Don't Look Now: But the U.S.
Economy Is Bleeding Cash

Today's comment is by Sean Hyman, our Currency Director and editor of The Money Trader.

Dear A-Letter Reader,

These days, it seems like the U.S. economy has a gigantic hole in it, that slowly leaks all the cash out of the economy. Every time you turn around, the Fed has to inject another round of cash into the banking system.

When will it end? You know the economy is still shaky when the Fed has to allow the banks to borrow money just to ensure they stay working properly.

By this point, Bernanke and the rest of his Fed buddies must be afraid there won't be enough cash left in the banking system to handle the year-end buying this holiday season. Around this time, each year, consumers take more money out of their banks and get more loans to finance larger Christmas presents.

Some Fed Band-Aids Won't
Heal a Hemorrhaging Economy

So what is the Fed doing about it? They've still got one trick left up their sleeves: Repos. Repos are a repurchase agreement. Basically, the Fed agrees to temporarily buy back U.S. Treasuries, mortgage backed debt and agency debt for a period of time. So as they "pay" the banks for these, it injects cash into the U.S. banking system.

However, these are just short-term arrangements. The banks eventually have to pay back the Fed in about a month or so. For instance, the Fed purchased a series of these "repos" starting on November 28th and they'll continue doing this on into January.

So the banks will have to buy back the repos the Fed bought on November 28th on January 10th. So these are fairly short-term arrangements (or "band-aids" as I like to call them).

Repos are not permanent solutions to the problems plaguing Main Street or Wall Street. They help out when the economy experiences these tremors. However, by using them, the Fed is showing that they understand the economy is still shaky. In fact, in the last Fed minutes, they stated that the economy is "still fragile."

So what does this mean for the U.S. economy? It means we're not out of the woods yet. We're still on shaky ground. The big "Wall Streeters" know it too. That's why they're selling every stock rally that comes its way. So no one is convinced yet that we'll avoid a recession in America.

We also know that banks have been reluctant to lend lately. That's why the overnight lending rate between banks has exceeded the Fed's target the last seven of the past eight days.

The New York Fed stated that it would "provide sufficient reserves to resist upward pressures" on money market accounts through the year's end.

Cut, Cut, Cut

So evidently, the cash injections that the Fed started on August 10th haven't stopped yet. Also, the Fed will meet to discuss interest rates in two weeks. The Fed Funds futures predict a 90% chance of another rate cut from the Fed at that meeting. I bet they're right.

The Fed still needs to give the economy that "shot in the arm" that it needs. Cutting rates is one of the best ways to do it. However, even shots in the arm take time to take effect. Fed actions on interest rates take six to nine months to affect the economy. So don't look for them to be able to save the economy tomorrow. This stuff takes time.

So in the long run, look for more U.S. dollar weakness. The biggest beneficiaries of the dollar fall may be the euro and the Australian dollar.

Both of these economies have held up much better than the U.S., so the scared money may very well run to these shores as a temporary "safe haven." If so, look for EUR/USD and AUD/USD to head higher in the upcoming weeks to months.

SEAN HYMAN, Currency Director

EDITOR'S NOTE: Want to know more about how the Fed is spending our economy into the poorhouse? Interested in how the rest of the world "takes care" of their currencies? Sign up for our FREE currency E-Letter, My Two Cents for all these insights. More importantly, tune in each day to find out how to protect what's left of your dollar's worth. Click here to receive our currency insights 5 days a week - for FREE.

Reviewing My Picks and Pans in 2007

With a few weeks left of trading in 2007, it's time to tally my main investment recommendations this year.

Following dozens of investment editorials, interviews and several investment conferences and seminars, I've certainly had my share of picks and pans in 2007.

This hasn't been a bad year for my investors. Though, it was looking much better heading into November. This month has been the worst month for global stocks since September 2002. In November, the MSCI World Index fell an ugly 8.3% in U.S. dollars or 10.5% in euro terms.

What matters most to me in this business, and to my investors, is to fess-up to losses when they occur.

Wall Street, on the other hand, doesn't fess-up to losses. Rather, they hide their trading misfortunes. They let other suckers absorb the costs of their ineptitude. When I'm wrong, I admit it, so you can get out before it's too late. And when I'm right, I let you know so you can pull the trigger on your profits.

I'd have more respect for investment advisers if they publish a list of their "winners and losers" every year. They should let the public scrutinize the bottom line. Too many advisers like to focus on their winners and rarely discuss why they lost money on selective trades.

My favorite lame excuse lies with money-managers. These guys justify losing money in a declining market by pointing to the benchmark, which declined far worse. What a joke. That's not the way to manage money and explains, in great part, why the majority of actively managed products continue to trail the benchmarks.

My absolute worst call in 2007 was to buy the already smashed-out British REITs in August. That was after a huge 35% drop accompanied by insider buying and high-profile Middle East institutional interest.

The booby-prize goes to British Land (London-BLND). It's down more than 20% in just a few months - despite trading at a fat 30% discount to book-value when I first recommended the REIT. But the entire financial services sector and the FTSE index went into a swan-dive again recently with all sorts of fears plaguing the banking and mortgage sector.

Also, my timing was off on Japanese smaller companies (the cheapest index worldwide) and French blue-chip stocks.

On the plus side, the majority of my recommendations in 2007 are in the plus column. My advice was consistent in both The Sovereign Individual and Commodity Trend Alert: Stick to gold and energy stocks in 2007.

Last summer, ahead of gold's latest rally, I strongly urged subscribers to buy gold stocks. I've also liked the oil drillers since January, which are also in the double-digits. In late December, I recommended BHP Billiton (NYSE-BHP) to my Commodity Trend Alert subscribers. Now it's at almost a double. We've also played the grains, junior gold's and other resource stocks.

I've also loved the Canadian dollar for a while now. Since 2002, I predicted the loonie would ultimately hit par-value versus the American dollar. Many of my resource picks this year in Toronto, when converted back to U.S. dollars, have posted big gains in just a few months.

As we shortly conclude another year of investing, my advice is to protect your downside as markets remain highly volatile. I suggest placing a trailing-stop on all your stocks. If you own mutual funds, don't bother with stops. More importantly, look carefully at your long-term asset allocation goals. Restrict trading fees and buy good companies for the long haul.

If you want to learn how to effectively hedge a portfolio, I urge you to read December's issue of The Sovereign Individual, which features our new "Chaos Market Hedge Portfolio." If you're a member, look for your issue to be posted online this week.

ERIC ROSEMAN, Investment Director

P.S. Don't miss out on the great hedging opportunities in next month's issue of our members-only newsletter, The Sovereign Individual. Sign up right now, for a risk-free trial to The Sovereign Society and you'll receive the next 12 issues - packed with investment ideas to help you navigate the murky investment waters in 2008. Click here to sign up now.

Privacy & Rights

The Lazy Person's Path to Revenge:
Call Your Enemy a "Terrorist"

Itching for revenge on your business competitor, raucous neighbors or mother-in-law? Just tell the FBI your nemesis is a terrorist. Then just sit back and savor the results.

That's exactly what happened to a man traveling from Sweden to the United States. The man's father-in-law was angry with him for divorcing his daughter. So to seek his revenge, the father sent an email to the FBI accusing his ex-son-in-law of having links to al-Qaeda - just when the man had to travel to the U.S. on business.

Upon his arrival in Florida, authorities arrested the son-in-law. Police handcuffed him, placed him in a detention cell, and interrogated him for 11 hours. Police finally convinced themselves the man wasn't a threat to U.S. national security. But even then, authorities refused to allow the man to enter the United States. He was unceremoniously expelled and placed on a flight back to Europe.

Confronted by Swedish authorities for sending a libelous email, the father-in-law admitted playing a dirty trick. He said he didn't think, "The authorities were so stupid that they would believe anything. But apparently they are."

If accusing your enemy of being a terrorist isn't enough, you need to think bigger. Think money laundering. Simply accuse your enemy of laundering money for terrorists.

That's what happened to Naresh Goyal, the founder and chairman of Jet Airways, India's biggest private airline. In 2005, Jet applied for a license to fly to the United States. After a series of delays, Mr. Goyal learned that authorities suspected he was laundering money for al-Qaeda. Later, he learned that local competitors were behind the claim.

After a two-year investigation, U.S. authorities approved Jet's application for U.S. landing rights. But Goyal holds no grudge against his accusers. "Indians are very creative," he says.

And that's the best way to get your revenge. Simply be creative. Yes, it's illegal to make false accusations against your enemy or competitor. And, yes, it might get you into trouble. But, that apparently hasn't stopped many people from making false accusations.

The bigger question, of course, is what happens after the FBI or other police agency completes its investigation. I suspect that the Swedish man interrogated and denied entry into the United States is now on the government's terrorist screening database. Mr. Goyal may be a proud member as well.

It's not easy getting off the watch list. Even dead people can't get off of it. Saddam Hussein, executed in 2006, apparently remains on the watch list. The watch list also reportedly contains the names of several of the Sept. 11, 2001 hijackers killed in the attacks of that day.

In other words, if you finger someone as a terrorist, the likely result is that wherever they travel, for years if not decades to come, they'll experience delays, detentions, and possible denial of entry rights. Sweet revenge indeed, for their false accusers.

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