The associated press came out with a staggering report out of Iran April 19, 2008. Iranian President Mahmoud Ahmadinejad declared $115 barrel oil “too low”. He said, “The oil price of $115 a barrel in today’s global markets is a deceiving figure. Oil is a strategic commodity that needs to discover its real value.”

He also claimed that $115 barrel oil was still below the inflation adjusted highs set in 1980. Ahmadinejad called the United States arrogant and selfish and said us Americans believe oil is a free commodity. He then went on to comment on the U.S. currency and called the dollar “a handful of paper” lacking global support. A website quoted Ahmadinejad as saying, “The dollar is not money and longer but a handful of paper distributed in the world without commodity support.”

Ahmadinejad’s points he was trying to make are right on the mark but the evidence he uses is certainly flawed making his credibility all but lacking. I must downright dismiss his remarks that the price of oil is still too low. While I believe oil is bound to go higher the current price of oil is the current price of oil with no questions asked. There’s no conspiracy to keep the price of oil low. Now a much more appropriate argument would to say that per cup oil is cheaper than bottled water and to go more in depth on the facts of oil depletion. Making the argument that global production is higher now than it most likely will ever be again it would be all but conclusive that oil is bound to shoot up higher than it is right now.

His inflation adjusted numbers do nothing to support his claim. If you adjust the 1980 high of $38/bbl you will get a number between $96 and $103 barrel oil. Even if the price is lower than it was in 1980 it certainly should be higher anyway as global production was still increasing even though the United States peaked nationally in the early 1970s. Whether the numbers are higher are lower by some a few percentage points is trivial and a moot point as it totally disregards the reason why oil prices are where they are today. It’s about the rate of oil depletion a topic Ahmadinejad didn’t mention once.

His bearish view on the dollar has no merit. He calls it a handful of paper with no global or commodity support. He is right the commodity support is not there but fiat currency is not backed by an underlying commodity but a faith in the nation which the currency is printed that their monetary and economic policy is sound. Global support is still certainly there. While it may not always be there the facts Ahmadinejad are stating are downright incorrect. The Chinese are still buying our debt and as long as this happens our dollar will remain somewhat propped up. Of course if this support ever went away our dollar would crash and would only be compounded by runs on the dollar and the U.S. banking system. Neither our gold reserves at Fort Knox nor our currency reserves would be enough to help keep our currency stable in that situation as our gold would last two days and our currency reserves roughly eight seconds.

Ahmadinejad seems to want it both ways as these assertions seem nothing more than Iranian PR. It is no surprise that high oil prices and a weak dollar would benefit Iran’s economy. Of course if the reason for high oil prices is an increase in the rate of global oil depletion than that would mean Iran and Iraq may certainly be in decline and would also assume their reserves may be less than what has been stated. This would give not only Iran but all OPEC nations less leverage in the world.

On a more rhetorical note, a crashing dollar crashed would not be a handful of paper but of cotton

Source: http://biz.yahoo.com/ap/080419/iran_oil.html

Investors Business Daily, a well respected paper, occasionally publishes their 20 rules for investment success. Following many of these rules seems to me like it would make the investor pretty unsuccessful.

Rule #2: Recent quarterly earnings and sales should be up 25% or more.

- So when a company has a good quarter and the stock shoots up, pull the trigger baby and buy at the overinflated price.

Rule #3: Avoid cheap stocks. Buy stocks selling for $15 to $100 or more.

- If a company trades below net cash but is at $10 a share it should be avoided at all costs. Cheap stocks are bad (Clyde Milton Listen Up) — buy expensive stocks.

Rule #4: Learn how to use charts to see exact sound bases and exact buy points. Confine buys to these points as stocks break out on big volume increases.

- Find a company, no matter the valuation where you can see an EXACT buy point on the chart. Then when it gets really popular and everyone wants to jump in that’s your time to buy. Don’t buy when it is undiscovered and cheap otherwise you may have to wait more than a few days for price appreciation.

Rule #5: Cut every loss when it’s 8% below your cost

- When a cheap stock gets cheaper get rid of it.

Rule #7: Buy when market indexes are in an uptrend

- Buy when the market is getting expensive

Rule #8: Read IBD’s Investor’s Corner and Big Picture

- Learn how to time the market and read Investor’s Business Daily

Rule #9: Buy stocks with a composite rating of 90 or more and a relative price strength of 85 or higher.

- Buy stocks that are popular among your peers

Rule #14: Don’t buy stocks because of dividends or P/E ratios. Read a story on the company.

- Buy a good story, valuation is meaningless.

Rule #16: Invest mainly in entrepeneruial New America companies

- Buy high tech stock with no proven track record. Buy a good story, Let’s face it Coca-Cola is just boring.

Rule #18: Don’t try to bottom guess or buy on the way down.

- Buy on the way up as the stock gets more expensive.

Rule #19: Find out if the market currently favors big-cap or small-cap stocks.

- Buy what the market favors

Rule #20 Do a post-analysis of all your buys and sells. Post on charts where you bought and sold. Evaluate and develop rules to correct your major mistakes. It’s what you learn after you think you know what you’re doing that’s vital. That’s how you improve your results.

- It doesn’t matter where the stock goes when you own it but what happens after you sell.

Following articles on the US dollar throughout the past several months, I’ve encountered a wide range of very mixed opinions. Reading primarily the New York Times business section, some columnists make the case for why the US Dollar is going to go lower and some say a weak Dollar is good for the United States. Anyone working for the New York Times is going to have to sound convincing as they are surely very good at their jobs. After reading nonstop on the subject I’ve come to some very controversial opinions of my own.

The main problem I see is the Federal Reserve. Bernanke is so fixated on patching up short term fixes and never has any insight on how we got here in the first place. It is logical to first understand why we have a certain problem then to just patch it up to delay the problem. Over the last few months the stock market has been rocky and the bond market has been even worse. Bernanke has said he is willing to cut interest rates to devalue our currency if it will help stop a recession. He’s also said that a low dollar wouldn’t affect Americans as long as they bought domestic goods. He also claims it would rid us of our deficit as the textbook approach says a low currency will correct a deficit. There are several logical fallacies with these statements and it’s more than terrifying that the head of our central bank is coming out and making comments like these.

First of all, Bernanke should not be so fixated on preventing a recession. It is a fact that if America never had a recession, we would be a lot worse off than we are today. Recessions are part of the business cycle as well as bankrupt the weaker companies and strengthen the stronger ones. If a company makes really terrible decisions, in a capitalist society that equates to bankruptcy or at the very least a massive loss of equity during a recession. A strong company may be temporarily weakened but when the recession is over they come out stronger because they’ll have fewer competitors as much of the competition went bankrupt as well as have the opportunity to buy their competitors in distress. It is also impossible to prevent a recession as the business cycle is a byproduct of capitalism. If you really don’t like business cycles, move to a country where free markets don’t exist. As the Federal Reserve’s shareholders are made up of men tied to private banks it makes sense that they would try to benefit themselves before the American people by attempting to bail out banks that took on way too much risk. By helping those out you make things worse. You set a precedent to take excessive risk because why not if you have the notion you will get bailed out by your friends if the investment turns against you. This is why Bernanke trying to prevent a recession at the expense of our currency is illogical.

The second statement Bernanke has made about the low dollar is that Americans wouldn’t be affected much as long as they buy domestic goods. Again, it is hard to believe that he sincerely believes this. A scenario which would disprove this is that of the average retired man or woman. You have a portfolio of CDs yielding 6% a year which you are living off of, you drive a car, and you eat food. When the dollar declines 50% against major foreign currencies, that man or woman has just had his or her standard of living cut in half. The 6% yield on those CDs are now yielding 6% but this time with a currency only worth half of what it used to be worth. If the oil supply and demand equilibrium stays the same, oil prices would still go up as we buy our oil in dollars. As gasoline is petroleum based, the price of gas in the United States would therefore increase. But it wouldn’t just be oil that increases most commodities from wheat to butter to sugar would increase as well. The average food company would face higher costs and would be more than happy to pass those costs onto the American consumer which would in return raise prices. It wouldn’t matter if the company was domestic or international. Unless Bernanke thinks the average retiree is living off gold krugerrands and 50 dollar palladium maple leafs, has no use for gasoline, and is willing to not eat then he has a case, otherwise I don’t buy it.

Bernanke’s other case for a low dollar as well as several New York Times columnists believe that the weak dollar would help reduce our trade deficit. They’re argument besides being a textbook example is that it is happening right now as during the course of this semester, The United States had the lowest deficit in two years. Unfortunately, to get to a trade surplus by devaluing our dollar would surly get us into a worse deficit then we are right now. So Bernanke is right in the short term, a weak dollar would temporarily reduce our deficit but in the long run it makes things much worse. As of now the United States stays solvent by borrowing 2 billion dollars a day much of it coming from the Chinese. Unfortunately, our currency is not backed by any asset but by people accepting that our currency is worth something. As of now OPEC is diversifying away from the dollar as they called the dollar, “a worthless piece of paper”. China is also diversifying out of the dollar as well. There’s a good chance they will retire the Hong Kong dollar which is pegged to the US dollar and switch over to the renminbi. Saudi Arabia will most likely get out of their fiat currency which is pegged to the US dollar and most likely move to some asset backed currency such as petrodollars. So if the dollar got so low for us to rid America of its trade deficit, these events, especially a Chinese pull out would certainly crash the dollar overnight and most likely cause a run on the dollar. When “dollar-bashers” make this argument, the US government and the Federal Reserve both say we have gold reserves at Fort Knox and currency reserves at the treasury. Fort Knox has not been audited since the 1960’s so who knows whether that gold is still even there. Assuming that it is, it would keep US currency stable for roughly two days. Our currency reserves are surely there (and if they weren’t the government could print more money as that is common when currencies are backed by nothing) and would last 8 seconds in the currency market. That’s why the reserve argument is also something to be discredited.

The way to prevent all this chaos from occurring is to get rid of our current system. When the founding fathers wrote the constitution, it was deemed unconstitutional to have a currency not backed by gold or silver. The market as a whole is very complicated and the CPI numbers are not taken seriously as an accurate measure of inflation. Many of the great investors such as Seth Klarman and Jim Rogers who worked with George Soros say that the CPI understates inflation and that the manufacturing index is more appropriate. The problem with fiat currency is that it is very easy to overprint money which leads to high inflation and a devaluation of the currency. A gold standard ensures you won’t overprint money as you can only print what is backed or partially backed depending on which gold standard you use. Instead of having a Federal Reserve micro-managing a free market economy you can get rid of the Federal Reserve which gets rid of all political and emotional bias and you leave it up to the market to determine borrowing rates, etc. While a bunch of guys debating what to do with interest rates may be really smart the individual decisions of everyone participating in the global market has been proven to be much smarter. Every major fiat currency has eventually had to reset and many of the time it retired for good. It is not a radical statement to say the US Dollar may very well go to zero and with this currency monetary policy the dollar will most likely not be the major currency anymore.

On October 27, 2007, Seth Klarman who manages the Baupost Group gave a speech as well as answered questions at the MIT Sloan Investment Management Conference. Klarman stressed tuning out daily market blips. He noted most investors can’t tune out the so called noise. I would tend to agree with this assessment. Even so called “Buffett Followers” who preach his mantra of never looking at stock quotes – many of them do, it’s just not in vogue. His conservative and somewhat boring approach to investing has given him impressive returns by any measure. Not only has he significantly outperformed the market but he has made money for his limited partners 24 out of 25 years. The key to this high yield investing approach is to first focus on downside risk before even considering the upside. He has also made his money without ever using leverage. Klarman makes the point that the market should not dictate you and using margin allows it to do just that. “It’s a slippery slope”, he said while referring to using leverage. “If you are on a small amount of leverage, why not use more?” Leverage is addicting.

“We are in an era of leverage,” he said to the crowd. Klarman noted that the last two generations of American have been using their homes as ATM machines and have been buying more goods on credit. He pointed out the problem wasn’t just amongst Main Street. Investment Banks have been pushing structured investment vehicles and exotic finances and the rating agencies have been labeling “toxic waste” as investment grade.

This situation has certainly become worse since October of 2007 and Klarman seems to have been very right on the severity of this theme which many pundits were calling trivial. Klarman noted last year that “Leverage is at record high levels…probably the beginning of a credit de-leveraging period.” He pointed out that the debt crisis is probably not near the end since people who owe money are taking out more debt to cure the problem. “This very ‘cure’ is what caused the problem in the first place”, he said.

In today’s environment credit receivables are ballooning. Perhaps the next round of defaults will take place in this arena. If you can’t take money out of your house anymore why not just swipe plastic? This type of mindset I believe is very prevalent in American society and while pundits such as Larry Kudlow will easily dismiss this rationale, I would be skeptical of this assessment.