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The Best Speculation in the World Right Now

By Dr. Steve Sjuggerud
Friday, August 8, 2008

I just got back from Europe yesterday morning...

And I have to tell you... right now, Europe is one of the best and worst places to visit.

I've been fortunate enough to visit dozens of countries around the world. And I still count London and Paris at the top of the list of "must-see" cities.

If you haven't been, you must go... just not now!

You see, prices in Europe are insane for Americans...

A taxi from London's Gatwick Airport to the city will now cost you US$200, compared to US$50 for the same trip in New York. And plan to pay at least US$500 a night for a Marriott-like hotel room in London. (For that you get a small bed, period. Anything else will cost you more.)

Since the room will cost you so much, and since you'll want to do some sightseeing, you figure you'll save on food, right? Not so fast...

Even a basic McDonald's Big Mac will cost you a lot. As I mentioned inTuesday's DailyWealth, the recent edition of the Economist magazine says a Big Mac costs a "whopping" US$4.57 in England. It's nearly 30% pricier than in the U.S.

The problem now is the exchange rate. Just like stocks and real estate, currencies can get outrageously expensive. Right now, European currencies are as expensive as they've ever been.

It's time for them to come back down. And it's time for investors to bet against them. One factor that's going to work for this bet is interest rates...

When the interest rates in one country are higher than another (all things being equal), money will flow to the country that pays higher interest rates.

Since Fed Reserve Chairman Ben Bernanke's been trying to pry the U.S. out of its housing mess, he's cut interest rates to artificially low levels (2%). Meanwhile, the Europeans haven't given enough weight to the risk of recession, and therefore haven't cut rates. The last move was a hike in rates to 4.25%... So money has flowed out of dollars and into euros.

I don't like to bet on long-term interest-rate movements. But as we look ahead, the interest-rate trends may reverse... Europe is sliding toward recession. Manufacturing is down in part because European companies can't compete anymore, price-wise. Their products are too expensive at these exchange rates.

Interest rates are a key tool central bankers use to head off recessions. Soon, Europeans may need to cut interest rates to "save" their economies.

Meanwhile, we've already done this in the States. Bernanke may need to raise U.S. interest rates from their artificially low levels. We're now ahead of Europe in the cutting and hiking rates game.

England and the rest of Europe originally thought they were immune to the problems we're experiencing in the U.S. But it's turned out they're not... So the interest rate advantage Europe has enjoyed over the U.S. could be ending.

Of course. But the euro "rubber band" is stretched as far as it's ever been stretched. That means expect a rise in the dollar, and a fall in the euro.Today, the dollar is incredibly cheap versus our major trading partners – the cheapest it's ever been. Could it get cheaper? Said another way, could the euro continue to get even more expensive?

Good investing,


Market Notes


Interesting news from Mr. Market... The downtrend in HOG may be finished.

HOG is the ticker for America's largest motorcycle maker, Harley-Davidson. We keep HOG on a watch list along with the likes of Home DepotPool Corporation, and Nordstrom. These stocks prosper when folks have spare cash to spend. They suffer when cash is tight.

As you can see from the left side of the chart, Harley has been suffering. Shares fell 50% from January 2007 to March 2008. Folks just aren't buying $20,000 motorcycles like they used to.

Now look at the lower right corner of the chart. HOG shares have clung stubbornly to the $37 area for six months. The stock has "built a base," as chart watchers call it... indicating the horrid times may be over. Charts of HOG's consumer-dependent brethren look the same.

What's going to happen to the resilient American consumer? Keep an eye on HOG shares. A break below $35 will tell you things are getting worse. A break above $42 will tell you things are getting better. We'll keep you updated.

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