The Soaring Canuck Buck Will Come Back to Earth

Today's comment is by Canadian native Eric Roseman, our Investment Director and editor of Commodity Trend Alert.

Dear A-Letter Reader,

For the first time since 1976, the Canadian dollar is now trading at par-value versus its largest trading partner, the United States.

On Friday, the Canuck buck or loonie, closed at par-value vis-à-vis the U.S. dollar, meaning one Canadian dollar equaled one American dollar. The last time both currencies traded at par was in 1976. At the time, the secessionist Parti Quebecois was elected in Quebec and commodities prices were in the midst of a secular bull market.

And Canadians are definitely proud now that history is repeating itself.

The news media in Canada has taken the loonie's new flight by storm since last Friday. A newfound pride has erupted across a country which has been almost perpetually saddled with a weaker currency against its much larger American brother.

Since hitting a 125-year low in February 2002, the loonie has surged a cumulative 62% versus the sagging greenback. Meanwhile, the greenback is now in its sixth year of a secular bear market versus most foreign currencies and gold.

Canada Now a Petro-Currency

Since discovering bitumen or tar sands in Northern Alberta, Canada has become the world's second-largest source of untapped oil reserves after Saudi Arabia.

It's no surprise the Canadian dollar shadows the price of spot crude. On any given trading day, the loonie tracks the performance of West Texas intermediate crude oil, while the U.S. dollar is slammed by economic trends.

Indeed, Canada's energy exports have skyrocketed this decade amid declining global reserves and China's insatiable appetite for refined Canadian energy products and raw materials.

As a result, Canada's trade balance has been in a secular uptrend since 2002 while its fiscal performance has been the envy of international markets as tax receipts surge. Despite the country's enviable twin surpluses, both Liberal and Conservative governments have refused to meaningfully reduce the country's stifling tax burden, further bulging Canada's budget surpluses.

We Can Thank the Drowning
Buck for the Flying Loonie

Since 2002, I've repeatedly predicted a par-value currency relationship between the world's two largest trading partners. Well, it's finally here.

The Canadian dollar has appreciated mainly because of a healthy balance sheet and booming commodities prices. But part of that currency gain can also be attributed to protracted U.S. dollar weakness. The American dollar has been in a virtual freefall over the last five years and has declined versus almost every currency in the world since 2002.

America's fiscal burden continues to drag down growth as a tirade of bearish developments encourages dollar-based selling. The ongoing mortgage-backed crisis, housing woes, the Iraq war and exorbitant budget and trade deficits are encouraging traders to dump the buck. Canada, on the other hand, has dramatically reduced its foreign debt over the last decade and continues to record trade surpluses almost every quarter.

But be careful. The soaring value of the Canadian dollar will exact a toll on Canada's economy - eventually.

Soaring Loonie Comes at a Price

A strong currency inhibits manufacturing exports as cheaper currencies in foreign markets compete to sell similar goods and services.

Canada does harbor a plethora of raw materials to feed and grow the world's emerging markets. But the country's non-commodity exports, including forestry, continue to bleed a slow death in 2007. The strong loonie is resulting in mounting manufacturing job losses, rising labor discontent and seriously damaging the country's export platforms in Ontario and Quebec.

So while Western Canada, loaded with natural resources, continues to benefit from the commodity bull market, the rest of the nation climbs deeper into a hole. The rest of the exporters are struggling with an expensive currency and the government's reluctance to cut tax rates. Business leaders have also increased the call to lower interest rates this year to suppress the loonie's value and alleviate manufacturing losses. Indeed, until the U.S. sub-prime crisis resurfaced in July, the Bank of Canada had been tightening or raising interest rates.

For now, Canada is enjoying a strong currency. It is the best-performing dollar-based unit in 2007. The Canuck buck is up 17% versus the U.S. dollar and even rising 8% versus the almighty euro.

But at some point over the next several months, I expect the loonie to finally head back to earth. I see a U.S. economic slowdown and easier Bank of Canada monetary policy clipping the loonie's wings. Never in Canada's history has it managed to defy a U.S. economic slowdown or recession.

The loonie has further to sail and will probably fetch a premium against the sagging greenback. But 12 months from now, I'll bet the Canadian dollar will buy less, not more, American dollars as the economy slows amid declining trade-flows between both markets.

ERIC ROSEMAN, Investment Director

P.S. My colleague, Jack Crooks, continues to find dynamite ways to play the American dollar's weakness for triple-digit profits with well-timed options. During the most volatile market moments this summer, Jack banked gains of 112% and 139% for his options subscribers. Test-drive his service today, so you can make these kind of profits while the dollar sinks.

Why the Fed's Dollar-Bashing
Move Doesn't Make Sense

I'm back in Europe at the moment, attending a conference just outside Paris, France.

I arrived in Paris last Friday morning after what seemed like a very long overnight flight (on a very crowded 747) to attend this conference. We're being graciously hosted by Bill Bonner, the founder and president of our parent company, Agora Publishing.

Bill was kind enough to open his beautiful 18th century Chateau to the 30 or so guests here in Courtomer, France, just over an hour and a half by train from Paris. The Château du Courtomer, Bill explained, was the last regal residence constructed for the nobility before the French Revolution. The Chateau is a very spacious and comfortable setting for the conference - the perfect setting to reflect upon recent events in financial markets.

The recent turbulence on Wall Street seems so far away in this idyllic setting in the French countryside. But I found myself using my lunchtime and the dinner hour to catch up on the early action from Wall Street...money never sleeps.

The Fed's easy-money move last week - cutting benchmark rates by a half-percent - was a leading topic for conversation over the weekend. Bill believes that the Fed is "desperate to avoid a recession."

But rather than helping prop up the U.S. economy with this action - as the mainstream press seems to think - the Fed has "kicked the buck into freefall, and with it, Americans' real wealth," according to Bill. He's got a very valid point that many investors still don't fully appreciate.

Of course gold, oil and other commodities have made spectacular moves in recent years. Also, international markets have far out-performed the U.S. markets. Most investors are quite well aware of this. Fundamental imbalances in supply and demand on a global basis are a key factor in higher commodities. Robust growth in many emerging markets accounts for why international stocks are soaring.

However, it's important to understand that the dollar's falling value helped propel these moves in a very meaningful way.

In fact, the dollar just made a new all-time low against the euro. Or as Bill correctly points out, when "measured against crude oil it hit another new record low - worth only 1/83rd of a barrel. As for commodities generally, the dollar also registered a new record low - at 441 on the CRB index."

Since global economies are being drawn closer together, you simply can't ignore the eroding value of the dollar, even if you never set foot outside the United States. Nearly every major commodity is priced in dollars. So as the dollar falls in value, oil, gold and other resources are pushed higher, just to remain at par. The price of everything we import goes up, reducing our purchasing power in direct proportion.

And when it comes to traveling the world, forget it. From the time the euro was first printed up to the present, an American in Paris has lost nearly 60% of his purchasing power, according to Bill's reckoning. "In the gold market, he has lost even more; his dollars from '99 will buy only one-third as much of the metal."

The Fed cut rates to help safeguard the domestic economy from recession. Or at least so the thinking goes. But this same easy money policy has only hurt the dollar and made Americans poorer relative to the rest of the world.

The Fed's policy just doesn't make much sense.

MIKE BURNICK, Senior Editor & Global Markets Analyst

EDITOR'S NOTE: It seems the Fed is willing to sacrifice your purchasing power in return for bailing out the major players on Wall Street. And while their efforts may have calmed the markets for now, the threat of recession remains. Needless to say, you can't count on the Fed's magic to protect your earnings. It's time to take matters into your own hands. Join us November 7 - 11 at the Atlantis Resort & Casino in The Bahamas for our upcoming Offshore Advantage Academy. You'll hear dozens of ideas to help shield you from the Fed's next big move - and even profit while the dollar falls. R.S.V.P. before Friday and receive a special early bird discount.

Privacy & Rights

Your Property is Presumed Guilty in Canada

For years, I've warned about the dangers of civil forfeiture laws. These dangerous laws allow police to seize your property, without accusing you of any crime.

The legal theory behind civil forfeiture is that your property is somehow "guilty" of a crime. Prosecutors accuse your property, not you, of that crime. And, if they find your property was somehow involved in or facilitated a crime, you lose it.

Civil forfeiture is a civil procedure, so you don't receive the same protections as a criminal defendant. Essentially, your property is "presumed guilty." If you can't prove that it's "innocent," you can lose it.

In the United States, civil forfeiture is a gravy train for local police and the federal government. Each year, billions of dollars of assets are confiscated from owners who in many cases are never charged with any crime.

If your property is seized, the proceeds don't necessarily go to the alleged "victims" of the crime your property supposedly facilitated. Instead, police get to keep it. This practice has created an insidious bounty hunter mentality. Instead of focusing on preventing crime, law enforcement agencies focus on seizing the richest, legally undefended assets they can find.

The attractions of a legal procedure like civil forfeiture to law enforcement agencies are obvious. And because of the "success" of civil forfeiture laws in the United States, other countries are bringing them into effect.

Case in point: Canada. In Ontario, a civil forfeiture law enacted in 2001 to be used against "organized crime" permits the province to seize assets if it can show on the balance of probabilities the assets were acquired directly or indirectly "in whole or in part" as a result of any illegal activity. Now that the law has been upheld by the Ontario Court of Appeal, the attorney general of Ontario predicts "exponential growth" in the use of the seizure powers.

Only, the law isn't being used against organized crime. Instead, it's mostly been used to confiscate "grow houses" where marijuana is cultivated. In numerous cases, the owner of the house has claimed not to be aware of the illegal activity. But innocence is no defense in a civil forfeiture, as the Court of Appeal decision held that the Canadian Charter of Rights - which guarantees that a person is innocent until proven guilty - doesn't protect property rights.

A recent report from the Ontario attorney general's office states that C$3.6 million in property has been seized in the past four years in 170 proceedings. Nearly C$1 million of these funds have been transferred to municipal police forces. And based on these results, lawmakers in five other provinces have introduced similar legislation.

If you live or do business in Canada - particularly if you own rental property - you can't afford to ignore these civil forfeiture laws. Policing for profit is a burgeoning enterprise in Ontario, and may soon be a reality in most other provinces as well.

How can you protect yourself? The easiest strategy is simply to keep your property heavily mortgaged. If there's little or no equity in the property, police have very little incentive to seize it. It's also a good idea to periodically inspect your property to make sure your tenants aren't using it illegally. Ontario law is typical in this regard: You may enter a leased residence you own if you give your tenant 24 hours written notice of entry.

Hear dozens of strategies to protect your property from "legal theft" - click here.

MARK NESTMANN, Privacy Expert & President,
The Nestmann Group
www.nestmann.com

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