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Yesterday, Treasury Secretary Hank Paulson announced ahead of his visit to China next week, that he would be asking the Chinese to be more rigorous in their revaluation of the Yuan versus the US Dollar to help balance the growing trade deficit between the US and China and make US industrial and infrastructure goods and food items more affordable to the massive Chinese population that on the back of continuing jaw-dropping growth, with industrial output up another 15% or so as recently reported, means the Chinese are getting wealthier and more affluent every day. Over some Beijing Duck and Dim Sum, Paulson is likely to succeed in this endeavor, as he is a very accomplished and persuasive negotiator, but it is the deep implications of such a move that could have wide-ranging implications for the US and World iconology that may not be that positive in the short term for the US Dollar, but could be enormously positive for Gold, Silver and hard assets in general. The danger of artificial currency manipulation, or a programmed eroding decline in the currency, is that it can get out of control and go from a trickle to a flood, even a river and sometimes a cascade of truly out of control, veritable mind-numbing proportions...

We have seen this movie before and the initial outcome was not good... In actuality it was devastating in the short to intermediate term for the Mexican people, wherein the Banks nearly went under and had to be re-capitalized through international affiliations, house prices were decimated and the peso went from an initial near 2 pesos to the US Dollar to at one point 14, before stabilizing at 10 to 1. And, today, 12 years later, it has helped turn Mexico into one of the World's largest Oil producers and explorers and the 10th largest economy in the World with an enviable growth rate of 5% plus and equal, if not better statistics than those of the US. The point we are making, is the Peso started out as a planned devaluation, that is very similar to the so called planned devaluation of the Yuan versus the US Dollar and until now, the rate of devaluation has not been alarming, although from the charts, it looks very similar to the Mexican Peso versus the US Currency just before the Mexican Peso started its sickening slide that eventually became one of the most devastating currency panics of all time. So, the implications of speeding up this devaluation of the Yuan versus the US Dollar is fraught with risk, because in many ways, the US Economy today emulates the Mexican Economy a dozen years ago. In the early 1990's Mexico's economy was booming and Mexican stocks were the darlings of Wall St, with Telephonos de Mexico or Telmex, the most heavily traded issue on the NYSE with almost 1,000 Mutual and Hedgefunds long up to their eyeballs. Then one day, a savvy contrarian pointed this out and almost in the same moment, this house of cards began to unravel with breathtaking speed and in a way resembles the house of cards that many say the US consumer has leveraged out of en masse home equity financings, mostly at sky high real estate prices. So, the US Economy is somewhat vulnerable to an exogenous event that could set up the same kinds of conditions and what is particularly worrying, is that a weakening of the US Dollar, while positive in the longer term a la Mexico, could have dire consequences in the short to intermediate term, because, already, overnight, the currency markets have taken Paulson's cue and the Dollar has already begun to weaken from a level we described a few days ago, as potentially  the last gasp rally for the US unit, ahead of what could become an accelerating, it not precipitous decline... The point being that US investments that are held in large by China, Japan, Russia and the Middle East are vulnerable to currency risk and that could put a lot of pressure on US Treasury Issues and potentially US Equities also, but at the same time, Gold, Silver and hard assets would suddenly look a lot more appealing, so for those who can see such a potential future outcome unfold, this could be their opportunity to switch out of the Trillion Dollar Bond Play that for those who bought a few years ago or caught the recent Fed inspired rally, are still ahead with profits, but the large majority who may have bought Bonds at the top, would be facing double whammy losses, if Bond prices should fall further and the Dollar also goes into a serious decline or freefall. It is somewhat interesting also, that as we approach new all time record highs in the Dow, that it is really a lone horse run, where the Generals, ie the Dow 30 largest industrial conglomerates are rallying, in part, as we stated a long time ago, that because for many of these companies some two thirds of their earnings now come from overseas, that they are really enjoying an artificial boost that is sending them back towards their highs and as a prime example, there is no doubt that a strong Yen back over 100 to 1 to the US Dollar, would be enormously helpful to Detroit, as would a substantially stronger Yuan, with those increasing sales of GM vehicles in China. However, the bad news is, the Transportations and broader market issues are nowhere near new highs and as we also expounded some time ago and when we were making multiple new highs across the board in the first quarter, the very fact that this is not happening today, is a very big statement that the Economy is nowhere near where it was in the first quarter, we now know was 5.6% growth and we have already dropped down to 2.9%. The big question is: Can we maintain this more moderate pace of growth and get thru this without a hard landing? In actuality, a weaker Dollar would help ease that possibility a whole lot, because if the US Dollar were to fall about 10% more, that in of itself, could re-vitalize the housing industry to some extent, by making property more affordable to the overseas investors and at the same time US industry and especially the coming High Tech explosion we foresee, would make US Computing items dramatically more affordable to overseas buyers. So, in reality, a weaker Dollar while painful to the pocket, ultimately will be a lot better for the US Economy and for those who are invested defensively against the US, such as in Gold related assets, their day will come big time... On Tuesday MODAR had one of its biggest days ever and by some measures set a new record with almost 200 intraday recommendations in an incredibly busy session that was driven by a number of high performing stocks that MODAR was able to evaluate and capture moves. Trade Well From the Desk of Savant

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