-->The Daily Reckoning
Weekend Edition
March 8-9, 2003
Paris, France
By Addison Wiggin

MARKET REVIEW: Banana Republic

Two events in the last three months signal a"tipping point" has
been reached - and the US dollar may have already embarked on a
6-9 bear market.

The first event, passed with some notice in the financial press,
but not nearly as much as is probably warranted. Paul O'Neill the
last"strong dollar" guy at the Treasury resigned. The second has
received a lot more press, especially here at the Daily
Reckoning: The now infamous Bernanke speech of November 21, 2002.


A recent report called 2003: The Decline Of The Dollar conducted
by our friends at the Everbank World Currency Research Unit shows
quite clearly that trend reversals in the value of the U.S.
dollar usually last several years. For example, in the 30-year
period since the dollar was taken off the gold standard in 1973
and became"free floating," we've had only four major currency
trends:

Weak dollar 1972-1978 (6 years)
Strong dollar 1979-1985 (6 years)
Weak dollar 1986-1995 (9 years)
Strong dollar 1996-2001 (5 years)
Weak dollar 2002-???? (? years)

Because the current weakening only began in February of 2002, the
cycle could still have a number of years to run. The dollar could
fall significantly from it's early 2003 level, before it reaches
anything lows experienced in 1995, 1988 or even as far back as
1980 and 1974.

The last time the US actively pursued a"weak dollar" - back in
1985 - the dollar plunged precipitously. In a nutshell, here's
what happened. In response to (then) record trade imbalances
created by a strong dollar in the 1980s, the United States, the
United Kingdom, Germany, Japan, and France (the"G-5") met at the
Plaza Hotel in New York City. The"Plaza Accord" led to a
concerted effort to reduce the value of the dollar. The dollar
finally began to fall in late 1985.

But once the fall began, it only took about 11 months to reach a
major low.

The dollar then remained weak until 1995 when Treasury Secretary
Robert Rubin announced a"strong dollar policy." Rubin's"policy"
was more like an attitude, but the Clinton administration
repeated the position so often that traders and investors began
to fear they would intervene at any sign of dollar weakness.

As a result, the dollar strengthened from 1996 into February
2002. After the bull market 1996-2002 the US has again experience
a record current account deficit... but this time it's worse! The
number has reached over 5% of GDP and is the largest trade
imbalance in US economic history.

Now that the Bush administration has effectively changed the
policy again - as evidenced by the resignations of O'Neill and
appointment of Bernanke to the Fed - one question remains: Are we
in for a similar plunge to pre-bubble era lows?

Well, it's certainly possible. A quick glance at a dollar chart
for the last 30 years and you almost feel certain of it. Indeed,
since Bush took office, the dollar has dropped 20%. And this weak
saw 4-year lows against the Euro. On Friday morning you could buy
a dollar ten worth of goods with one crisp euro.

It used to sound so much better when we said that sentence in
reverse. Enjoy your weekend all the same.

Cheers,

Addison Wiggin,
The Daily Reckoning

P.S. But here's what could be a more shocking figure: foreign
direct investment in the US has dropped 85% since the bubble peak
in 2000. And according to Floyd Norris of the NY Times, for the
first time since 1995, Americans have invested more in foreign
markets than foreigners have invested in the US.

Foreigners have all but stopped buying American stocks too. Which
means, in order to keep up appearances, Americans must now borrow
the money it needs... to the tune of some $1.3 billion a day.
"The United States," Norris quotes a commentator from
breakingviews.com,"is taking on the financial characteristics of
a banana republic."

We're in the process of loading the Everbank World Currency
Research Unit report to the website... not only will it help you
understand what is going on with respect to the dollar, but the
team at Everbank also offer some excellent protection against it.
I'll let you know when it's available.


THIS WEEK in THE DAILY RECKONING

THE REBIRTH OF DEFICITS (03/07/03)

"...The government will have to pay out a lot of money at some
point, and the 'long run' is indeed catching up to us. In about a
decade, says our Fed chairman, this"relative budget tranquility"
will come to an end. What will happen then? It seems to us that,
at some point - not so far off into the future as many would like
to believe - this debt will be inflated away (more than usual,
that is)..."
http://www.dailyreckoning.com/body_index3.cfm?id=5145

BACK FROM THE DEAD? (03/06/03)

"...In the 1990s, investors seemed to have little in the way of
discipline. They were greedy. Everyone was convinced that the
dot-com stocks were their ticket to great wealth. Fundamentals
didn't matter. Value wasn't a concern. But as heretical as it may
sound to any established investor, there are still some survivors
out there that are worth looking at today..."
http://www.dailyreckoning.com/body_index3.cfm?id=5133

IT'S THE WAR, STUPID (03/05/03)

"...The problem with the market right now IS Iraq...or more
accurately, the very successful PR campaign to keep war talk in
the news. It's not the economy. Anyone who says otherwise is
trying to be clever or got it backwards. The economy doesn't
predict the market...the market is better at predicting the
economy six months ahead..."
http://www.dailyreckoning.com/body_index3.cfm?id=5128

KICKING THE DOG (03/04/03)

"..."Kicking the dog" refers to a practice, immortalized in a
Monty Python movie, of communicating unhappiness by punishing a
weaker party rather than one who might be more objectively at
fault. In the pending war to oust Saddam Hussein, Saddam is the
dog. But while Bush may be attacking Iraq, his real target is
Saudi Arabia..."
http://www.dailyreckoning.com/body_index3.cfm?id=5118

A CRITICAL JUNCTURE (03/03/03)

"...America's profit malaise is nothing new; it started in the
late 1970s. Until then, profits of non-financial corporations had
fluctuated around 8% of GDP. A steep plunge in the following
years slashed it to half that level. From then on, there were
only feeble recoveries. In hindsight, the 1980s clearly emerge as
the critical juncture in the development of the U.S. post-war
economy..."
http://www.dailyreckoning.com/body_index3.cfm?id=5108


HEADLINE, NEWS And INSIGHT:

Visions of Panama
by Mark Nestmann

"...Today, Panama is ideal for offshore investors who want to
enjoy the increasingly rare privilege of strong, legally
guaranteed financial privacy and no taxes, corporate or personal.
But Panama has a long history as an offshore center. Its
tax-advantaged offshore laws date back to the 1920s. Along with
Luxembourg and Liechtenstein, Panama is the world's oldest 'tax
haven'..."
http://www.dailyreckoning.com/body_headline.cfm?id=2985

Deconstructing America
by Paul Craig Roberts

"...The U.S. gave away its agricultural knowledge, its education,
its technology, its manufacturing jobs and is now giving away its
IT jobs. The displaced manufacturing workers did not move to the
promised greener pastures. What reason is there to believe that
the displaced engineers, Wall Street analysts, accountants,
scientists, and other knowledge workers will do any better when
their careers are outsourced?..."
http://www.dailyreckoning.com/body_headline.cfm?id=2981