The Dollar Rebound

The last couple weeks have seen some extraordinary moves in the financial markets. Analysts are all over the board in trying to explain the movements. Depending on what camp they are in, there are a myriad of data to support whatever angle they are trying to prove.

I simply have no angle to promote or any ax to grind. I simply want to educate and help prepare those who see that there is very dark economic times ahead, times that will forever change history. Some may think that is melodramatic or alarmist, but the facts don't lie.

No one can deny the existence of the subprime mortgage collapse and the huge ripple effects it created and still is creating.

[Banks' losses from the U.S. subprime crisis and the ensuing credit crunch crossed the $500 billion mark as writedowns spread to more asset types.

The International Monetary Fund in an April report estimated banks' losses at $510 billion, about half its forecast of $1 trillion for all companies. Predictions have crept up since then, with New York University economist Nouriel Roubini predicting losses to reach $2 trillion.]

No one can deny the price of oil rose to a record $147.27 on July 11, 2008, causing inflationary pressures on goods and services combined both now and well into the future. Estimates on real inflation prior to the record price were already in excess of 14% for 2008 and growing.

No one can deny the real estate market is in serious trouble and looking to get worse before it gets better. This includes the much tougher lending requirements across the board and the financial insolvency trouble facing Freddie Mac and Fannie Mae.

[Fannie Mae, the largest U.S. mortgage- finance company, cut its dividend 86 percent after posting a loss that was more than three times analysts' estimates and said the worst housing slump since the Great Depression is deepening.

Fannie, which owns or insures about 25 percent of all U.S. mortgages, said credit losses rose 66 percent to $5.3 billion as delinquencies rose. Chief Executive Officer Daniel Mudd forecast a "significant'' increase in reserves for the rest of the year as the housing market deteriorates. Fannie's results, combined with a loss by Freddie Mac that was also wider than analysts anticipated, may boost the need for Treasury Secretary Henry Paulson's bailout plan announced last month.

Fannie Mae, will stop buying or guaranteeing Alt-A home loans, such as those that require little or no documentation of borrower incomes or assets, by yearend.

Freddie Mac, which reported an $821 million quarterly loss Aug. 6th, said that Alt-A mortgages were the biggest reason for a surge in its foreclosure losses. The delinquency rate for the $190 billion of the loans owned by Freddie Mac or underlying the bonds the company guarantees jumped to 3.7 percent on June 30, from 1.8 percent on Dec. 31.]

No one can deny that the US dollar index slumped to a near record low of 71.87 on July 15, 2008, the lowest since the all time low previously set in April. Since then, the dollar has staged a remarkable turnaround and have gained for the last 9 consecutive days closing today at 76.39.

Many factors have contributed to that. Oil has dropped more than $30 a barrel in the last 3 weeks. There are a number of reports indicating weak economic data from Europe and the European Central Bank saying that economic results will be weak well through the third quarter of 2008 and hinting that they will likely lower interest rates sooner rather than later.

Also, the United Kingdom reported today that claims for jobless benefits climbed 20,100 in July to 864,700, the biggest increase since December 1992. Unemployment grew for the sixth straight month. The Bank of England signaled it could cut interest rates sooner rather than later. The pound sterling's trade-weighted index hit its lowest since January 1997. The pound dropped more than 3 cents against the dollar today to a 21 month low.

All of these factors provide some relief for the dollar, but none of them have changed the economic conditions in the US except for the decrease in the price of oil. Thus, the recent rebound of the dollar will very likely be short lived.

No one can deny that there are many banks and financial institutions in trouble. From Bear Stearns, IndyMac, Freddie Mac and Fannie Mae as previously mentioned, Wachovia, and more than 90 other banks have very precarious balance sheets due to bad credit risks. The FDIC is there to bail out troubled institutions, but how long can $49 billion in insurance funds insure more than $3 trillion in deposits if many institutions start failing?

I could certainly go on and on, but I think you get the point. All of these occurrences are leading to a 'perfect economic storm' that we will have to reckon with sooner or later. For those who ignore these warnings will simply be one of the nameless masses that are swept away.

So, will you heed the warnings and take steps to be prepared?

As always, the choice is yours.

As mentioned yesterday, I will not post any more entries the rest of the week due to travel plans.

then if anyone hears the trumpet but does not take warning and the sword comes and takes his life, his blood will be on his own head. Since he heard the sound of the trumpet but did not take warning, his blood will be on his own head. If he had taken warning, he would have saved himself. Ezekiel 33:4-5 (NIV)

If you have questions or comments, please feel free to contact me at the address below.
Email: DeltaInspire@panama-vo.com