Why in the heck would anyone in their right, or wrong, mind ever think markets have certainty? If they did, the quant funds wouldn’t be blowing apart right now. If they did, we would have no such thing as a dynamic pricing system. Market certainty is standing in line for eight hours for a loaf of bread in the old Soviet Union—you were certain nothing else was on the shelf, and certain the price would set by the state—that’s certainty for you!

In his book, The Misbehavior of Markets, Benoit Mandelbrot summed it up this way, as he described what an alien being looking down on our markets might see:

“Our alien, seeing a planet obsessed by so illogical a system, quickly decamps. But his observations of two forms of wildness remain: abrupt change, and almost trends. These are the two basic facts of a financial market, the facts that any model must accommodate.”

Mr. Mandelbrot appears to be a very smart guy. He knows a bit about math. He has done groundbreaking work on the markets with his research on power laws (corn market) and fractal mathematics (a field it seems he virtually created). If anybody could have found market certainty, he might be the guy. Yet he hasn’t!
The point is this: don’t ever enter markets expecting certainty. Expect to be fooled. If you work from that premise, all the rest is gravy.

I was asked recently: What are my favorite books about the market and trading? I boiled it down to my top six (couldn’t quite get to 5). And one of them is Mark Douglas’ book, “Trading in the Zone.” And the core reason this book makes the list is because Mr. Douglas makes it very clear there is no such thing as certainty in markets. He lays out why it’s critically important to have the right mindset going into markets. And he says, yes it’s important to do your homework and be disciplined. But, don’t believe that this game is anything more than a probability bet. The best we can do is “inch the odds of success ever so slightly” in our favor. And when we do that, pull the trigger (make the trade).

Some may argue about this. But just think about it for a moment. How many times have all the fundamentals lined up in your favor for a trade (a stock, bond, or currency), creating a great deal of “certainty” and yet you’ve been completely clobbered on the trade? I’d dare say for me, too many times to count. No matter how elegant the model, no matter how seemingly tight our inside contacts may be, we will always be fooled because there is no such thing as certain.

Markets misbehave. And sometimes they misbehave in a very big way. And the time they tend to misbehave most is when the consensus thinks there is certainty, or near certainty. For example of recent near-certainty groupthink: global growth is on track, China will continue to grow at 10% plus per year interrupted, interest rates will remain low, central banks don’t matter, on and on into infinitum. It’s all the stuff that one can never forecast, yet we fool ourselves in to believing in certainty.

Jack Crooks
Black Swan Capital
www.blackswantrading.com

Black Swan Capital’s Currency Currents is strictly an informational publication and does not provide personalized or individualized investment or trading advice. Commodity futures and forex trading involves substantial risk of loss and may not be suitable for you. The money you allocate to futures or forex trading should be money that you can afford to lose. Please carefully read Black Swan’s full disclaimer, which is available at http://www.blackswantrading.com/disclaimer

In fact, for many of the reasons I’ve discussed in past Money and Markets columns, the weight of evidence suggests that we’ve likely seen the bottom in the dollar, with a multi-year bull market ahead.

That’s a high level view. But how are things shaping up on a shorter term outlook for the buck?

Let’s take a look at the four stages of this prospective dollar bull market and the immediate catalysts that should underpin its continued strength …

Stage 1: Marking the Bottom

My analysis of the seven-year cycles in the dollar index suggests a cyclical bottom was marked when the dollar rallied sharply off of its all-time lows in 2008 driven by the uncertainty surrounding a growing financial and economic crisis.

Back then, capital fled all areas of the world in search of safety. And the dollar represented a safe parking place.

Stage 2: Retracement Period

Then we had the deep retracement of 2009. The global economy was showing signs of stabilization that encouraged global investors to start dipping their toes back in the water … i.e. taking risk again. That’s when capital was reversed out of the dollar in search of higher risk, higher return assets.

And just when sentiment was about as negative toward the dollar as it could possibly get, we were introduced to the first sign of collateral damage from the financial/economic crisis and the unprecedented government responses: Crumbling government finances.

The first wobbling sovereign nation, Dubai, quickly splashed water on the face of an increasingly optimistic global investment community. All of the sudden the theories of a V-shaped recovery became fractured by the realization that the widespread economic crisis could run deeper — a scenario that many had conveniently and complacently dismissed.

Stage 3: More Fear; More Risk Aversion

In recent months much of the dollar strength has been driven by fears of a sovereign debt crisis. And much of that strength has come at the expense of the euro and the British pound.

We’ve seen the dominos of a potential sovereign debt crisis line up, as I detailed in last week’s column. The tremors that started in Dubai, quickly turned scrutiny toward Greece and the other weak spots in the euro zone (Portugal, Italy, Ireland and Spain). And it appears increasingly likely to soon weigh on the UK economy and the British pound.

As we know, currencies don’t operate in a vacuum. They’re valued relative to the value of another currency. So, given the recent concerns about the future of the euro and the increasing spotlight on the next sovereign debt domino, the UK, the dollar is benefiting primarily because of the weakness of other major currencies.

And there’s another developing situation that should offer more fuel for the dollar …

Stage 4: A Falling Yen

The euro, the British pound and the Japanese yen make up 83 percent of the dollar index, the often quoted proxy for the economic firepower of the U.S. dollar on a global level.

While the pound and the euro have been under assault in recent weeks, the yen has been pushed and pulled in a tug of war: Strengthening as capital flows out of risky euro/yen and pound/yen positions, and weakening on the basis of fundamental divergences between the recovering U.S. economy and the deflation-burdened Japanese economy.

But the fundamental evidence has been clearly favoring the dollar relative to the yen for some time. What’s been lacking is a catalyst to send it higher.

Well, over the past two weeks we’ve finally gotten a clear catalyst to sell the yen against the dollar.

Catalyst for Yen Weakness

Back in August 2009, it became cheaper to borrow dollars (compared to borrowing yen) for the first time in sixteen years. In the chart below, you can see when the short-term interbank borrowing rate for dollars (Dollar Libor, the blue line) crossed below the equivalent interbank borrowing rate for yen (Yen Libor, the red line).

What looks like a minor rate differential can have a major impact on market perception. Since that cross occurred, the dollar lost as much as 13 percent against the yen as global investors began favoring dollars, as opposed to yen, to fund carry trades … i.e. selling dollars to fund the purchase of high yielding currencies.

But as of last week, this differential has crossed back, once again making the Japanese yen the cheapest currency in the world to borrow. And based on the diverging policy paths of the U.S. and Japanese central banks, this differential should continue to widen in favor of U.S. rates and dollar strength relative to the yen.

So given the ongoing crisis surrounding the euro, the vulnerability of the British pound from a continued spread of sovereign debt concerns AND the catalyst for a weakening yen, I’m expecting the dollar to continue its upward path against major currencies both in the short-term and longer-term.

This investment news is brought to you by Money and Markets. Money and Markets is a free daily investment newsletter from Martin D. Weiss and Weiss Research analysts offering the latest investing news and financial insights for the stock market, including tips and advice on investing in gold, energy and oil. Dr. Weiss is a leader in the fields of investing, interest rates, financial safety and economic forecasting. To view archives or subscribe, visit http://www.moneyandmarkets.com.

Of course, there’s nothing magical about age 65. Some people end their careers earlier and busy themselves in different ways. Others enjoy their work so much they keep on going as long as their health allows.

In either case, you probably have some idea when you’ll want to retire. And you probably consider it when planning your investment strategy — or at least you should. That’s because there’s a big difference between age 25 and age 60 when it comes to deciding what to do with your money.

ETF sponsors know this. They also know many people are looking for an “easy answer” that will let them save for retirement without having to think very much. Their solution: Target-date ETFs.

What’s Your Target Date?

For example, suppose you’re 40 years old. You’re in good health and live carefully. You like your work and think you can keep doing it until you are 70. That’s 30 years from now — year 2040.

With that many years to go, you can afford to be a little more aggressive now. When you get to 60+, you should probably pull back on your risk a bit.

Target-date ETFs automatically do this for you …

For instance in the above case, you might take a look at iShares S&P Target Date 2040 Index Fund (TZV). This ETF buys other iShares ETFs. The proportions are weighted to be more growth-oriented now, and will gradually change to be more conservative as the year 2040 gets closer.

Currently, TZV is allocated like this:

Source: iShares

As you can see in the above chart, the portfolio is invested almost completely in stocks — roughly 90 percent. This is what most advisors would probably recommend for someone with a 30-year time horizon.

The allocation won’t stay this way. As time passes, you will see less of TZV devoted to stocks and more going into bonds …

- In ten years, it should look much like the Target 2030 ETF (TZL) does today, with around 80 percent in stocks.

- In twenty years, it will look like the Target 2020 ETF (TZG) now, with about two-thirds in stocks and the rest in bonds.

- And in thirty years, it should look a lot like the 2010 fund (TZD) does now, with over half the portfolio in bonds.

iShares has a whole series of ETFs keyed to specific retirement years. Other firms offer similar products. They vary in the details of the asset allocation strategy and how it is applied, but the general idea is the same.

So What’s the Problem?

Target-date ETFs offer one-stop shopping with no need to make adjustments along the way. But I’m skeptical for five reasons …

First, their advantage is based on the assumption you will buy and hold them for many years. My experience tells me that very few people will actually do this. Investors get scared in bear markets and greedy in bull markets. They don’t just sit still like the “professionals” tell them.

Circumstances can change, too. For instance, you may decide to retire earlier than anticipated, or later. Then what? You spent decades paying for someone to implement a strategy you end up not even needing.

Second, the target-date strategy isn’t free. In fact you’re adding an extra layer of fees when you buy one of these funds. You pay once for someone to decide what ETFs to allocate your money into, and again for the ETFs they decide to buy.

Is the fee very much? In some ways, no. TZV charges 0.25 percent on top of the component ETF fees. Part of this is being waived right now, but the numbers add up over time. It could be thousands of dollars if you stick with TZV for as many years as they want you to.

Third, each fund family treats the target date differently. This means the stock and bond allocations will often be dramatically different between two funds with the same target date.

Many of these funds that were at or near their “target date” still got clobbered in the recent bear market. The reason is that many took on more risk in an attempt to look favorable when compared to funds with similar target dates.

Fourth, you probably don’t need them. The fact that you read Money and Markets tells me you want to educate yourself about investments. Chances are you can decide for yourself how to split your money between the different categories of stocks and bonds.

Fifth, investors like you are not the intended market for target-date funds. They are designed for people who don’t pay attention — folks who would otherwise keep all of their money in a low-yielding bank account.

But since you do pay attention, you can do a lot better! So it might not make sense to pay extra for something you don’t need.

This investment news is brought to you by Money and Markets. Money and Markets is a free daily investment newsletter from Martin D. Weiss and Weiss Research analysts offering the latest investing news and financial insights for the stock market, including tips and advice on investing in gold, energy and oil. Dr. Weiss is a leader in the fields of investing, interest rates, financial safety and economic forecasting. To view archives or subscribe, visit http://www.moneyandmarkets.com.

A surplus here, is a deficit there … that type of thing. It explains why austerity for all the bad children in Europe won’t work.

Just get on a strict diet of austerity, you nasty little PIGS, and everything will be just fine in the end. Yeah. Sure Mitch!

“Unfortunately, the domestic German debate assumes, wrongly, that the answer is for every member [of the EU] to become like Germany. But Germany can be Germany—an economy with fiscal discipline, feeble domestic demand and a huge export surplus—only because others are not,” Martin Wolfe writes in today’s Financial Times.

Fiscal indiscipline is a problem, no doubt. But it does not go to the core of the problem. Martin Wolf says it this way:

“Germany insists that every country should eliminate its excess fiscal deficit as quickly as possible. But that can only happen if current account balances improve or private balances deteriorate. If it is to be the latter, there needs to be a resurgence in private, presumably debt-financed, spending. If it is to be the former, there are two choices: first, current account balances must deteriorate elsewhere in the Eurozone, entailing a move to smaller private surpluses in countries like Germany. Or, second, the overall balance of Eurozone must shift towards surplus—a ‘beggar they neighbour’ policy,” Mr. Wolf summarizes.

Think of the Eurozone as a total economy by itself for a moment. Then I think you can better understand the little microcosm of imbalances.

Germany (France to a lesser degree on consumption side) is the “over producer and under consumer,” and the rest of the countries are the “under producers and over consumers.” This has always been good for Germany in the past, as these over consumers, who increased their private and public debt to purchase German goods, couldn’t buy them fast enough; which is why Germany retained the mantle of world’s largest exporter, till it was dethroned in 2009 by the Chinese juggernaut.

This captive base of consumers in Europe is one of the primary reasons why the euro came into existence in the first place. It seems unlikely Germany would not have given up its D-mark for the euro if it did not see a huge advantage for its industrialists. Thus, why the credit crunch has been the game changer; no longer are the over consumers in a position to buy as they did before the credit crunch. (Does this sound familiar—insert China in the place of Germany here and the US in the place of the over consuming countries of the Eurozone.)

Viewed this way, you can see why Germany takes a big hit to its exports if austerity is the only measure taken by the over consumers. If they become austere, they don’t have the money to buy German goods. If the over consumers must rebalance their fiscal deficits, through trade alone, they will be forced into the ‘beggar thy neighbor’ policy that will only increase political tensions in a zone that is already rife with tensions—as the old warring tribes of Europe are starting to beat on the drums. [This is evidenced by the recent very public lashing out at Germany’s Nazi past by Greece’s deputy prime minister. And we’ve been told privately it’s even worse.]

Is Germany prepared to start consuming more and exporting less to rebalance the zone? Unlikely as a policy choice. Imagine saying to the your German voters—“Well guys, we need to be relaxing more, taking on more debt, and producing less, so that we can be less competitive compared to our Eurozone comrades.” Ain’t going to happen, we don’t think.

A beggar thy neighbor trade policy from the fiscal basket case countries to reduce their current account problems seems unlikely—the over consumption that got them into trouble in the first place is precisely because they don’t have even close to the labor productivity as Germany; and its gotten worse as the Eurozone has “progressed.”

Back to Mr. Wolf [our emphasis]:

“Let me put the point starkly: Germany’s structural private sector and current account surpluses make it virtually impossible for its neighbors to eliminate their fiscal deficits, unless the latter are willing to live with lengthy slumps. The problem could be resolved by a eurozone move into external surpluses. I wonder how the eurozone would explain such a policy to its global partners. It might also be resolved by an expansionary monetary policy from the European Central Bank that successfully spurred countries and also raised German inflation well above the eurozone average.”

We are betting on a European Central Bank cut. Mr. Wolf’s summary today is precisely why we have written in Currency Currents recently that we expect such an event and why the real or future perceived growing positive yield differential between the euro and the dollar will be yet another reason to favor dollars; the other reason of course is relatively stronger US economic growth.

And going back even further to our writing, we wrote this back in June 2009 in our Special Report on the potential Demise of the Euro:

By virtue of one central bank for 16 different countries suggests to us an inherent flaw. Granted, globalization has led to more synchronized business cycles among all countries, but there will always be discrepancies. And with 16 potential business backdrops, and the ECB effectively focusing on Germany’s needs first and foremost, there are bound to be tensions. Up until very recently these tensions have been muffled. No more. We are now finally starting to see public bickering among the various ECB council members. No surprising given the asymmetrical shock is upon us.

The bickering is about how loose the ECB should be going forward. The German’s want more austerity and conservatism, always afraid of stoking the fires of inflation, while others want more ease and liquidity as financial pressure build across the zone. In addition to more ECB ease, many states want increased aid from Germany.

Before we go further here, it is important for us to emphasize that German has been more than happy to provide more than its share of subsidization of weaker states in the European Union. It is a quid pro quo. Germany effective controls monetary policy and the creation of the EMU gives Germany industrialists a captive common market to dominate. But now, as we told you in the introduction, the game is changing and Germany is no longer receiving its benefit from the Union as demand for German goods plummets across the region.

Juergen Stark, the Bundesbank ECB Council member issued a public warning to the German government that bailouts of other weak EU Members would be a violation of European Union Law, specifically prohibition against monetary financing of government expenditure.

These comments come on the heels of Athanasios Orphanides of Cyprus (with deep connections to the U.S. Federal Reserve), George Provopoulos of the Greek central bank, and Ewald Nowotny of Austria recent Cyprus calls for near zero interest rates and quantitative easing by the ECB. Bundesbank President and ECB Council member Axel Weber came down hard against both central bank purchases of assets from banks as well as against policy interest rates below 1%. This incident was reported this way: This is the first time in the history of the European Central Bank that its Council members are engaged in a major dispute over policy in wide open public view, as reported by Leto Research.

We have been fortunate to have a friend who knows a whole lot about Europe. And fortunate that this friend’s friend — a proprietor of Leto Research – is a truly brilliant man on global macro dynamics (we quoted him in our original Euro Demise report). Given he is of Greek origin, he knows much more than the average bear about Greece and its historical interrelationship with the vaunted Eurozone. He summed it up this way in a research piece this week:

“Portugal, Spain and Italy are similar to Greece. In just the same way as Greece, their debts arose from financing the purchase of goods and services from Germany and France (and their satellite economies of Belgium, the Netherlands and Luxembourg). The root cause of their indebtedness is the same: the fact that the Eurozone, despite claims to the contrary, was never anything more than an arrangement to secure captive markets for German exports. About 50% of German export surpluses come from “Club Med” countries. Unless that arrangement is overturned, Portugal, Spain and Italy will follow the path to oblivion that Greece has entered: First, a wave of austerity that cripples economic activity and shrinks the taxable base, then asset stripping ordered by a future European Monetary Fund to the benefit of German creditors.”

Our call: EURUSD goes to par against the dollar or possibly well beyond. Keep in mind, EURUSD once traded at around $ 0.8300. Stay tuned.

Jack Crooks
Black Swan Capital
www.blackswantrading.com

Black Swan Capital’s Currency Currents is strictly an informational publication and does not provide personalized or individualized investment or trading advice. Commodity futures and forex trading involves substantial risk of loss and may not be suitable for you. The money you allocate to futures or forex trading should be money that you can afford to lose. Please carefully read Black Swan’s full disclaimer, which is available at http://www.blackswantrading.com/disclaimer

But, according to Mr. Papandreou, it is not the Greek budget deficit of 12.7% of GDP, nor its public debt ratio of 113%, nor S&P’s projection that the ratio will rise to 138% by 2012, nor the deceit of the previous Greek administration in disguising the extent of the 2010 deficit, nor its financial chicanery before joining the euro in 2001, nor the demonstrations and protests in Greece over the pension and salary cuts forced by his austerity budget, that have caused investors to sour on Greek sovereign debt. These items are secondary. It is the fault of the speculators “those …who only place value on immediate returns, with utter disregard for the consequences on the larger economic system”. The Greek government is perfectly willing to sell its bonds to ‘investors’ in the private market but does not want to have to pay the price they demand for lending their money.

Things would certainly be easier for the Greek Prime Minister if the misdeeds of his government had not been brought so dramatically to light in the CDS market. Life would be simpler for Angela Merkel and Nicolas Sarkozy if they did not have to consider rescuing Greece over the strenuous objections of their electorates. But for these leaders to blame the “speculators” is a ploy worthy of the cheerfully cynical Captain Renault in Casablanca. The immediate cause of the Greek debacle is the unfettered European welfare state and it is as obvious as the gun that killed Major Strasser.

But unlike Captain Renault whose order to ‘round up the usual suspects’ is the first evidence of his political change of heart and conversion to the Free French in World War II, do not expect any likeminded conversions by the Greek Premier, the French President or the German Chancellor, to the righteous cause of budget discipline and economic growth.

To understand a sideways market, it’s important to be able to recognize a trending one. Some traders use popular indicators and chart patterns to read a market, in order to determine whether the market is trending up or down. Another way to spot a trending market is to look for a market that is making higher highs and higher lows (an uptrend), or lower lows, and lower highs (a downtrend).

When a market isn’t making higher highs or lower lows, bars are typically overlapping as the market trades in a range. In this environment a trend fading strategy, selling highs and buying lows, is the perfect way to trade. This is exactly what we look to do when using the Ping Pong Strategy that we trade at Rockwell Trading.

The name “Ping Pong” says it all. We are looking for the market to bounce back and forth, while we sell highs and buy lows. Although traders can technically trade different time frames, our favorite chart for trading the Ping Pong Strategy is a range bar chart.

In the chart below, you will notice that overlapping bars are often found in between trending markets. It’s in these ranges that the Ping Pong strategy is most effective and easiest to apply.

Trading the Ping Pong Strategy, we want to enter long when the market is moving sideways, and when a bar completes with a new low. This is one of the advantages of using range bars over time bars. With a range bar, a new bar will begin when a specified range has been exceeded, so we will always know where a bar will complete with a new high or low.

Trading the E-mini S&P 500, our first Ping Pong entry is a long at 1053. When the market moves up and we get a new bar with a close higher, we reverse the trade and go short at 1055. This locks in a 2 point profit and we will reverse at the next low. The next reversal takes place at 1053.75. With this reversal we lock in a 1 ¼ point profit and we look to reverse short at 1055.25. This next reversal locks in a 1 ½ point profit and we reverse going long when we get a new low at 1054.50, locking in another ¾ point profit. You’ll notice now that we are long but our next trade doesn’t take place until the short at 1053.75. This reversal comes 3 bars later because each range bar closed lower instead of higher and for us to close, or reverse a long Ping Pong trade, we need to see a bar close higher.

Let’s review the trades:

At this point our reversals show a 4.75 point profit and we’re short 1 contract at 1053.75. Another reversal would lock in another winning trade, but remember that we are trading a trend fading strategy that is meant to be traded in a sideways market. The market has remained in a range for more than 10 bars and is starting to test the lower range. A break here and series of lower lows could indicate a trending market, which we see just a few bars later.

A word of caution…This strategy is ONLY meant to be used in a sideways market. It cannot be placed on autopilot and you must manage your trades. If you’re uncomfortable recognizing the difference between a trending and sideways market, a little chart reading and practice can go a long way. Last but not least, it is very easy to overtrade this strategy and give back profits. Consider a target of 2 points a day, and let money management do the rest of the work for you.

Happy Trading!

Mark Hodge

Mark is an independent trader and Head Coach at Rockwell Trading (http://www.rockwelltrading.com). He has traded all markets and timeframes but specializes in short term futures trading. As Head Coach at Rockwell Trading, Mark works one on one with beginners and professionals alike, and conducts educational webinars for traders around the world.

I also said that in a global crisis, these sovereign debt fears have the ability to be contagious. Such fears can destroy investor confidence in the capital markets of troubled countries, as well as in the overall global economy.

And when confidence wanes, capital flees … a surefire recipe for falling dominoes. That’s especially true in the wake of a deep global recession that has left many countries with bloated deficits and debt loads.

Despite the European leadership’s attempt to lessen the sense of urgency in the euro zone and despite the ambitious plans rolling out to shave outsized deficits, the problems with governments’ finances are not finding a resolution.

More likely, it’s just the beginning of another major destabilizing force for the global economy. And the result is looking more like another bout with recession … or perhaps depression.

Here’s a brief look at how the dominos are setting up to fall, and ultimately why I think the British pound is the next vulnerable currency, as fear and instability spread from country to country.

Falling Domino #1: Dubai, the Wakeup Call

In late November the Dubai government created a hiccup in the rosy plans that many market participants were increasingly hitching their wagons to: A V-shaped economic recovery.

All of the sudden the new, innovative center for global finance was in default. And contrary to what was assumed, its rich neighbors weren’t there to provide a lifeline.

Now Dubai World’s debt holders are getting only 60 cents on the dollar for their government bond investment.

Falling Domino #2: Greece, Next in Line

Greece, the weakest of the sixteen-member European monetary union, the euro, was running a budget deficit more than four times the limits set forth in the euro-zone’s fiscal constraint guidelines.

The ratings agencies took the alert from Dubai. And they started slashing Greece’s sovereign debt ratings sending out a warning signal to all debt holders and making Greek government debt refinancing that much more difficult.

Falling Domino #3, #4 and #5: Portugal, Ireland and Spain The Next Troubled Spots

Greece isn’t the only euro-zone country in trouble … Portugal, Ireland and Spain all have severely bloated deficits and debt levels. That puts them in violation of European monetary union (Emu) guidelines, not to mention diminishes their outlook for economic growth — a tool desperately needed to start dealing with their red ink.

Consequently, the ratings agencies have put these weak countries under the magnifying glass. And ratings and outlooks have been downgraded. For example, Spain, the third largest economy in the euro zone, lost its AAA rating in January.

In prior Money and Markets columns I’ve discussed in more detail how the developments within these troubled Emu members have exposed structural flaws in the euro and have created an irreparable moral hazard.

Now, European leadership has stepped in and promised to provide support to the most immediate need: Greece.

By doing so it opens the floodgates. Meaning there is nothing to stop the other weak, fiscally-irresponsible members from lining up hat-in-hand to be bailed out by the stronger, more fiscally-responsible ones.

As for the euro, this total breakdown in the foundation of the currency union has it on a path for destruction or, at best, an extended period of uncertainty.

Falling Domino #6: The UK, Looking Grim

The next, most vulnerable and biggest domino in line to fall is the UK. Among G-7 countries, the UK has the weakest performing economy, the largest deficit and the worst deterioration of its debt position.

As conditions get worse in the euro zone and it becomes increasingly evident that there are no clean fixes, the UK is the most likely candidate to come under the gun.

The British pound plunged to its lowest level in 24 years against the dollar at the height of the financial crisis … now just a year later it appears another test of that level is in the cards.

And that’s where the outlook for the pound looks grim. Already, this week, negative forces have gathered against the pound taking it to its lowest level vs. the dollar in more than ten months!

So while the uncertainty about the UK government’s finances continues to build, I expect the pound to be the next victim of currency speculators.

Falling Domino #7: The U.S.? In the Crosshairs

In this spread of sovereign debt fears, bond market pressures and falling dominos, the U.S. is in everyone’s crosshairs. And in a scenario where a sovereign debt crisis spreads through the major economies of the world and impacts some of the largest, most liquid currencies, the world doesn’t look like such a safe place any longer.

Therefore, if you’re evaluating your investment options, you’re likely seeking the highest probability for return of your capital rather than return on your capital. And I think the flow of global capital will demonstrate that the currency of choice will be the U.S. dollar and dollar-based assets.

This investment news is brought to you by Money and Markets. Money and Markets is a free daily investment newsletter from Martin D. Weiss and Weiss Research analysts offering the latest investing news and financial insights for the stock market, including tips and advice on investing in gold, energy and oil. Dr. Weiss is a leader in the fields of investing, interest rates, financial safety and economic forecasting. To view archives or subscribe, visit http://www.moneyandmarkets.com.

My takeaway: This is but a preview of what’s to come here in the U.S.

Why the Crisis Is Coming To a Head in the U.K.

Britain’s finances are in shambles. The country’s budget deficit is running at more than 12 percent of gross domestic product, roughly the same as in Greece. In fact, for the first time, the country recorded a whopping $6.7 billion deficit in January … much worse than the $3.9 billion SURPLUS economists were expecting.

The U.K. government is planning to sell $349 billion in debt this year, the most ever, to cover its deficit. But demand is flagging, with foreign investors dumping the most U.K. sovereign debt in nine months in January and yields generally rising.

Then a few days ago, the crisis came to a head. The catalyst: New polling data that threw the British political outlook into chaos. Polls showed that the Conservative Party’s lead over the Labour Party shrunk to its lowest level in more than two years.

It now appears that neither party could come out of spring elections with a clear majority, leaving the U.K. with a “hung” parliament. That would make it much more difficult for the government to reduce the nation’s debts and deficits.

With all of that, it’s no wonder …

– The British pound plunged six days in a row, its longest series of declines since October 2008.

– The yield on 10-year U.K. government debt recently hit 4.27 percent, compared with a low last fall of 3.44 percent.

– The cost of protecting against a British debt default in the credit default swap market surged to more than 101 basis points, or $101,000 per $10 million of debt. That’s up from around 44 bps in the fall.

Striking Similarities …

You don’t need a Ph.D. in economics to see the striking similarities between the situation in the U.K. and the situation here in the U.S. …

– Our debt situation is totally out of control, with the national debt on track to double over the next decade to almost $19 trillion.

– Our budget picture is a mess, with $8.5 trillion in deficits projected over the next 10 years.

– Our foreign creditors are starting to sell our bonds, with China alone dumping $34.2 billion of Treasuries in December, the most ever.

And politically, we’re facing the same gridlock and inaction as the U.K.
Just look at the deficit commission nonsense …

President Obama had to create an 18-member panel by executive order because Congress voted down an earlier proposal. Since it’s a presidential commission, Congress can just ignore any findings. And those findings won’t even be released until December 1, for purely political reasons (that’s after the mid-term Congressional elections).

Lastly, just like the U.K., we have bailed out, backstopped, or otherwise taken over so many institutions and segments of the capital markets that our own balance sheet is getting shakier and shakier.

As PIMCO Chief Investment Officer and “bond guru” Bill Gross just noted in a monthly commentary:

“If core sovereigns such as the U.S., Germany, U.K., and Japan ‘absorb’ more and more credit risk, then the credit spreads and yields of these sovereigns should look more and more like the markets that they guarantee. The Kings, in other words, in the process of increasingly shedding their clothes, begin to look more and more like their subjects. Kings and serfs begin to share the same castle.”

Bottom line: We’re running this country’s finances off the rails. And just like in Greece … Ireland … Spain … and now the U.K., it’s going to come back to haunt us.

So consider dumping your long-term U.S. bonds, and buying some gold as a hedge against global debt and deficit problems. Or if you’re more aggressive, check out a service like my Crisis Opportunity ETF Trader, where my subscribers are positioned to profit from this unfolding fiscal nightmare.

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