Powell Report

GCOR Update For Monday, July 21, 2008

Several times over the past year I warned in GCOR that "the flip side of a global boom will be a global bust." There is simply no way to have one without the other.

Fortunately, it doesn't follow that the bust will last as long as the boom. Because fear is a far stronger emotion than greed, declines tend to move with a lot more speed. That can make for harrowing times but once the rebalancing of the books is complete, growth can return.

Unfortunately, I don't think the U.S. economy will do as well as the global economy because our country is in far worse financial trouble. For over 20 years, America has been fooling itself into believing that wealth could be created by juggling paper rather than by manufacturing real goods. Now those enormous houses of paper are coming apart. The only real surprise is that anyone could be surprised that it is happening.

A Tipping Point Has Been Reached

I think the failure of Fannie Mae and Freddie Mac were the tipping points for the U.S. financial service industry, not the end of the slide as some Pollyanna's would have you believe. Countless smaller institutions are in equally bad shape and are also teetering on the edge of failure. Over the next several months, we can expect to see many of them collapse. The Fed can't bail them all out.

In my opinion, the Fed should not bail out any failed institution. We are in the trouble we are in today because huge bailouts in the past prevented the normal purging of unsound practices that always follow a long expansion.

The current financial service crisis can be traced directly to the rescue of the banks and savings & loan institutions that the Fed engineered in the mid 1980s. As a result, the U.S. went into the current upturn with the uncorrected problems from that era. It's no wonder that the financial service industry is even worse trouble now than it was then.

The biggest problem with bailouts isn't financial - at least not directly. Bailouts reward crooks and flim-flam artists -some with highly sophisticated educations- and encourage them to carry on. It's no coincidence that many of the same people who created so much mayhem in the 1980s are also responsible for the current mess.

As a result, I have been telling people to hope the Fed will not be able to put the day of reconciliation off once again. As bad as the downturn may be now, the U.S. economy will come through it and recover - although the process may take several years. That may not be true next time if the books aren't balanced and America has an even bigger crisis.

Dollar Drop Likely To Accelerate

Last week I wrote that foreign investors are losing faith in the U.S. economy and are bailing out of the dollar. The further we slip into the red the worse the exodus will be.

At some point -and that may not be far away- we could see the run on the dollar that I and my colleague Richard Maybury have been warning about for several months. You absolutely must have made your move out of the dollar before then. There is no time to waste.

An equally big threat is that foreign investors will stop pouring billions of dollars into buying more federal debt. They know that the money will be used to bail out (translation: "support") some of the worst financial practices anyone has ever seen.

Less foreign money coming into the U.S. Treasury will mean that even more bailout dollars will have no backing whatever. That in turn will drive the value of the dollar even lower, and even fewer people will want it. It is a downward spiral that can only accelerate.

So, my bottom line advice again this week -with even greater emphasis- is that you should reduce your exposure to the failing U.S. dollar, and to do it now.

Two Currency ETF's Look Good

Last week I recommended opening a Swiss franc and/or a euro bank account -or their equivalent CDs- in a U.S. bank.

This week I will add two good foreign currency ETFs to my recommended list. Both are sponsored by Rydex Investments, a respected firm that also has many mutual funds. The ETFs track their currencies changing values to the penny.

For the euro I recommend CurrencyShares Euro Trust (FXE). http://finance.yahoo.com/q/pr?s=FXE For the Swiss Franc: CurrencyShares Swiss Franc Trust (FXF). http://finance.yahoo.com/q/pr?s=FXF

As with all ETFs, the CurrencyShares offerings trade on U.S. stock exchanges and can be bought and sold with a phone call or a few mouse clicks.

August GCOR Newsletter Due Out Soon

The August GCOR newsletter should be in the mail by Friday, August 1 or Monday, August 4. In the letter I will be introducing what I think will be the next multi-billion dollar boom. Watch for it.

About This Website

This is the third week the new GCOR website has been online. Several features are yet to be added. Please be patient while I flesh out this new service.

Meanwhile, I plan to publish a GCOR commentary and update each week, or more frequently as world and market events may require.