END OF FIRST HALF OF YEAR

Well it's been some run. Can the market break out in the second half? This chart shows the bear market rally.

http://img269.imageshack.us/img269/6481/bearmarketrally.jpg

The big number I was waiting for today was the US Consumer Confidence level . The consensus was for 57.00 but the number came way lower at 49.30. How can they have confidence when their looking at their friends and neighbors loosing their jobs daily. Tomorrow the car sales numbers come out with an estimate of 8.6m

Another number that came out was the
US - Redbook (wk6/27,2009) Store Sales Y/Y change which came in at -4.30% . I'm not a bit surprised there as the personal savings number that came out last time was up.

Then later in the day we got the terrible news of the Delinquencies Rise in the prime mortgage market. This number rose by more than double. Prime mortgages 60 days or more past due climbed to 2.9 percent of such loans through March 31 from 1.1 percent at the same point in 2008. Well you can't really be surprised with the continued job loss of around 600,000 each time the number comes out. Also there are many that took wage cuts or are on short time that are now struggling with payments. Foreclosure filings crossed 300,000 for a third straight month in May, according to RealtyTrac Inc., and the U.S. economy has lost about 6 million jobs since the recession began in 2007.

Serious delinquencies on prime loans, which account for 2/3 of all U.S. mortgages, rose to 661,914 in the first quarter from 250,986 a year earlier, according to the report. Overall, mortgages 60 days or more past due rose 88 percent from last year, according to a report by the Office of the Comptroller of the Currency and the Office of Thrift Supervision .

Data also showed a continuing emphasis on preventing avoidable foreclosures to keep families in homes and mitigate losses, as servicers continued to implement more home retention actions (loan modifications and payment plans) than home forfeiture actions (foreclosures, short sales, and deed-in-lieu-of-foreclosure actions). Prime borrowers received about twice as many home retention actions as home forfeiture actions, while subprime borrowers received more than seven times as many.

“While I’m very concerned about the rise in delinquent mortgages and foreclosure actions, the shift in emphasis by servicers to more sustainable, payment-reducing modifications is a positive step that should show significant benefits in the coming months,” Comptroller of the Currency John C. Dugan said. “In addition, as the Administration’s Making Home Affordable program gains traction and helps offset the impact of this very difficult economic cycle, we should continue to see progress in future reports.”

“We continue to drill deeper into the mechanics of foreclosure prevention actions, thereby gaining more insight into what works,” said OTS Acting Director John E. Bowman. “This report provides a valuable roadmap for how financial institutions can best ensure that more Americans will stay in their homes.”
The report covers the performance of 34 million loans totaling more than $6 trillion in principal balances from the beginning of 2008 through the end of the first quarter of 2009. The impact of the increase in modifications, particularly those with reduced monthly payments, will be seen only in future data. Likewise, data presented in this report do not reflect modifications made under the Administration’s Making Home Affordable program, which was announced in March and began to be implemented after the reporting period, and changes to the Hope for Homeowners program.

Prices of U.S. single-family homes declined in April from the prior month,but the pace of the decline moderated, suggesting stability is emerging in someregions, according to Standard & Poor's/Case Shiller home price indexesreported on Tuesday. The index of 20 metropolitan areas dipped 0.6 percent in April from March,
after a 2.2 percent decline the month before, for an 18.1 percent downturn from
a year earlier.

For details, see [ID:nNYS005189] Reuters Messaging: ryan.vlastelica.reuters.com@reuters.net
0844 ET 30June2009-Bove raises price target on State Street

Remember the first shoe to drop was the sub-prime catastrophe . Could the job losses be the second. The banks were stress tested to 10% unemployment and I wonder how much of the prime mortgage was taken into account. Dare I say that we will get round two of stimulus spending.

Links for further news on this post http://www.ots.gov/

http://money.cnn.com/data/irc/index.html

Another interesting link for the day

http://www.tradingtheodds.com/

THE NEXT LEG DOWN FOR THE MARKETS ?

There are many chartist out there and the one chart most are watching is the Elliott Wave on the S&P. The thing about these charts is each person can have their own interpretation as in which leg we are actually in at a given time. Here is a link to a short lesson on the Elliott Wave Theory http://stockcharts.com/school/doku.php?id=chart_school:market_analysis:elliott_wave_theory









I'm also posting this Excerpt which I came across at this link http://www.elliottwave.com/freeupdates/archives/2009/05/01/Dow-Below-1000-Seriously.aspx









Excerpted from The Elliott Wave Theorist by Bob Prechter, published April 18, 2009 Yes, Below 1000 in Dollar Terms

Readers sometimes ask if I am serious about the Dow eventually falling below 1000. People can understand that the Dow can fall in terms of gold, but they are so convinced about coming hyperinflation that they consider the idea of the nominal Dow in triple digits to be simply out of touch with reality.

The primary reason I believe the Dow is going to fall that far is its Elliott wave structure, which calls for it. But I can also see a monetary reason for this event. The tremendous inflation of the past 76 years has occurred primarily by way of instruments of credit, not banknotes. Credit can implode.

The only monetary outcome that will make sense of the Elliott wave structure is for the market value of dollar-denominated credit to shrink by over 90 percent. Given the eroded state of capital goods in the U.S. and the depletion of manufacturing capacity, it is not hard to see why all these IOUs have a deteriorating basis of repayment. The future has already been fully mortgaged; it's time to pay. But there is no money to pay, only more IOUs, which cannot be paid, either. So the credit supply (after a brief respite) will continue to shrink, which means that wealth, and therefore purchasing power, will disappear along with it. In the broadest sense, this change will constitute a collapse in the "money supply."

Such a monetary background would be consistent with the Dow falling below 1000 in nominal terms. It is one of the reasons that Conquer the Crash is subtitled How To Survive and Prosper in a Deflationary Depression . To be sure, the central bank does have the capacity to print banknotes. But I expect that the final implosion in credit value will be so swift that the authorities will not act in time to counter it. They will continue to try to maintain the fictions of full face value for IOUs until they fail spectacularly to keep up the scam. Then they will start to scramble, but it will be too late.









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Now I personally don't think the DOW is worth following as it's way to easy to manipulate with so few companies in the index.You get a much better picture when you look at the S&P which has a better spread of companies to get the story of what is happening out there. Here is a chart of the S&P with an Elliott wave plotted on it.

Link for this chart http://img7.imageshack.us/img7/5790/elliottwave1.jpg

Here is a second chart which I put a Fibonacci retracement on . The RSI on this chart could easly pull down from here also the slow sto is in danger zone here. The last two trading days are showing selling vol but not exceptionaly high. I'm beginning to think that with the first half of the year complete it's time to be very vigilant. Many stocks have had a tremendous run and the most likely ones to fall hardest are in my view the banks. Some posted great profits for the last quarter, but as we know these didn't reflect the true picture as they changed the accounting rules . The toxic assets are still there and will have to come into play sooner or later.

Link for this chart http://img7.imageshack.us/img7/8756/fibspx.jpg





Again This is only for discussion . Read my disclaimer at the bottom of this page.

FAZ / FAS

UPDATE

29/June/09

I phoned Direxion on Friday and asked if they were doing a reverse split on faz/fas. The reply was it wasn't been discussed as of yet. The guy told me there was another etf that had been done and I probably heard about that but there was nothing happening as of yet with the two I asked about. That was on Friday June 26 2009. Then this comes to my attention today. I got it from Stockwits.com .

http://xml.10kwizard.com/filing_raw.php?repo=tenk&ipage=6396328

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This is one of the etf's I'm trading at the moment. I switch between the two depending on my view at the time in the market . Faz is a Direxion Daily Financial Bear 3X , while FAS is Direxion Daily Financial Bull 3X Shares . The investment seeks to replicate, net of expenses, 300% of the daily performance of the Russell 1000 Financial Services Index The fund will invest at least 80% of assets in securities that comprise the index. It will also utilize financial instruments that, in combination, provide leveraged and unleveraged exposure to the index. The fund is nondiversified.

As you can see when the purple line which is the 15-period ma crosses the yellow which is the 40ma it gives a buy signal . Also its the opposite when it happens vice-versa giving a sell. When I sell FAZ I tend to switch to FAS to catch the run on the other side. The 40 ma crossed the 15ma on faz yesterday near the close which was my signal to sell. I switched to fas for a $500 profit in a few min and closed out all trades. Nothing is guaranteed with this method but it has it's merits.

These etf's are dangerous to hold for a long time as I and many others have learned . They have a natural time decay so will over time get down to the possibility of a reverse split. They should be only used for a day trading play and certainly not held for a longer time period. A week is to long in my book.

Double and Triple ETFs Decay Their Value Faster - By Design

http://ezinearticles.com/?Double-and-Triple-ETFs-Decay-Their-Value-Faster---By-Design&id=2095978

Inverse exchange-traded fund

http://en.wikipedia.org/wiki/Inverse_etf

I'm showing this to let you know what I'm at these days and am not endorsing it as a play for you. Remember the stock market goes down as well as down lower, there has to be losers to have winners dont risk what you can't afford to lose . Everyone has their own ideas on how to play the markets and I for sure am no Jim Cramer thank God ;-) . Well that's my disclaimer done with, now do well with your trading........ Also not so long ago the Market was known to go up believe it or not.

You can get this chart here http://stocktiger.com/live/faz1540.php a site I would recommend as it is full of very useful tools for trading.

The tank is full of gas but the engine is seized

Well the old 1942 Packard Woody Wagon came to a stop a while ago, the tank was full of gas but the engine had seized. It looks like they have no spare parts left these days so the car is doomed to the scrap yard. That's the the same story for the US today the country of course was a shining light in it's prime and the engine was California . You can't go far without the engine and when you look at the state today you can only scratch your head and wish you had the parts to fix the problem.
In the last month California lost about 70,000 jobs and the total for the year to date is around 750,000. The Big O has said that the US needs to be creating 150,000 a month just to keep even. The banks were stress tested to a 10% unemployment rate nationally. The Big O has told us that unemployment will hit 10% this year. He is right if it even hits 12% as the 10% will have been achieved . Looking at the country as a whole this is how it stands with the Bureau of Labor Statistics it looks bad with some way worse than Cali
Alabama9.8%(p) in May 2009 Historical Data
Alaska8.4%(p) in May 2009 Historical Data
Arizona8.2%(p) in May 2009 Historical Data
Arkansas7.0%(p) in May 2009 Historical Data
California11.5%(p) in May 2009 Historical Data
Colorado7.6%(p) in May 2009 Historical Data
Connecticut8.0%(p) in May 2009 Historical Data
Delaware8.1%(p) in May 2009 Historical Data
D.C.10.7%(p) in May 2009 Historical Data
Florida10.2%(p) in May 2009 Historical Data
Georgia9.7%(p) in May 2009 Historical Data
Hawaii7.4%(p) in May 2009 Historical Data
Idaho7.8%(p) in May 2009 Historical Data
Illinois10.1%(p) in May 2009 Historical Data
Indiana10.6%(p) in May 2009 Historical Data
Iowa5.8%(p) in May 2009 Historical Data
Kansas7.0%(p) in May 2009 Historical Data
Kentucky10.6%(p) in May 2009 Historical Data
Louisiana6.6%(p) in May 2009 Historical Data
Maine8.3%(p) in May 2009 Historical Data
Maryland7.2%(p) in May 2009 Historical Data
Massachusetts8.2%(p) in May 2009 Historical Data
Michigan14.1%(p) in May 2009 Historical Data
Minnesota8.2%(p) in May 2009 Historical Data
Mississippi9.6%(p) in May 2009 Historical Data
Missouri9.0%(p) in May 2009 Historical Data
Montana6.3%(p) in May 2009 Historical Data
Nebraska4.4%(p) in May 2009 Historical Data
Nevada11.3%(p) in May 2009 Historical Data
New Hampshire6.5%(p) in May 2009 Historical Data
New Jersey8.8%(p) in May 2009 Historical Data
New Mexico6.5%(p) in May 2009 Historical Data
New York8.2%(p) in May 2009 Historical Data
North Carolina11.1%(p) in May 2009 Historical Data
North Dakota4.4%(p) in May 2009 Historical Data
Ohio10.8%(p) in May 2009 Historical Data
Oklahoma6.3%(p) in May 2009 Historical Data
Oregon12.4%(p) in May 2009 Historical Data
Pennsylvania8.2%(p) in May 2009 Historical Data
Puerto Rico14.4%(p) in May 2009 Historical Data
Rhode Island12.1%(p) in May 2009 Historical Data
South Carolina12.1%(p) in May 2009 Historical Data
South Dakota5.0%(p) in May 2009 Historical Data
Tennessee10.7%(p) in May 2009 Historical Data
Texas7.1%(p) in May 2009 Historical Data
Utah5.4%(p) in May 2009 Historical Data
Vermont7.3%(p) in May 2009 Historical Data
Virginia7.1%(p) in May 2009 Historical Data
Washington9.4%(p) in May 2009 Historical Data
West Virginia8.6%(p) in May 2009 Historical Data
Wisconsin8.9%(p) in May 2009 Historical Data
Wyoming5.0%(p) in May 2009 Historical Data
I wonder will we get the next stress test like we got the second Govt. handout after they found out that the first was way to low.

Then we have the debt of California coming up in the news. Will they default and what will the knock on effect be there. Moody's and Standard & Poor's rating merchants must be working overtime on this. California is responsible for around 14% of the total GDP for the US which was about $1.7 trillion ( in 2006). This shows how important the state is to the country as a whole. The Cali bond holders must be thinking cars too or should I say car companies GM comes to mind. The Municipal bond market could become the next tire to deflate.

Anyone interested in a car to restore . It has a tank of gas. Didn't think so


UPDATE

Deficit forces California to issue IOUs

http://www.ft.com/cms/s/0/1940d18e-64cf-11de-a13f-00144feabdc0.html?ftcamp=rss&nclick_check=1

From the Daily Bail

This is a high quality version of the Financial Services Subcommittee on Oversight and Investigations hearing of May 5, 2009.Rep. Alan Grayson asks the Federal Reserve Inspector General about the trillions of dollars lent or spent by the Federal Reserve and where it went, and the trillions of off balance sheet obligations. Inspector General Elizabeth Coleman responds that the IG does not know and is not tracking where this money is.

Amazing really .

Did you invest in your garden

All the talk about green shoots got the gardeners out this last few weeks . The markets have been fed a lot of fertilizer over a 4 month period. It's always the experts that get things moving. Then they appear to become complacent and send out the kids do do their part.

Of course the kids know everything and get straight to work. The peas are doing well wow look at the carrots and those onions are champions . So they invest in the top performers by adding a little feed here and there. Building up a nice portfolio for themselves. The big boy's like Goldman sucks and a few others tell them they did well with their choices and would be well fed this summer. They tell the kids to hold on for a while and that they will reap the benefits of their work. Little did the kids know that the big boys were starting to eat their early seeds....... and little less did they tell them where the fertilizer and plant food were kept. Perhaps the kids found the roundup and thought that's the stuff to use on our portfolios (some like to round things up)

Beware this garden could end up eating you

Meltdown coming ?

With this happening it tells a story.

Insiders Exit Shares at the Fastest Pace in Two Years .

This Guy is wrong

Protectionism

I noted this video on youtube today. It's by Jim and his stance on buying American . We have also seen of late a bit of a drive around the world of people advocating this idea to help their economies. Well history has shown that this in fact kills not only country economies but also global trade. Usually it's implemented by placing taxes or quotas on imports. What Jim asks for is just buy American . He says dont buy crap, thats ok nobody needs crap. He seems to think that there is an imbalance in wages between the 3rd world and the US He's right again. But he has to realize that as bad and low as the wages are in the 3rd world countries the US was paying it's workers to much too. As for no one is able to make good things as well as the US, he's very wrong. There are millions of examples of where the rest of the world are streets ahead of the US. The Auto industry just one example.

Has the World started the protectionist route ? I say most definitely yes. How you might ask. Well the most obvious thing is the bailouts of banks and most big business . The latest example is the state subsidies battle between the to big airline makers. Another protectionist route is also raising it's head and that is the battle ground of the Exchange Rates . That can be hidden in the quantitative easing that's going on now. Some think that the arguments for protectionism are good and will save them from the lows of a recession and carry them through . It could help in a short downturn but what the world is facing is something quite different . History shows that Protectionism has failed in a big way. Protectionism has also been accused of being one of the major causes of war.

Yen, Dollar Rise on Iran Concern, World Bank Recession Forecast

By Yoshiaki Nohara and Ron Harui
June 22 (Bloomberg) -- The yen and the dollar gained as concern the political tension in Iran is worsening and a World Bank report saying the global recession will be deeper than earlier predicted fanned demand for the currencies as a refuge.
The yen strengthened versus all 16 major currencies after Iran’s government detained five members of former President Ali Akbar Hashemi Rafsanjani’s family and said at least 17 people had been killed during protests over this month’s disputed election. The Australian and New Zealand dollars and South Africa’s rand fell the most against the greenback and the yen after the World Bank also warned that a flight of capital from developing nations will increase the number of jobless.
“There is growing uncertainty over what will happen in Iran that seems to be sparking risk aversion,” said Ryohei Muramatsu, manager of Group Treasury Asia in Tokyo at Commerzbank AG, Germany’s second-largest bank. “This would be supportive of the yen.”
The yen advanced to 133.24 per euro as of 7:49 a.m. in London from 134.18 in New York last week, after rising as high as 133.02. Japan’s currency strengthened to 96.13 per dollar from 96.27. The dollar climbed to $1.3855 per euro from $1.3937.
Japan’s currency gained 1 percent to 76.80 versus the Australian dollar and climbed 1 percent to 61.26 to the New Zealand dollar as splits within Iran’s ruling elite deepened. Parliament Speaker Ali Larijani yesterday criticized the top election body for siding with President Mahmoud Ahmadinejad and said most Iranians don’t accept Ahmadinejad’s electoral victory.
World Bank Forecast
The yen typically strengthens in times of financial turmoil as Japan’s trade surplus makes the currency attractive as it means the nation does not have to rely on overseas lenders. The dollar benefits as it is the world’s reserve currency.
The World Bank forecast in a report that the world economy will contract 2.9 percent this year, compared with a previous estimate of a 1.7 percent decline.
Japan’s gross domestic product will shrink 6.8 percent this year, more than the Washington-based bank’s prediction in March of a 5.3 percent decline, while the euro area will shrink 4.5 percent, almost twice as much as the previous forecast for a 2.7 percent contraction.
“The reality is that economic numbers speak for themselves, and the data in Europe has been more negative than elsewhere,” said Mitul Kotecha, Hong Kong-based head of global foreign- exchange strategy at Calyon. “Equity markets are really struggling at the moment. When equity markets struggle, the U.S. dollar generally benefits.”
Dollar Index
The Dollar Index, which tracks the greenback against the currencies of six major U.S. trading partners including the euro, yen and pound, gained 0.3 percent to 80.48.
The yen also rose as rising volatility damped demand for so-called carry trades. Volatility implied by one-month euro options against the yen climbed to 17.6 percent from 17.1 percent on June 19, indicating a greater risk of exchange-rate fluctuations that can erode profit on such trades.
In carry trades, investors get funds in a country with relatively low borrowing costs and invest in another with higher interest rates. The risk is market moves can erase those profits. The benchmark interest rate is 0.1 percent in Japan, compared with 3 percent in Australia and 2.5 percent in New Zealand.
Asian Currencies
Indonesia’s rupiah led Asian currencies lower as concern the global slump will be prolonged curbed demand for emerging- market assets.
“Markets are cautious about the global growth story,” said Thio Chin Loo, a senior currency analyst at BNP Paribas SA in Singapore. “The outlook is mixed and I don’t expect it to clear up for the next few days.”
Foreign investors sold $42 million more Indonesian stocks than they bought last week, and cut their holdings of local- currency bonds to 86.4 trillion rupiah ($8.3 billion) as of June 16, from 89 trillion rupiah on June 5, government and stock exchange data showed.
The rupiah fell 0.5 percent to 10,455 per dollar, according to data compiled by Bloomberg. It dropped 2.9 percent last week. India’s rupee lost 0.7 percent to 48.44 per dollar.
Analyst forecasts about the dollar have become the most scattered in two years, driving up foreign-exchange price swings and increasing risks that trading strategies and corporate hedges will backfire.
Redtower Asset Management, an Aberdeen, Scotland, investment adviser, sees the currency strengthening to $1.16 per Euro by year’s end, from $1.3906 today, as the world economy recovers from the first global recession since World War II. Standard Chartered Plc predicts a more stable economy will weaken the dollar to $1.55 as the Federal Reserve keeps its benchmark interest rate near zero to sustain growth, prompting investors to sell greenbacks for higher-returning assets.
Rising Volatility
The 39-cent gap between the high and low calls in Bloomberg’s strategist survey is almost double August 2007’s 20- cent divide. Wider fluctuations increase the risk for so-called carry trades, where money borrowed from countries with low rates is used to invest for higher yields. A move to unwind such investments probably would drive down the Brazilian real, South African rand and other developing nations’ currencies.
“It’s usually in this environment when volatility starts to pick up, before you have a real big move toward one camp,” said Paresh Upadhyaya, who helps manage $21 billion in currencies as senior vice president at Putnam Investments in Boston. “The dollar’s at a critical juncture, and to me it’s a sign we’re going to see a more significant move one way or the other.”
To contact the reporter on this story: Yoshiaki Nohara in Tokyo at ynohara1@bloomberg.net; Ron Harui in Singapore at rharui@bloomberg.net. Last Updated: June 22, 2009 02:53 EDT

Is this the death of the dollar?

By Edmund ConwayPublished: 7:32PM BST 20 Jun 2009

After two smugglers were stopped last week with what at first appeared to be $134bn in US state bonds, the tension and paranoia surrounding the fate of the dollar hit a new high. Border guards in Chiasso see plenty of smugglers and plenty of false-bottomed suitcases, but no one in the town, which straddles the Italian-Swiss frontier, had ever seen anything like this. Trussed up in front of the police in the train station were two Japanese men, and beside them a suitcase with a booty unlike any other. Concealed at the bottom of the bag were some rather incredible sheets of paper. The documents were apparently dollar-denominated US government bonds with a face value of a staggering $134bn (£81bn).
How on earth did these two men, who at first refused to identify themselves, come to be there, trying to ride the train into Switzerland carrying bonds worth more than the gross domestic product of Singapore? If the bonds were genuine, the pair would have been America's fourth-biggest creditor, ahead of the UK and just behind Russia. No sooner had the story leaked out from the Italian lakes region last week than it sparked a panoply of conspiracy tales. But one resounded more than any other: that the men were agents of the Japanese finance ministry, in the country for the G8 meeting, making a surreptitious journey into Switzerland to sell off one small chunk of the massive mountain of US bonds stacked up in the Japanese Treasury vaults.

In the event, late last week American officials confirmed that the notes were forgeries. The men, it appeared, were nothing more than ambitious scamsters. But many remain unconvinced. And whether fake or otherwise, the story underlines one important point about the world economy at the moment: that the tension and paranoia surrounding the fate of the US dollar has hit a new high. It went to the heart of the big question: will the central bankers in Japan, China and elsewhere continue to support the greenback even in the wake of the worst financial crisis in modern history, or will they abandon it as America's economic hegemony dissipates?
Dollar obituaries are nothing new. The currency has been presumed dead more times than Shane Macgowan. But like the lead singer of The Pogues, the greenback has somehow withstood repeated knocks and scrapes over the years and lived on, battered, bruised and a couple of teeth the lighter, to fight another day. In the 1970s and 1980s there were plenty predicting its demise, although at that point the main challenger was the Japanese yen. And in the years preceding this crisis, economists and investors including Peter Schiff and George Soros were lining up to declare the dollar's demise as the world's reserve currency. In the late 1990s, the creation of the euro gave dollar sceptics another stick to beat the currency with, and no doubt the European currency has claimed some of the prominence in its first decade

Now, following the collapse of the global financial system, those warnings have become louder still, and ever more difficult to dismiss – because this time around there are threatening noises coming from those who actually have the power to do something about it. First came a paper from Zhou Xiaochuan, the governor of the People's Bank of China (PBoC), a couple of months ago, positing the idea of introducing the special drawing right (SDR) – a kind of internal currency at the International Monetary Fund (IMF) – as an international reserve currency. These calls were then repeated, with more force, by the Russian president, Dmitry Medvedev, who last week declared that the world needed new reserve currencies in addition to the dollar.
And this time around, the dollar is most certainly suffering. Since 2002 its trade-weighted strength – calculated against a basket of other currencies – has fallen by more than a quarter, from 112 to 81 points. In the same period, the proportion of dollars held by reserve managers in leading central banks has also taken a dive. According to figures from the IMF, confirmed holdings of dollars in government vaults, from Beijing and Tokyo to London and Paris, fell from 71pc of reserves to 64.5pc between 2002 and 2008.
However, detecting what is really happening in the world of foreign exchange reserves is notoriously closer to an art than a science. For instance, figures from April seemed to suggest a fall in China's holdings of US Treasuries – something 'dollapocalypticists' pounced on at the time. But according to Brad Setser of the Council on Foreign Relations, the country was merely rejigging its Treasury portfolio rather than liquidating parts of it. In such an opaque world it is little wonder the conspiracy theories over those two Japanese smugglers show little sign of dissipating.
Nonetheless, for US Treasury Secretary Tim Geithner, who has inherited his predecessors' role as dollar wallah-in-chief, the currency's travails have made it all the more difficult for him to repeat the mantra that he "believes in a strong dollar" while keeping a straight face. Indeed, when he tried to insist at a university lecture in Beijing earlier this month that "Chinese financial assets are very safe," it drew floods of laughter from the audience.
He wasn't playing for laughs, but the irony of the situation is plain to see. If there were a textbook list of actions one could take to weaken a currency, the US (alongside most other developed nations) would be following it to the letter. It has cut interest rates to a whisker above zero; it has engaged in quantitative easing, pumping cash directly into the economy; it has committed to spending trillions of dollars on a fiscal stimulus package designed to pull the country out of recession; it has pledged tacitly to support its stricken banks so that no major institution is allowed to collapse. In any normal circumstances, actions like these would hammer a currency.
According to Stephen Jen of BlueGold Capital Management: "People are having second thoughts not simply because they don't like the dollar, but they are having second thoughts about whether US assets are obviously the strongest assets to own."
Like everything else, the currency's fate depends on how well the US authorities manage the crisis. The US is balanced on a knife-edge between possible Japan-style deflation as the weight of all its debts bear down on it and potential inflation as the force of all its powerful stimulus measures take root. No one knows for sure which way it will fall, but neither would be particularly good for the currency, and by extension for those who hold much in the way of dollar assets.
And China and all other major central banks which have trillions of dollars in their vaults, face something of a dilemma. Any fall in the greenback will cause the value of their investments to slide. Even if they wanted to exit, there seems no easy way of doing so without provoking some serious self-harm. Indeed, according to Olivier Accominotti, a PhD economist at Paris's Sciences Po university, the situation is not unlike that faced by France in the 1920s, as it sought to reduce its massive sterling reserves. The Bank of France found itself in a "sterling trap" in which it "could not continue selling pounds without precipitating a sterling collapse and a huge exchange loss for itself".
Neil Mellor, of Bank of New York Mellon, said: "We've got a situation where Geithner is smiling and has no choice but to stress the credibility and stability of the US financial and economic system, while the creditors [such as the Chinese] smile back and say they believe him, while at the same time giving hand signals to their reserve managers to get rid of these things."
Rather like the brinksmanship on display throughout the Cold War, it is a dilemma which applies itself to game theory. Both sides know that the dollar is set to weaken, but both could be set to suffer if they both allowed it to collapse at the same time. "If you are the Chinese it is in your interest to play the game – you've got a lot of dollars at stake – but in the long run you surely want to reduce your holdings and diversify them at the margins," says Mellor.
Still, with every passing week, the conjunction of different warning signals for the US currency seems to evolve and intensify. Recently, the alarm bell ringing most loudly has been the increase in yields on US Treasuries – a sign, some fear, of acute nervousness among institutional investors about the sheer scale of the cash the Obama administration is planning to borrow in coming years. The Federal Reserve's meeting next week is likely to be watched attentively by everyone with a stake in the game, as the central bank indicates whether it is planning to plough more dollars of newly-created cash into the economy.
But while the debate fixates on the greenback, the issues at heart here go far deeper. The dollar's fate is intertwined with that of the global economy. America is on the brink of losing its economic superpower status, which it will have to share with China at least, if not others, in the coming years. Holding such a position confers important responsibilities, none of which is more symbolic than providing the world's reserve currency – the currency against which all major commodities are denominated, and the de facto international unit of exchange in trade and finance.
It was a position enjoyed by UK sterling during the first waves of globalisation in the Victorian era and the final decades of the British Empire. Eventually, around the time of the Second World War, the dollar inherited the mantle. At first this was something enshrined in the Bretton Woods agreement of 1944, which fixed world currencies to the dollar, but although that system broke down in the 1960s and 1970s, it has remained the de facto currency of choice.
In a globalised world, with trade being carried out between hundreds of different nations by thousands of different companies, having an international standard makes sense: it enables traders to exchange goods more quickly and efficiently than they would have done otherwise. It may be invisible to us, but the vast majority of foreign exchange transactions – particularly those between smaller nations – involve the dollar. Exchange your sterling for Thai baht and you're actually swapping pounds for dollars for baht, whatever the exchange booth says. Even the much-vaunted exchange arrangements by the Brazilian and Chinese are designed not to disrupt these foundations, but merely to smooth things over for importers and exporters.
But a by-product of the dollar's dominance has been the skewing of the world's monetary system. By dint of having this blessed position, the US has been able to finance ever-larger current account and fiscal deficits, with both the government and the public borrowing from overseas, at cheap rates of interest. It has been able to sell US Treasuries at interest rates that other countries can only dream of because of this position as reserve currency. It has had a captive consumer – both because its government bonds are something of a safe haven and because those wishing to peg their currencies against the dollar and enhance their trade flows have little choice but to buy US Treasuries.
And this mutated international monetary system that has evolved since the 1960s is largely responsible for the crisis into which the world has tipped. Because it was able to borrow off other countries at such low rates without enduring the market punishment – in other words higher interest rates – America was able to build up massive current account deficits which poured a record amount of debt throughout its economy, which manifested itself in the financial crisis.
Indeed, as Mervyn King said in a speech earlier this year: "At the heart of the crisis was the problem identified but not solved at Bretton Woods – the need to impose symmetric obligations on countries that run persistent current account surpluses and not just on countries that run deficits. From that failure stemmed a chain of events, no one of which alone appeared to threaten stability, but which taken together led to the worst financial crisis any of us can recall."
When the PBoC's Zhou referred to the SDRs he was not merely questioning the dollar's pre-eminence. He was indicating something far more radical – that China supports plans for a new Bretton Woods-style agreement to manage the flows of cash around the world. At that seminal conference in 1944, John Maynard Keynes's original idea, which was watered down by Harry Dexter White of the US Treasury, was for an international reserve currency, Bancor, fixed against a basket of 30 currencies, and that countries would be penalised if their current accounts swung too far into surplus or deficit. It is an idea which is now being dusted off from history books by officials in finance ministries around the world, including in China.
Such a radical shake-up would cause earthquakes in the currency markets, a prospect which perhaps makes it unlikely. So in the absence of such a deal, how is the dollar's role likely to evolve in the coming years? The short answer is that no one should expect it to lose its reserve currency status any time soon. It took around half a century for Britain to cede this position to the US, even after being overtaken in true economic might.
One possibility is that the SDR may be used increasingly as a means of denominating assets in accounts, but this is something which would take place gradually, over a course of some years. But even if that is a bridge towards a multi-polar world, in which other currencies vie with the dollar for influence, it will take some time – perhaps 30 years or more, according to Stephen Jen. "People should look at history," he said, referring to sterling's pre-eminence in the first part of the 20th century. "There's a real incumbency advantage."
Jim O'Neill, chief economist at Goldman Sachs, sees the next few years as something of a "vacuum period".
"The BRIC countries [Brazil, Russia, India and China] are becoming so much more important, while the G7, including the US declines, which raises issues about the degree of dominance of the dollar. The problem is that the currencies of the BRICS are the ones that matter, but they won't let you export or use their currencies.
"Until we see another five years' of evidence over whether China is a more consumer-driven economy, becoming bigger and bigger, and whether the euro can have a successful second decade, the dollar looks set to remain dominant."
China has made some hints about loosening its hold over the yuan in recent months, but these are only early manoeuvres. A second step would be to allow the yuan to become a part of the SDR – whose own value is determined by those of a basket of currencies including the dollar, pound and euro. As Jen adds, there are certain prerequisites any contender to the crown of world reserve currency needs in its pocket.
"We have to ask this question: is Russia going to provide asset market that will be as liquid, reliable property rights, the rule of law, currency convertibility and so on? Will we see the same from the likes of China? Their task is very daunting."
Referring to the forged Treasury bonds picked up on the Japanese smugglers on the Swiss border, he adds: "There is a message here: we haven't heard much about anyone counterfeiting roubles. That is probably telling you something."

http://www.telegraph.co.uk/finance/economics/5586543/Is-this-the-death-of-the-dollar.html