Outrages (Both Grand and Small) and the Way to Dodge Them All

Adam Lass, Senior Editor of WaveStrength Options Weekly, sees more trouble ahead for the dollar and the Japanese yen.

Sometimes the outrage is wholesale: Vast trillion dollar errors committed by smooth-talking hooligans in top hats and tails. Lord knows we have seen enough of THAT lately, what with million dollar executive bathrooms and billion dollar Ponzi schemes.

But sometimes the outrage is on a smaller scale, like the poor Michigan vet you read about here last week who was frozen to death by local power company apparatchiks. Today, I’d like to start with a bit of a tornado in a bottle, before we turn our minds back toward the hurricanes that are driving the global economy for cover.

I’m sure that most of you drive automobiles of some sort or another, and I believe that it is a reasonable assumption that you purchased that car with a note from a bank. Finally, I’ll bet that you traded in an older vehicle to the dealer when you bought the new one.

Yes, yes, I know: You’ll always make more selling the dear old coupe yourself. But who on earth has the time or mental strength to deal with the hassle of placing the ad, answering all the calls, and dealing with all those strangers?

What’s more, there may be a tad left over on your old loan that needs to be dealt with, so it’s just so much simpler to let the guys at the dealership deal with it. It’s almost like an act of mystical transubstantiation: You drive in with a grimy old car, write a single check, and drive away with a shiny new one. Ah, but as always, the devil is in the details.

These days, car dealers are having about as rough a time as anyone you could name (except maybe bankers). GM (GM: NYSE) and Ford (F: NYSE) sales in January fell 49% and 40% respectively.

Many dealerships are virtual ghost towns these days, complete with tumbleweeds rolling across the showroom floor. In fact, many are simply closing up shop altogether.

And therein lies the rub: It seems that some of these gentlemen are acting less than, well, gentlemanly when it comes time to shut down, leaving many of their debts unpaid. Oh, and also a few of yours as well.

Specifically, they have neglected to pay off the remaining loans on cars they have accepted in trade. As I mentioned earlier, bankers aren’t doing terribly well either these days. Indeed, they have enough red ink on their books right about now to turn the Nile biblically crimson.

Having no profits to speak of, when some local auto dealer declares bankruptcy, the banks are in no position to right off the loans he has neglected. So they are left with two choices: They can put liens on the owners of record. Or they can go after whoever has the car now.

Suddenly regular folks, who are already hard up against it keeping up with upside-down mortgages, two-income families trying to operate on one and a half incomes (or maybe just half incomes), suddenly find out that they now have two car loans to pay off ASAP.

I know I said that this was one of life’s littler outrages, but it isn’t all that small really. Indeed, any of the roughly 25% of the buying public who overlap loans in this fashion could find themselves in exactly this sort of “double jeopardy.”

As word spreads of this danger, an entire cadre of customers may find themselves waiting out the last few years of their loans, rather than risking their credit, a trend that can only exacerbate the decline dealers and manufacturers are suffering.

Now let’s turn our focus back toward grander scales. U.S. auto manufacturers are not the only ones suffering in this crisis: Nissan (NCM:NSANY) is expecting $2.9 billion in losses for the fiscal year ending March 31, and has announced some 20,000 pink slips in an attempt to staunch the bleeding. Twelve thousand of these job cuts will hit the home islands.

Even Toyota (TM:NYSE), inheritor of GM’s title of “global lead dog,” is looking back to see how it got bit on the rump. Nissan can still remember losing money back in the bad old days of the previous recession. But Toyota’s $3.85 billion annual loss is its first such failure since 1950!

Nor is this slump restricted to Japanese automotive manufacturers. Rather, the car types are simply joining companies like Toshiba, Sony and Panasonic, all of whom are stressed trying to sell into the critical U.S. market.

The cause of this stress is two-fold: First there is the obvious, the 14-month long U.S. recession. But beyond that, there is also the Japanese yen’s perennial strength against the dollar.

While Tokyo’s central bankers may want to see the yen cut down a notch (or 10!), the inadvertent conspiracy between prudent Japanese housewives (who insist on saving yen whenever possible), and the U.S.’s willingness to spend not only our own but our great-grandchildren’s dollars has overwhelmed the balance, making Japanese goods just too darned expensive on this side of the pond.

Right now, the two central banks are at a bit of a stalemate, what with rates in both countries hanging out right about the zero mark. Not to worry, both Tokyo and Washington are busy inventing new ways to force ever more currency onto the markets.

Lately we’ve seen that balance seesaw a bit. However, in the end, Tokyo’s inherent conservatism will be overwhelmed by Washington’s incredible profligacy. We’ve just invented a trillion new dollars, a feat no one this side of Zimbabwe is looking to replicate anytime soon.

I expect the dollar to resume its habitual relationship to the euro, yen and gold shortly, and recommend that investors continue to buy shares of the SPDR Gold Shares Trust (GLD: NYSE), which has gained some 25% over the past four months.

Other Related Topics: Currency Investments , Economic Growth , Editor Adam Lass , Foreign Automakers , Gold Investments , WaveStrength Options Weekly

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