LIVING OFF DIVIDENDS & PASSIVE INCOME

A couple of days ago, legendary investor, commodity bull and one-time partner of George Soros, Jim Rogers, was interviewed by Betty Liu of Bloomberg’s Singapore office. It seems that Jim Rogers is also of the opinion that Fannie Mae is going to lose a lot of money along with other investment banks.

He’s still bullish on commodities like oil and food grain and he’s bearish on the US Dollar. Surprizingly, he’s also bullish on Arline stocks.

Here’s an excerpt of the relevant portions of the interview:

Financial Sector

Regular readers know I’ve been pretty pessimistic on the outlook of the US economy and bearish on the US dollar as well. However, since it seems like everyone is echoing the same sentiment, could it be that we’re due for a short (or medium) term spike in the US Dollar?

According to Lou Basenese, editor of the The Alpha Intelligence Alert, think it’s time to go long the USD.
Here are some of the reasons he cites:

1. Bernanke & Paulson Rediscover “Verbal Intervention.” Treasury Secretary Henry Paulson and Fed Chairman Ben Bernanke finally got off their duffs to defend the dollar. Paulson got things started in Qatar on Sunday. Speaking to the leaders of the Gulf oil states, he urged the countries to think twice about abandoning their dollar peg, as “ending the peg is not the solution to the inflation problem.” And Bernanke stepped up today. Speaking, via satellite, to an international monetary conference in Spain he insisted Fed policy will be a key factor, “ensuring that the dollar remains a strong, stable currency.” After such a long silence, this week’s tag team approach is nothing but a positive development.

Previously I had mentioned several ways to invest for a recession or a major downturn in the US economy. In that post, I stated that one of the ways to hedge against the declining dollar (apart from my favorite method of buying gold) was investing in foreign currencies.

Several people emailed me asking how to buy foreign currencies.

A few were concerned that they would have to travel overseas and open a foreign bank account. Luckily, it isn’t so difficult. You have 3 choices.

1. Buy Currencyshares ETFs. You can choose between several currencies like Australian Dollar (Ticker: FXA), Swiss Franc (Ticker: FXF), Japanese Yen (Ticker: FXY), Euro (Ticker: FXE), etc. If you have a brokerage account, its as easy as buying stock. This is probably the easiest method. They also pay monthly dividends and are quite similar to buying a foreign currency CD.

Based on continuing weakness in the dollar, gold briefly breeched the $1000 level yesterday along with oil hitting an all time high of $111 per barrel. I had a really strong suspicion that we’d see $1000 gold by mid-March.

Despite what Bernanke and Paulson said last summer, the housing bubble has spread to other parts of the economy and subprime mess has not been contained. In a last ditch effort to prevent banks from collapsing, the Federal Reserve announced a bailout of Fannie Mae, Freddie Mac and other banks, promising to exchange bogus mortgages for Treasuries during a 28 day window. They named this Term Securities Lending Facility (TSLF) but it’s just a good old bail-out.

As I stated in my last post, the government is bankrupting our economy. I asked Chuck Butler of Everbank.com “why is the government trying to weaken the dollar and if there was any advantage to having a weak dollar?”

He was gracious enough to answer my question:

It’s a political thing… If the Gov’t can show that they are doing what they can for Manufacturing, that equals votes. The main thing though is the dollar is used to attract foreign investment. I’ll explain.

The Gov’t is running a huge deficit, and as long as they are running a huge deficit, they are in need of foreign investment to finance that deficit. The amount of financing needed each day is over $2 Billion.

There’s been a lot of talk regardimg the weakening US dollar and its effect on your wealth. Many people believe it can’t last and the dollar will rebound. Others think that it still has more room to fall.

I personally think that it will continue to fall so long as the government does nothing to stop the reasons for the weakness. Here’s a good explanation by Mark Hutchinson.

The U.S. greenback will remain generally weak for two key reasons:

* First, the United States is still running a $700 billion balance-of-payments deficit with the rest of the world. Asian central banks have been financing this by buying U.S. Treasury bonds. As we now also know, German regional banks have also been financing it by buying subprime mortgage debt. [It’s particularly good for the balance-of-payments ledger when foreigners buy subprime mortgage debt, helium-filled dot-com stocks, or the Brooklyn Bridge, because the profit that domestic shysters make from selling worthless assets to foreigners counts as income.] Nevertheless, both these once-favorable trends are showing signs of ending. This means the United States has to export more, which means the dollar must drop still more against the euro, sterling, yen, renminbi and the currency of anyone else that might be persuaded to buy U.S. products if they’re cheap enough.

The offices of Liberty Dollar were raided by the FBI yesterday. Apparently they didn’t like the fact that they were selling Silver Ron Paul Dollars! I don’t understand how anyone buying the $20 coin for $25 would mistakenly assume that they were legal tender but I guess someone at the FBI HQ did!Actually, they were also selling Silver certificates, redeemable for actual silver. This can be construed as a currency which is illegal. Only the Federal Reserve has the right to issue pieces of paper (that aren’t backed by anything) to use as barter.
The silver dollars which were available for $25 a few days are currently going on Ebay for $305! Damn, I wish I had bought a few.

Legendary investor, Jim Rogers thinks Fed Chairman, Ben Bernanke is a complete moron who “doesn’t understand how the economy works”. He’s selling all his possessions in the US, exchanging all his dollars for the Chinese remnimbi and moving to Asia. If you think he’s overreacting and the dollar can’t stay down, consider that its dropped against almost all major currencies this year. The dollar has seen some strength this week. Use this temporary bounce in the dollar to take a position in gold or other currencies.

“Nations are not ruined by one act of violence, but quite often, gradually, and almost imperceptibly, by the depreciation of their currency, through excessive quantity”.
– Nicolas Copernicus, 1525

“One of the saddest lessons of history is this: If we’ve been bamboozled long enough, we tend to reject any evidence of the bamboozle. We’re no longer interested in finding out the truth. The bamboozle has captured us. It is simply too painful to acknowledge - even to ourselves - that we’ve been so credulous.”
– Carl Sagan

Check out this excellent, excellent video where Ron Paul rips Bernanke a new one. He explains why lowering the interest rates is screwing the US citizens. Low rates leads to a weak dollar which causes inflation (since we import nearly everything from foreign countries).

By lowering the rates, the Feds are enabling inflation. Which they probably want because it makes it is much easier to pay back all the money the government has borrowed from foreigners. The government currently needs around $2 Billion per day to sustain itself. Paying back foreign countries with dollars that are worthless is quite an enticing option.However, it doesn’t come without any cost. Putting more dollars in circulation devalues the current value of each existing dollar. If the Fed increases the money supply by 10% per year, the value of each dollar of your savings is decreased by a corresponding 10% too. Since you’re not getting 10% interest in the bank, your savings are being eroded every year. This is what Ron Paul was concerned about. The savings of elderly people are being eroded while simultaneously, everything is getting more expensive.

While I’ve been screaming about Australian Dollar parity, the Canadian Loonie has launched a stealth attack against the Almighty Dollar. After achieving parity on the 20th September, it’s rallied almost 10% since then. Today it hit $1.09 in after-hours trading.

But I’m not complaining. Last month I received over $440 from Canadian Royalty Trusts. As the US Dollar keeps dropping, my income from the Trusts keeping increasing! (Although in theory, since they sell oil and gas which are priced in US dollars, a strengthening of the Loonie squeezes their profit margins. But lets ignore that fact since oil is near $100/barrel and I expect gas prices to start creeping up too).

But before you start buying up CurrencyShares Canadian Dollar Trust (FXC) in excitement, you should consider that a strong Loonie is bad for the Canadian economy. Their exports are more expensive to foreigners which is a problem since they export a lot. And the strength of their currency is causing Canadians to drive south across the border in US and spend their money here! (Which funnily enough, is great for us).

With Bloomberg reporting today that Gisele Bundchen, the world’s highest-paid supermodel, has refused to accept payment in U.S. dollars, the dollar’s downtrend is receiving more negative publicity.

Giselle joins the ranks of billionaire investors like Warren Buffett, Jim Rogers and Bill Gross who are pessimistic on the dollar’s future. The 27 year old Brazilian model has made $33 million in income so far this year.

According to the Treasury Department’s data, U.S. investors bought $198 billion in foreign securities this year through August, 72 percent more than in the same period last year.

Sovereign wealth funds run by the largest exporters and oil producers, including China, Singapore and Qatar are also liquidating US dollar positions. Its projected that these funds may grow from a current $2.5 trillion to $17.5 trillion by 2017 and shift more than $500 billion out of the dollar over the next 3 years.

Its not often that Warren Buffett offers investing advice that’s easily to implement. According to an email I just got yesterday,

“We are still negative on the dollar,” Buffett continued, shifting his focus to Berkshire’s strategy for dealing with the troubled U.S. currency. “We bought stocks in companies that are earning their money in other currencies. We are gaining foreign currency exposure.” His comments echo Jim Rogers’ and Julian Robertson’s bearishness from yesterday.

So where will the $52 billion man be putting his money?

“My impression is that the Korean market is modestly cheaper than other markets in the world. I think the Korean market will do better for the next 10 years,” said Buffett. The Oracle of Omaha is currently visiting the TaeguTec facility in Daegu, South Korea. TaeguTec is a subsidiary of Iscar — a company Berkshire Hathaway bought a $4 billion stake in last year. While there, he voiced his approval of South Korean steelmaker Posco.

Jim Rogers, co-founder of Quantum Fund along with George Soros, achieved 4,000% returns in the 80’s. He’s famous for being bearish on the US economy and the US Dollar. However, he’s currently bullish on the Dollar, saying that everyone is negative on it.

In his opinion, when too many people take one side of a trade, the opposite is likely to happen. The Dollar has been in a bear market since 2002, but it turned bullish during 2005. He thinks its over-sold and in the short-term at least, due for a correction.

While I’m not buying any Dollars, I could definitely use a spike in the USD for my entry point into Australian Dollars.

Many claim the dollar’s weakness is helping offset a dropoff in U.S. economic demand that’s come from a recession in the housing market. Goods priced in dollars are cheaper in Europe or Australia, and manufacturing in the U.S. becomes more attractive for companies that export goods. That helps preserve jobs in the U.S.

I sold my long position in CurrencyShares Australian Dollar Trust (FXA) today. I made a nice 6% in about two weeks on it. I sold it because it gapped down and looked like it was going to drop futher in the next week or two.

The US Dollar is due for a short-term bounce which will cause the price of FXA to drop, but thinking long-term, I think the Australian Dollar will hit parity with the USD within 18 months. It isn’t a far fetched idea when you consider that 1 AUD = 1.20 USD in 1981.

Others agree with me. According to Chris Gaffney of Everbank.com:
“Fundamentals suggest the Aussie dollar will continue to rise in 2008. The economy is expected to expand by more than 4% next year, and inflation will accelerate. Overseas shipments of raw materials, which contribute about 14% to Australia’s economy, helped drive 4.3% growth in the second quarter from a year earlier, the biggest increase in three years.”

Today the Loonie achieved parity with the US dollar for the first time in 30 years. Five years ago, 65 cents could buy you 1 Canadian Dollar. Since then the Dollar has devalued 50% against the CAD and nearly 100% against Gold. This has been partly due to a massive increase in the number of Dollars floating around, and partly because of the low interest rates which no longer attract much foreign interest.

The 50 basis point cut in the Federal Funds rate isn’t going to save us from recession. What it definitely did do is weaken the dollar further against all major currencies.

How are you going to Hedge against a weakening dollar?

I been a strong advocate of investing in Gold and Silver for 2 years. Today Gold hit $735 after trading around around the $665 mark for the past year.

The New York Times has an interesting article, Japanese Housewives Sweat in Secret as Markets Reel about housewives losing a lot of money in trading forex.

Since the credit crisis started shaking the world financial markets this summer, many professional traders have taken big losses. Another, less likely group of investors has, too: middle-class Japanese homemakers who moonlight as amateur currency speculators.

Ms. Itoh is one of them. Ms. Itoh, a homemaker in the central city of Nagoya, did not want her full name used because her husband still does not know. After cleaning the dinner dishes, she would spend her evenings buying and selling British pounds and Australian dollars.

When the turmoil struck the currency markets last month, Ms. Itoh spent a sleepless week as market losses wiped out her holdings. She lost nearly all her family’s $100,000 in savings.

More and more countries are growing weary of the US Dollar. Latest in the list is Iran.

Iran asked Japanese refiners to switch to the yen to pay for all crude oil purchases, after Iran’s central bank said it is reducing holdings of the U.S. dollar.

Iran wants yen-based transactions “for any/all of your forthcoming Iranian crude oil liftings,” according to a letter sent to Japanese refiners that was signed by Ali A. Arshi, general manager of crude oil marketing and exports in Tehran at the National Iranian Oil Co. The request is for all shipments “effective immediately,” according to the letter, dated July 10 and obtained by Bloomberg News.

I guess they’d rather get paid in the world’s most undervalued currency which has a good chance of strengthening over the next few years, rather than the USD which looks like its just going to keep on depreciating against all other currencies.