The world has a fair deal of experience in dealing with small countries that can’t pay their bills. And the world is gaining more experience by the minute. Greece can’t pay its bills? Put together a funding package that comes at the price of domestic austerity and higher taxes. Ireland can’t pay its bills? (Or actually its banks’ bills?) Put together a funding package at the price of domestic austerity and higher taxes. And when the small countries can’t pay their bills again in a couple of years, go through the process over and then over again until creditors finally agree to take a haircut on their loans.

But what about a huge country, one that is at the center of the world’s economic and financial system, one that can be described as the world’s greatest power, one that controls the world’s supply of the global currency of exchange? What do you do with such a country that can pay its bills but shows no inclination to do so? And instead brazenly asks for more credit?

The world doesn’t have a lot of experience working its way through problems like that. But I think that’s the kind of problem that now confronts the world. The deal between the Obama White House and Congressional Republicans to extend the Bush administration’s tax cuts for another two years at the cost of adding another $1 trillion to U.S. debt says to the world that we have no intention of paying our bills. And pugnaciously adds, So what ya gonna do about it?

I’ve actually been able to find just one example in Western history that sheds any light on situation that the United States and the world finds itself facing. Read more

Dollar rallies while the euro stumbles: Which is good for some stocks

The U.S. dollar keeps running higher as the euro stumbles.

With financial markets unconvinced that the Irish bailout will put an end to a euro debt crisis that’s ready to engulf Portugal and Spain, the U.S. Dollar Index (DXY) pushed above 81 this morning for the first time since September 21. (The U.S. Dollar Index tracks the dollar against a basket of currencies that includes the euro, yen pound, Canadian dollar, Swiss Franc, and Swedish krona.) The dollar index had moved above 86 in June after beginning the year near 74.

The euro, on the other hand, has moved below support and has in fact dropped below its 200-day moving average as investors drove the yields for bonds in Spain, Portugal, Belgium, Italy, and Hungry—as well a Ireland—up this morning. The British pound has also dropped below its technical support at its 200-day moving average on news that the country will contribute to the Irish bailout, even though the United Kingdom does not belong to the euro block. That served just to remind the financial markets of the big exposure of U.K. banks to the Irish crisis. I’m sure it didn’t help either that the U.K. government lowered its forecast for GDP growth for 2011.

There’s plenty of U.S. news this week to confirm—or reverse–these currency trends. Read more

Time to re-think 2011.

The news of the last three weeks plus the market reaction to that news demands a rethink of investment strategy for 2011.

2011is going to be a lot less linear, a lot more volatile—if not necessary more or less profitable– than I thought it would be just a few scant weeks ago. 

Let me begin by contrasting what I thought then with what I think now and what those changes mean for how to approach 2011. Read more

With no strong trend out of today’s market, stocks hang on tomorrow’s news flow

Bounce or rally? We still don’t know.

The U.S. stock markets started with a strong bounce this morning. The Standard & Poor’s 500 index moved up 1.1% off the starting line.

Key was “news” from Europe that suggested Ireland might be closer to a rescue deal. That led to a retreat in the U.S. dollar against the euro. Which helped commodity and commodity stock prices. A rebound in China overnight helped tee up the European rally.

But the market couldn’t muster much follow through from there. The S&P bounced between 1198 and 1200 for much of the day before finally moving down to close at 1196.69.

As the day wore on, the market noticed that there’s still no actual deal in the Irish debt crisis. Read more

2000. 2007. 2011.

Is the Federal Reserve about to do it again? Is the Fed about to preside over the creation of another financial bubble?

Asset prices in the world’s emerging economies are climbing on the crest of a flood of dollars from the Federal Reserve. Central bankers in the world’s emerging economies certainly have started to worry about what happens if all the hot money flowing into their economies and markets suddenly starts flowing out. “As long as the world exercises no restraint in issuing global currencies such as the dollar,” Xia Bin, an advisor to the People’s Bank of China said, “then the occurrence of another crisis is inevitable.” (For more about reaction to the Fed’s policy see my post http://jubakpicks.com/2010/11/04/everybody-loves-bens-600-billion-at-least-in-the-short-term/ )

I think some degree of worry—less than full panic but more than polite concern—is appropriate at this stage. And that worry should play a role in shaping your investment strategy as the decade advances. In today’s post I’m going to lay out the Whoops, the Fed’s done it again scenario. In a Friday post I’ll tell you what I think you can do about that danger.

In 2000 I’d say the sin was one of omission. The Fed sat on the sidelines aware that a stock market bubble was building but it did nothing to head it off. Remember then Federal Reserve chairman Alan Greenspan talked about “irrational exuberance?” Well, it was all just talk. The Fed, which had the power to try to moderate the bubble by tightening credit on Wall Street, believed that trying to manage bubbles was futile. All a central bank could do was watch from the sidelines and then help clean up the wreckage.

And quite a bit of wreckage there was. The NASDAQ Composite Index peaked at 5048.62 on March 10, 2000 and it bottomed at 1114.11 on October 9, 2002. That was a loss, top to bottom, of 77%.

Eight years after the October 2002 bottom, the NASDAQ Composite is up handsomely—131% from October 9, 2002 to November 5, 2010.

But ten years after the bear market began in March 2000 the NADAQ has barely recovered half its losses. From a high of 5048.62 the market has clawed back to 2578.98 at the close on November 5. That means the NASDAQ Composite Index is still down 49%.

I’d put the Federal Reserve’s role in the financial and economic crisis set off by the U.S. mortgage crisis in a different class. The sin here was one of commission. The Fed played an active role in creating this global meltdown and in making it as bad as it was. (Or maybe that should be “is”?)

To clean up the wreckage from 2000, the Federal Reserve lowered short-term interest rates. Read more