"Those whom the gods would destroy, they first encourage to borrow cheaply"

Today's must read on the next financial panic.

Prediction #1: U.S. Dollar Bears Will Remain On the Run in 2012

Since its March 2008 low the U.S. Dollar is up 13% against a basket of the world's most widely held currencies, including the yen, sterling, franc, loonie, krona, and of course the beleaguered euro.

How is this a problem for portfolio manager Axel Merk, the self described "Authority on Currencies"? After all, according to Merk's written after-the-fact letters he claims to have traded out of and back into the euro just in time to surf its wild gyrations.

Merk moved his fund management business to California a number of years ago, where he has been beating a steady 'demise of the U.S. dollar' drumbeat ever since. This past year Merk Funds even took to deploying amusing anti-Dollar cartoon propaganda while routinely touting the superiority of the euro over the U.S. dollar.

Continue reading the full article at Seeking Alpha here.

SNB Gift-Wraps $2,000/oz. Gold

Perhaps not since World Bank President Robert Zoellick publicly advocated a return to the gold standard last year has the barbarous relic received such a sure-fire price boost.

Today the Swiss National Bank declared that it will print an "unlimited" number of Swiss francs (because fiat central banks can do that) to prevent further appreciation of the franc.

The Swiss franc had been considered perhaps the ultimate safe haven currency, alongside perhaps to a lesser extent the Japanese yen. Both have been appreciating steadily over the past year+ in the face of periodic interventions by their respective central banks. Both countries have trade surpluses, which creates a built-in demand for their currencies as domestic firms repatriate funds. The Japanese and Swiss banking systems are also considered relatively strong. However with the SNB's decision to crank up the printing press and peg the franc to the euro at 1.20 francs will undoubtedly increase pressure on the Bank of Japan to do something similar.

Strangely, the price of gold dropped dramatically on the SNB news before rationality returned and pushed gold back up to an all-time record high of $1,923/oz. (although it did finish the day below $1,900).

Bottom line: today's news is very bullish for gold, and my prediction, made just under a month ago when gold reached $1,700/oz., that the yellow metal would push forward to $2,000/oz. should now materialize sooner than anticipated.

Video: A Bleak Long-Term Economic Picture for Japan?

Predicting the Land of the Rising Sun's future is a complex undertaking, and many a financier has had both their belt and suspenders handed to them from betting on Japan's economic implosion.

I'll admit up front that I don't have a ready prediction that X will happen by Y date. But here are some of the macro elements to keep in mind:

1. Japan is a major surplus country, meaning it produces and sells much more than it consumes. Much of the savings the country generates, which have to go somewhere, have been invested at home in Japanese Government Bonds (JGBs) and abroad in U.S. dollar denominated assets. Alongside China, Japan is the second largest holder of U.S. treasury debt with as almost $1 trillion in holdings.

2. While Japan has a breathtaking 200%+ public debt/GDP ratio (the highest in the developed world), 94% of that debt is Japanese owned. What this means, basically, is that so long as the Japanese keep buying JGBs then Japan's fiscal future is in its own hands. In contrast, the U.S. depends on foreigners to finance a large portion of its federal deficit. The thrifty Japanese save enough to finance their Keynesian stimulus policies all by themselves and still have plenty left over to spot Uncle Sam!

Now, the Japanese savings rate has been steadily declining to what would seem an unsustainable level in terms of maintaining the current fiscal course.

Continue reading the full article published on SeekingAlpha here.

World Bank President Zoellick Gift Wraps Gold $1400+

'Tis soon to be the season of giving, and the monetary gifts to gold owners are getting off to an early start.

Not to be outdone by Federal Reserve Chairman Ben Bernanke's recent 'QE2' goody bag, World Bank President Robert Zoellick has penned an editorial in the Financial Times calling for a global monetary debate on returning to a gold standard of sorts.

Zoellick's proposal is for a basket of the world's leading currencies - the dollar, euro, yen, pound, and renminbi - to be paired with gold (which he describes as "an international reference point of market expectations") in a new Bretton Woods styled monetary order.

Gold really didn't need much of a reason to finally poke its head above $1400/oz, but Zoellick's op-ed and the gold chatter that's sure to follow will almost certainly provide the nudge.

Meantime gold owners can sit back, grab a bag of popcorn, and enjoy what's about to happen to the price of your Au.

Bank of Japan Intervention: What Happened Last Time? What's Next?

On Tuesday the yen traded at ¥82.88 yen per dollar, its highest level since May 1995. As predicted the Japanese government decided it had seen enough and instructed the Bank of Japan (BOJ) to 'intervene in the currency market' (aka print money). This caused the yen to quickly fall back to ¥85 per U.S. dollar level.

The BOJ also confirmed that its intervention -- reported to be in the ¥300-¥500 billion range ($3.61-$6.02 billion) -- will go unsterilized, which means that the BOJ will not seek to withdraw the new yen it has 'printed'.

Currency Traders Now Have an ¥82 Yen Bullseye

Via Bloomberg, Japan’s Chief Cabinet Secretary Yoshito Sengoku communicated two very important pieces of information:

1. ¥82 yen per dollar is "the line of defense to prevent currency strength from harming the economy"
2. "The government is seeking to gain the understanding of the U.S. and Europe for the intervention"

We now know the Japanese government's pain point (¥82 yen per dollar). Providing the market with an exact target -- not unprecedented for Japan (see below) -- could prove to be a mistake.

We can also infer from the "seeking to gain the understanding" comment that the BOJ's intervention was not only uncoordinated, but also without the consent of other central banks. It would be surprising if the Fed and ECB signed off on the BOJ's intervention. Europe, the U.S. and other nations are mired in a slow recovery and seeking export led growth. Japan's currency intervention makes U.S. and European goods more expensive in Japan.

What Happened Last Time the BOJ Intervened?

It was six years ago when the Bank of Japan last intervened in the currency market. In 15 months through March 2004, the BOJ sold ¥35 trillion yen ($421.7 billion) for dollars. What was the BOJ trying to accomplish? As noted back then Economy Trade and Industry Minister Takeo Hiranuma said "a dollar at ¥115.00 is the ultimate life-and-death line for Japanese exporters".

Two comments:

Today's Feast for Bears

Stock market bears were handed ample fodder today:

• Comments from Nobel Prize winning economist Joseph Stiglitz on how Europe is at risk of a "double dip" recession due to ill-timed government budget cuts. Professor Stiglitz  has been supposedly advising Greek officials nearly every day since their debt crisis erupted this spring -- ignore this insider's words at your own risk.
• The safe haven Japanese yen rallied to a 15-year high versus the U.S. dollar at 83.59, well beyond the psychologically important 85 level. The yen also hit a nine-year high versus the euro at 105.43. If the yen appreciates further towards 80 vs. the Dollar, the Bank of Japan will probably be forced to intervene with or (more likely) without G7 coordinated action. 
• While the yen is rallying the Japanese stocks are in a bear market, with the Nikkei down over 20% and under the psychologically important 9,000 level.
• Another safe haven currency, the Swiss franc, just rallied to an all-time high against the euro at 1.30 as once again it appears money is flowing out of the EU and into Switzerland.
• Unless you've been hiding under a rock today -- understandable if you've got a lot of equity tied up in the value of your home -- you probably already saw that July home sales figures were abysmal and indicate room for a much further decline in housing prices. Further significant declines in housing -- some estimating another 10-30% down -- may trigger a significant increase in strategic defaults.
• Money continues to pour into bonds as the yield on the U.S. 10-year note punched all the way up to 2.47%, the lowest level since the stock market was pricing in financial armageddon in March 2009.

What does this all mean?

The Yen: A Little Less Conversation, A Little More Action?

The value of the yen just hit its highest level against the U.S. dollar since Nov. 27 at 85.32, which is close to its 15-year high of 84.82.

While recent news from Japanese exporters has been relatively positive, a higher value yen could threaten Japan's fragile economic recovery. A strong yen makes the price of Japanese exports less attractive in key foreign markets, such as the U.S.

In the past simple jawboning by Japanese officials has proven effective at 'talking down' the yen. On cue Yoshihiko Noda -- Japan's eighth Finance Minister in the past three years -- said that he is “closely watching” the currency market and that the yen’s current movement “is a little one-sided”. And as I write the yen is trading off a bit to 86.24.

However, given the serious discussion of QE 2.0 or QE Lite in the U.S., will talk alone be enough to keep the yen from rising this time?

Some Japanese exporters already appear to be looking for 'a little less conversation, a little more action' from the Bank of Japan. Yesterday Nissan Motor Co. Chief Operating Officer Toshiyuki Shiga said "with the current rate there would be an impact on our orders for export. I hope each country will cooperate to minimize the impact of the yen’s strength, and I hope the government (Japanese) will make such efforts.”

The last time the Bank of Japan intervened in a significant way was in 2004. I recently interviewed Axel Merk, portfolio manager of the $500 million Merk Currency mutual funds. Merk contrasted the Bank of Japan's currency prowess with the recent ineffectual efforts of the Swiss National Bank (SNB), which failed miserably in its attempts to halt the rise in the Swiss Franc against the Euro. Unlike the SNB, the Bank of Japan can "do real damage" to the value of the yen. Earlier this year Merk removed the yen from his list of "hard currencies" when it appeared the government might finally get organized enough to put pressure on the Bank of Japan to devalue the yen.

I wouldn't expect Bank of Japan intervention unless the yen breaches the 84.83 level for a sustained period. For investors, there are several yen ETFs to choose from.

In the meantime, here's Elvis: