A Bank Holiday on Deck?

We've been hearing the same rumours about embassies buying foreign currencies for their own use as cited here, but have not been able to obtain enough confidence to comment on it before this public disclosure in a major news source.

Harry Schulz apparently thinks a bank holiday is in the offing.

We think that if something decisive like this happens it is more likely related to a de facto devaluation of the dollar, a market break, that would be very brief. The Banks would close in order to allow the markets to stabilize. The occasion is therefore likely to be a major failure of a household name in banking, or perhaps even the failure of the State of California. California is the size of a large national economy.

We struggle with the notion of a dollar devaluation. Against what? A continued weakness seems to be in the cards, with some major event precipitating a break in market confidence.

It is obvious that there is a campaign to undermine Ben Bernanke as the Fed Chairman, coming out of the Obama Administration. Bernanke is not willing to monetize debt as aggressively as Geithner and Summers would prefer.

A 'big event' appears to be more a long shot that a bet, but we'll keep an eye on it. It does explain some of the more obnoxious moves by insiders to grant themselves huge bonuses and sell their personal stock holdings now.

A number of people have asked us to comment on this, in addition to the Japanese bond smuggling story out of Switzerland which we suspected was just related to a private fraud of some sort.

A gradual and orderly devaluation of the Dollar is most probable but some exogenous event could trigger a loss of confidence and a slide which could provoke a bank holiday. A decline of 20 to 25% in the dollar index from here is what technical analysis seems to indicate, but the Dollar Index is hopelessly out of touch with the modern realities of global currency exchange.

We have taken some steps in our personal life to guard against this, but think it is unlikely given what we know today.

MarketWatch
Latest Schultz Shock: a 'bank holiday'
by Peter Brimelow
Jun 24, 2009, 1:35 a.m. EST

NEW YORK (MarketWatch) -- The top-performing letter that predicted the Crash of 2008 now predicts a confiscatory Franklin D. Roosevelt-style "bank holiday." But it's surprisingly sanguine about stocks -- in the (very) short term...

In its current issue, HSL reports rumors that "Some U.S. embassies worldwide are being advised to purchase massive amounts of local currencies; enough to last them a year. Some embassies are being sent enormous amounts of U.S. cash to purchase currencies from those governments, quietly. But not pound sterling. Inside the State Dept., there is a sense of sadness and foreboding that 'something' is about to happen ... within 180 days, but could be 120-150 days."

Yes, yes, it's paranoid. But paranoids have enemies -- and the Crash of 2008 really did happen.

HSL's suspicion: "Another FDR-style 'bank holiday' of indefinite length, perhaps soon, to let the insiders sort out the bank mess, which (despite their rosy propaganda campaign) is getting more out of their control every day. Insiders want to impose new bank rules. Widespread nationalization could result, already underway. It could also lead to a formal U.S. dollar devaluation, as FDR did by revaluing gold (and then confiscating it)."

HSL is still sticking with its 20-year "V" formation forecast, but emphasizes that within the current 10-year downtrend phase there will be rallies that will "last 1-2 years." It attributes its current success to "successfully trading almost daily, especially in commodity stocks (coal/potash/energy/ fertilizer/gold). Take profits constantly and rebuy on mini pullbacks. Prefer non-U.S. dollar companies; many such companies are listed in U.S. & Canada or Australia."

HSL says: "The world is staggering today between stagflation and net deflation right now; it varies widely around globe. Net deflation is a maybe 35% risk, due to toxics and/or deepening depression. Bit more likely, we'll slowly creep up to a dangerous 4.5% inflation on average, medium-term. But the wild card is the currency risk, which has a 50% (?) chance of boiling over and causing literally overnight (i.e. 24 hours) mega inflation in the asset markets."

Nevertheless, in the very short term, HSL's charting leads it to say: "we MAY not get a new bear market decline that many bears are predicting. Likewise, DJIA & S&P500 may build a Head-and Shoulders right shoulder."

HSL's currently recommended allocation:

• 35%-45% Government notes, bills and bonds. (Not U.S.)

• 8%-10% Stocks (non-golds).

• 10%-30% Commodities, via futures, commodity stocks and/or physical assets.

• 35%-45% Gold stocks and bullion.

• 0-5% Bear stock protection via inverse ETFs like ProShares UltraShort QQQ ; ProShares UltraShort Dow30 ("Use to trade/hedge market downturns only.")