing is line number 29 which shows how much money is being sucked out of U.S. banks by foriegn investors, the figure was a whopping $83.6 billion in January.  Third there is the  wonderfully vague and  unscientific  line number 20  “Other Acquisitions of  Long-term securities” which is an uncounted and totally estimated unrecorded  amount of principal repayments to foreigners on U.S. government agency and corporate bonds. This made up figure came in at -14.7 billion on the month and shows that there is little accounting accountability at the Treasury and also that their is little appetite for corporate junk bonds and government agency bonds. The only reason there was a positive report at all was because of the $62.3 billion that U.S. investors pulled out of overseas markets in January. This to me is proof that foreign investment is not funding our current account deficit and this totally justifies the decline in the dollar we have been seeing on it’s own. When you couple that will major investment banks collapsing overnight and the money supply being increased at an astronomical rate it is no wonder the dollar is in the toilet.  Meanwhile Canadian manufacturing is looking good while the NY Empire Index came out abysmal and is getting progressively worse each month. Capacity utilization was much worse than expected and industrial production was also weak. Tell me again Hank, how is the “global economy” helping the U.S.? By allowing foreigners to buy our companies and debt and then pull their money out whenever they feel like it? I don’t think that is the solution at all to America’s problems. PPI was higher than forecast and you can count on it staying that way as long as commodities are being priced on weak dollars. Since Friday the market has all of a sudden decided to price in a 100 basis point cut during today’s meeting and I really hope the market is wrong. This will only serve to exacerbate our countries problems, not solve them and allow inflation to spin completely out of control. Even so with so many of their member banks on the brink of collapse the Fed can be expected to help their friends at the expense of the masses that they supposedly serve. If the rate cut is only 50 basis points or 75 then expect a rally in the dollar.

The Japanese yen is finally started to work towards a “real exchange rate” a floating rate that is not being manipulated by intervention. This is long overdue and will help to correct imbalances which hurt the U.S.A. and also Japan. With this in mind the yen is still a buy now that it has cleanly broke 100 and kept on trucking. This thing could easily make a run for 80 yen to the dollar in the next month or two.

The Fed sponored buy out of Bear Sterns and their sudden decision on Sunday to cut the rate at which they lend to banks and allow the investment banks they do business with to borrow money form them outlines just how close to collapse the entire financial system is. The house of cards that the Fed has spent 100 years building is starting to collapse, or is it? Seems like JP Morgan Chase is doing the same thing it was 100 years ago, buying up the competition after there is a run on them. So it really is just business as usual for the puppet masters on wall street. So what if the dollar goes down the tubes, never to recover because the Fed is pumping so much cash into the market. This just pays the way for the Amero that they want anyway so it doesn’t hurt them one bit. Of course if more banks collapse and the stock market crashes and there is a depression that would be a different story. I think at that point people would be lynching Bernake and company and I would be busy trying to find a tree big enough to hang them all from. So we will just wait and see if it is all going to work out the way the fed wants or if the wheels are going to come of at last. One thing is for sure, there is no reason to buy the dollar.

heads up big mouth Bernake is about to flap his jaws in 10 minutes and is likely to talk the dollar down even more in the process. The Fed already announced today that they would continue to pump worthless paper money into financial markets to please their masters. This of course is also negative for the dollar.

I still like the yen and would not be surprised to see USD/JPY end the day below 100. I don’t see any harm in riding it down there until around the time the market closes. There is a good chance that if it closes below 100 it will keep falling when the market reopens on Sunday. I still think it is prudent to exit before 5 pm EST however since most of us can’t trade again until 5 pm on Sunday and the market actually opens at 2 pm.

Well USD/JPY did indeed break 100 again twice since my last post but it has not been able to stay in the double digits.  The argument can be made that Japanese exporters are defending the 100 level but even they must realize the futility of doing so and should soon give up. Of course there are always speculators trying to “buy the bottom” perhaps just because it’s a round number and a mentally important level if for no better reason. Certainly today’s CPI report did nothing to bolster the case for raising rates with a 0% growth in inflation over last month. That is not to say however that there is no inflation this figure is just supposed how much more the rate of inflation is increasing and indeed the figure is still showing a 4% yearly increase which should be unacceptable to anyone who is truly attempting to foster price stability and protect the savings (if any) of the people.  Meanwhile the U.S. consumer confidence was dreadful today and really puts a big nail in the dollar’s coffin with this U.S. economy being based on consumption and people being very pessimistic and not spending or likely to spend anytime to soon. Frankly most people have no money to spend anyways, only about a trillion dollars worth of unused credit cards which can only bury the deeper in debt and increase their dependence to the banks who own their possessions. Meanwhile those who reject this financial slavery are punished as the money they have worked hard for and sacrificed to save is being eroded by inflation. With oil prices hitting new highs there is no reason to expect any of this to change in the future either. In a nutshell what I am saying is forget all the BS you have heard about a soft landing. Even the head of Morgan Stanley in Asia is now saying that there is a world of hurt coming down and compared our plight in the U.S. to Japan’s in the nineties. He contends that a weak currency is essential to correcting imbalances and allowing America to export more and consume less. Meanwhile I am calling for the yen and renimbi to strengthen so I guess we both want the same thing, for our trade balance to be truly balanced. Maybe if we had truly free trade this would be possible, Unfortunately NAFTA and the WTO do the exact opposite. For example NAFTA is over 1800 pages, and if that is free trade I would hate to see managed trade.  All NAFTA really does is pave the way for the North American Union, much like the economic cooperation agreements in Europe paved the was for the EU and the euro. It also actually increases regulation of trade and gives government more control over it. On the other hand the Chinese dictate what, when and where things will be sold in their country, where as there are no such restrictions on Chinese goods in the U.S. For example Will Smith was recently miffed when Chinese Authorities did not allow his latest blockbuster I am Legend to be screened there. Hmm no wonder piracy is rampant in red China…

By now it should be no secret that I am bearish on the dollar and bullish on the yen since I have been for months. A nice 3 cent move that I called for you guys yesterday night just as it started on GBP/JPY that I hope you were able to catch at least a piece of. After today’s nonsensical argument for a strong dollar by Paulson and the stuttering that immediately followed it expect the market to stabilize for a time. There are enough idiots out there to buy the manure he is selling about regulation and “strong economic fundamentals” in the U.S. This banter has helped the dollar gain against the Franc and Yen but now that both pairs are back to the levels they hit this morning after the weak sales data they are a short again. Look for USD/CHF to hit parity soon and USD/JPY to hit 100 and stay below it this time.

The Swiss kept rates on hold today even though the economy is doing very well there and beating all expectations.  This is not surprising for two reasons. First the Swiss Franc has appreciated against the Euro which was a key reason to raise rates before to attract capital and lower inflation on products imported to Switzerland from the Euro area. Second the turmoil from the debacle I described in the daily commentary is also affecting the major Swiss banks as well and the SNB is trying to accommodate them also. You could also argue that growth will slow due to decreased demand from key trading partners and the appreciation of the Franc in the coming quarter.  Although the one thing that all these central banks seem to parrot (possibly in the hopes that speculators will listen) is that commodity prices should fall soon. Given the fact that commodities are priced in dollars and the dollar is no where done crashing this is a completely unfounded statement. Once these commodities are priced in something else like Euros this scenario becomes much more likely.

What analogy should I use to describe our current economic situation in the U.S.? How about it’s our wedding day and we are the bride. Or perhaps Alan Stang said it best in Tax Scam when he said “we are being serviced in the way a bull services a cow” he used the IRS in that analogy and I can just replace that with the Federal Reserve system although I also agree with him about the illegal direct tax on labor. This is another key reason for our economic woes today and the demise of the middle class in this country. Today’s retail sales not surprisingly were weaker than last months and there is no reason to expect this trend to reverse itself any time soon.

Meanwhile “Hank” Paulson is speaking and actually points out that “every 6 to 8 years” our economy seems to go into the toilet. Hmm I wonder if that could be the result of the Federal Reserve’s manipulation of the markets and their penchant for bubble building. Those powerful and extremely greedy souls who run our economic system would rather suck the money out of the little guy’s pocket by manipulating investment prices so that the “end-user” of the investment product ends up paying a ridiculously high price for it and realizes it after the fact when it’s too late. Some of these poor souls actually borrow money to “get in” on the action and the bankers and other market manipulators use the greed of the little guy against them. The whole con is to convince the people that the worthless stock or other “asset” in question is solid gold and sell it to them at ten times what the banks and profiteers paid for it. Sadly the people who pull the strings at the Federal Reserve are part of and indeed are the perpetrators of this monumental con. The fact is the booms and busts have become MUCH WORSE since “the Fed” took power. Anyone remember the Great Depression? Which was caused in large part due to the irrational buying of stocks on margin and the buying of products on installment plans? The twist this time is that their own strategy bit them in the behind, and it is the banks that have been conned in this go round by the mortgage brokers and by defrauding each other. I don’t expect them to learn their lesson however; all they have learned is not to trust each other. This is why there is the liquidity crisis that we are hearing so much about. Sadly the Federal Reserve has taken it upon themselves to bail out the banks and players who own the Fed (go figure) and these institutions which by all rights in a truly free market would be out of business and with good reason will continue to thrive. They will continue to employ these same shady tactics in the future, but aim them squarely at the populace next time. So in essence their predation on greed led them to prey upon each other (whose greedier than a banker?) and when it blew up in their faces the Fed bailed them out. So I ask you, what good is the Federal Reserve at all if they only intensify the oscillation of economic cycles instead of muting the volatility as is their mandate and claim? If they only prop up companies which have no business staying in business and do not deserve too based upon their actions instead of letting someone else fill the void and possibly do a better job? If these institutions and everyone else knows that they can get away will all kinds of nonsense then what incentive do they or anyone else have to do things the right way? On the other hand when small banks took notice of why their large competitors collapsed they would hopefully have the wisdom to do things differently when they grew to fill the void. Indeed smaller and more competitive banks who were free to set their own rates would be good for the economy and would offer consumers more options and through increased competition better rates and service. That is the essence of free markets. Instead we see increased regulation and the blatant disregard of the Federal Reserve in favor of the large and monopolistic banks which set it up in the first place. This is a sad day to be an American and makes me ashamed to see our country come to this and to be a part of it by banking with a large bank. Maybe the people can make a difference if we all shift our holdings out of these corrupted behemoths and into small local banks that actually deserve our business.

Paulson is prescribing additional regulation as the answer to the current economic problems. Sadly this is the mentality of the government and in large part also the people. We have been brainwashed into believing the government intervention in free markets is the answer when history has shown this not to be the case.  In fact it was because of free markets that our economy was strong and we were the envy of the world. Paulson just said the economic fundamentals are strong in America and the dollar should strengthen as a result!? What bubble does he live in? I think I will actually start calling him bubble boy. What economy is he looking at? Certainly not the same one that currency traders around the world are looking at, otherwise the dollar really would be strong not poised to set all time lows.

As I said in the commentary I love GBP/JPY short at 206 but it has already fallen about 20 pips since I wrote that. No worries it has plenty of more room to fall and I still expect a test of 200 in the near future. Get short now and consider dumping at 20 and shorting again if it bounces off the figure/Fibonacci. If it doesn’t and there is good follow through go ahead and short it again. Of course you can just stay in the whole time too if you want, depending on your style. I would not recommend buying at 205 because I am not sure it will bounce on the figure. I would rather take profits there and if it does bounce short it again at around 205.25 or so to make an extra 25 pips on the way back down. Of course in that case you risk it moving another 20 pips without you before you get back in so it might not be worth it if you think the same as I do, I see this pair at 205 very soon.