Good day… And a Happy Friday to one and all! The end of what seemed to be a very long week… The last weekend in June, can you believe that? Next week, we’ll be getting ready for the 4th of July celebrations! WOW!

Well… What a volatile week it has been in the currencies! Up, down, all around, and settling back to levels that we saw before the Fed’s FOMC meeting earlier this week. Suddenly, investors are looking for yield again… Looks like they are “Desperately Seeking (not Susan) Yield! And why not? The Fed, and the Bank of Canada (BOC) have come out and said that there will be no interest rate hikes until we’ve turned quite a few pages on the 2010 calendar.

So, with investors clamoring for yield, the dollar gets taken to the woodshed… As I said earlier this week, one of these probes above 1.40, need to take hold of the figure and build on it, otherwise we’re doomed to remain in the 1.35-1.40 range, and range trading is for the birds! Talk about counting flowers on the wall, and watching paint dry! UGH!

I was shocked yesterday to see but a few emails asking me more about the SDR’s story that I talked about… Men, women, boys and girls, all… This is important stuff! Don’t take it lightly! There’s a movement underway that could end up costing you dearly, if you do not take the diversification steps…

I think it is important to know that the BRIC countries (Brazil, Russia, India, and China) are serious about replacing the dollar with a “global currency” i.e. the IMF’s SDR’s… And… That the BRIC’s want more power on the World’s stage… And why not? These countries currently have almost 3 Trillion in foreign reserves… And… A very large piece of the world’s population… (Thanks for that fodder, Kevin!)

OH! And guess who was banging the drum for a “super-sovereign” currency overnight? China, that’s who! So… They’re Baaaaaaaaccccckkkkk! OK… This was the People’s Bank of China (the Central Bank), that made this statement, along with a call for the IMF to manage part of member’s foreign exchange reserves… Hmmm… OK, I just said that China wants more power on the world stage, and here they are saying that their puppet will be the IMF! OK, I took some liberty with that, but it’s the way I see it!

OK… Back to what’s going on in the currencies today… Hmmm… The dollar is getting taken to the woodshed to end the week, that’s what’s happening! And the currency leading the pack with regards to performance VS the dollar, drum roll please…. The Brazilian real… A 3 day “winning streak” has the real back to levels it saw before the Brazilian Central Bank (BCB) cut rates about 10 days ago…

The way I see it, and long time readers know this will be interesting in the least, is that investors want to invest in the BRIC countries, but there’s very little liquidity there in each of those currencies, along with very little yield, except… In Brazil… Liquidity isn’t what the majors enjoy, in fact it’s still traded on what’s called a “non-deliverable forward”, which means it can only settle in dollars, with no deliverability, but… It’s traded easier and less costly than the other BRIC’s and… It has the highest interest rate available… So… You can see why investors are buying reals…

Having said that though… You must know about the volatility… Look at what happened this week… On Monday, we started the week with the real at 1.9750, only to see it rocket to 2.0326 in one day’s trading, a near 3% move / loss in one day! Then we saw it rally back to 1.9795 the next day, and after 3 days of gains the real sits at 1.9420 this morning, thus generating a “gain” for the week! And… The other thing, is that Brazil is considered an Emerging Market… And long time readers have learned over the years that when one Emerging Market gets slammed, they all get taken to the woodshed… So… Be careful out there!

A high yield currency that far removed from the early days of trading like Brazil, but offers yield, is the New Zealand dollar / kiwi… And kiwi has been held back, although still posting a gain VS the dollar, overnight as 1st QTR GDP printed at a negative -1%, thus marking the 5th consecutive quarter of negative growth in New Zealand…

I’m probably out there on the big fat limb (to hold me up, of course!) by myself on this one, but… I personally believe that both the Reserve Bank of New Zealand (RBNZ) and the Reserve Bank of Australia (RBA) have seen the lows in their interest rates, and no further rate cuts will come from these respective Central Banks. I know, that last week, we were all hyped up about future rate hikes from the RBA in 2010, and we probably got a little ahead of ourselves with that thought… I’m probably ahead of the curve on the “end of rate cuts” talk… But that’s where I like to be!

So… When the world’s investors are looking for yield, they don’t have to go to Brazil, or India… They can go to the old reliables… Australia and New Zealand, with a reduced fear of further rate cuts… At least that’s they way I see it! And yes, I could be wrong…

And how about Gold and Silver this week? What a week on Mr. Toad’s Wild Ride for precious metals… The main thing though is that they are finishing the week with a rally, and Gold which was trading at $922 on Monday, is $944.85!

And how about that grilling that Big Ben Bernanke received yesterday by legislators over the Fed’s conduct in the Bank of America (BOA) takeover of Merrill Lynch… You may recall that BOA’s CEO, Ken Lewis said he was “bullied” into taking over Merrill and not disclosing to his shareholder all of Merrill’s losses that were on the books… Big Ben denies that he participated in any bullying… (doesn’t that lead to Paulson then? Did Big Ben just throw Paulson under the bus?)… Any way… Big Ben did little to convince the legislators that the Fed didn’t keep their hands out of the cookie jar… And that, my friends, may be the foot in the door that we’ve been looking for… Maybe, just maybe, because you never know, but with the legislators having questions about the Fed and Big Ben, they probably aren’t in any mood to hand over the regulatory powers that the President wants to give them…

And… My old fave Central Banker, NOT! Big Al Greenspan was back in the news last night… I’m trying to figure out how he and I got on the same side of the ship… But, here was Big Al, my nemesis for years, talking about inflation being a concern… Let’s listen in to Big Al… Alan Greenspan, former chairman of the Federal Reserve, said the threat of inflation needs to be confronted because it poses a threat to economic recovery. “Excess capacity is temporarily suppressing global prices. But I see inflation as the greater future challenge,” Greenspan said. “If political pressures prevent central banks from reining in their inflated balance sheets in a timely manner, statistical analysis suggests the emergence of inflation by 2012.”

Of course, I think inflation will be showing its ugly face next year, not 3 years from now!

And on the data front… The Weekly Initial Jobless Claims “surprised” economists by moving back up, after falling last week… 627,000 unemployed Americans filed for unemployment claims last week… No “green shoots” here! In fact… We need to see if we can use these so-called Green Shoots that the President and Big Ben keep talking about, for ethanol… They’ve got to be good for something! HAHAHAHAHAHAHAHA! I must say that a reader gave me that line!

And here’s Warren Buffett on Green Shoots… “I had a cataract operation on my left eye about a month ago and I thought maybe now I’ll be able to see green shoots. We’re not seeing them. Whether it’s retailing, manufacturing, wherever. We have a big utility operation. Industrial demand is down like we’ve never seen it for a simple thing like electricity. So it hasn’t happened yet. It will happen. I want to emphasize that. But it hasn’t happened yet.”

And… Then… There was this… A good story to end the week and head to the Big Finish with…

Barclays Capital Inc. (Barclays) the world’s third largest currency trader, have lowered their one-year forecast for the dollar, saying foreign investors will reduce their purchases of U.S. assets… Barclays referred to the dollar’s status as “safe-haven paradise lost”, due to the ballooning fiscal deficit and the printing of money by the Central Bank… Barclays believes that the euro will be trading at 1.50 in a year…

Hmmm… Nothing new there for Pfennig readers, but, I always find it to be good to see others with their BIG research departments, no divisions, yeah, divisions, that’s bigger than a department! Wait, get back on track, here Chuck! Yes, the Big research divisions, that finally come around to what little old me has been saying for months now… Oh! And that “little old me” has just got to crack up any one that knows me, and have seen me lately!

And one more thing… Oil is back to $71 this morning, as there has been more problems in Nigeria… Let’s hope these problems go away!

Currencies today 6/26/09: A$ .8055, kiwi .6450, C$ .8710, euro 1.4085, sterling 1.6490, Swiss .9210, rand 7.9680, krone 6.4250, SEK 7.8125, forint 196.20, zloty 3.1975, koruna 18.50, yen 95.40, sing 1.4540, HKD 7.75, INR 48.21, China 6.8338, pesos 13.18, BRL 1.9420, dollar index 79.86, Oil $71.07, 10-year 3.55%, Silver $14.25, and Gold… $945.65

That’s it for today… Well… Today marks the 2-year anniversary of the surgery that removed my cancer ridden femur, and replaced it with a prosthetic. Quite an ordeal, but… Here I am! Rock you like a hurricane! Oops, sorry, got carried away there! I’m so happy that’s behind me now! Well… Michael Jackson has died at 50 years old… When I think of Michael Jackson, I just remember my two oldest kids, playing that Thriller album over and over again. The heat wave over us continues, but is expected to back off next week… My little buddy, Alex, turns 14 on Sunday. WOW! We began a tradition when he was quite young, of the two of us going to breakfast on his birthday. Two years ago, when I was in the hospital, my darling daughter, Dawn, brought Alex to the hospital with breakfast, so we could continue the tradition. I hope I can continue celebrating with him for many years to come. So… Happy Birthday Alex! Real long time readers might recall when Alex was 3, and would sit on my lap as I wrote the Pfennig from home, and every once in awhile the text would look like this… 9087lkndy7, and I would say, “sorry, Alex is helping me again”… Alex has already made me aware that he can get his drivers permit next year… YIKES! OK, time to head off into the sunrise… (not sunset, as I’m writing at daybreak, HAHAHAHA) The currencies are having a Fantastico Friday, so why don’t we joining them?

Source: Desperately Seeking Yield

The creation of a new reserve currency to be issued by international financial institutions was one of the measures Russia proposed to the G20 on March 16, ahead of the group’s summit next week.

Russian authorities previously met with financial ministers and central bankers from China, Brazil and India on March 13. The group issued its first-ever joint communiqué ahead of the G20 finance ministers last Saturday, March 14.  The joint statement did not mention a new currency like Russia proposed, but an unidentified source told Reuters that the issue was discussed.

Chinese policymakers confirmed as much today (Monday) when Zhou Xiaochuan, Governor of the People’s Bank of China, released an essay entitled “Reform of the International Monetary System” on the BOC’s Web site.

Without explicitly mentioning to the U.S. dollar, Zhou asked what kind of international reserve currency does the world needs to secure global financial stability and facilitate economic growth.

According to Zhou, the dollar’s unique status as the world’s primary currency reserve has resulted in increasingly frequent financial crises ever since the collapse of the Bretton Woods system in 1971.

“The price is becoming increasingly higher, not only for the users, but also for the issuers of the reserve currencies,” Zhou said. “Although crisis may not necessarily be an intended result of the issuing authorities, it is an inevitable outcome of the institutional flaws.”

Zhou called for the “re-establishment of a new and widely accepted reserve currency with a stable valuation” to replace the U.S. dollar – a credit-based national currency. The central bank governor noted that the International Monetary Fund’s Special Drawing Right (SDR) should be given special consideration.

Created by the IMF in 1969 to support the Bretton Woods fixed exchange rate system, the SDR was redefined in 1973 as a basket of currencies. Today the SDR consists of the euro, Japanese yen, pound sterling, and U.S. dollar.

“The SDR has the features and potential to act as a super-sovereign reserve currency,” said Zhou. “Moreover, an increase in SDR allocation would help the Fund address its resources problem and the difficulties in the voice and representation reform. Therefore, efforts should be made to push forward a SDR allocation.”

Zhou proposed the following actions to move the SDR in a direction that could better accommodate demand for a more stable reserve currency:

• Set up a settlement system between the SDR and other currencies. Therefore, the SDR, which is now only used between governments and international institutions, could become a widely accepted means of payment in international trade and financial transactions.

• Actively promote the use of the SDR in international trade, commodities pricing, investment and corporate bookkeeping. This will help enhance the role of the SDR, and will effectively reduce the fluctuation of prices of assets denominated in national currencies and related risks.

• Create financial assets denominated in the SDR to increase its appeal. The introduction of SDR-denominated securities, which is being studied by the IMF, will be a good start.

• Further improve the valuation and allocation of the SDR. The basket of currencies forming the basis for SDR valuation should be expanded to include currencies of all major economies, and the GDP may also be included as a weight. The allocation of the SDR can be shifted from a purely calculation-based system to one backed by real assets, such as a reserve pool, to further boost market confidence in its value.

Many analysts view the campaign by emerging markets for a new reserve currency as an attempt by to gain more control in the IMF, which has traditionally been dominated by richer countries. But the new currency campaign is also further evidence that Beijing is becoming less and less comfortable with its large holdings of U.S. assets, namely Treasuries.

Concerns about the dollar losing value have escalated in recent weeks as the U.S. Federal Reserve pursues a policy of quantitative easing in an effort of taming the financial crisis.

“We have lent a huge amount of money to the United States,” Chinese Premier Wen Jiabao said earlier this month. “Of course, we are concerned about the safety of our assets. To be honest, I am definitely a little bit worried. I request the U.S. to maintain its good credit, to honor its promises and to guarantee the safety of China’s assets.”

China is the world leader with $2 trillion in foreign currency holdings. About half of that is held in U.S. Treasuries and notes issued by other government-affiliated agencies, such as Fannie Mae (FNM) and Freddie Mac (FRE).

Half of Russia’s currency reserves – the world’s third-largest stockpile – consist of U.S. dollars, as well.

Source: Emerging Markets Seek to Dump the Dollar as World’s Main Reserve Currency

Good day… And a Wonderful Wednesday to you! The first full day of the new regime… I will say this, it makes one proud to be an American when you can watch a peaceful, even extravaganza, handing over of leadership… It really rips me up when I read that the Wall Street Boys really contributed cash to the inauguration proceedings… Making certain the new President knows who contributed cash to his party… Probably cash they received from the Gov’t in bailout payments! Nah… That couldn’t happen… Could it?

Well… The currencies didn’t really trade outside of a very tight range yesterday, except for the pound sterling, which continues to fall VS the dollar, euro, yen, and probably even the Zimbabwe currency! OK, that’s harsh! But I wanted to paint the picture, so that everyone understood the grave situation the pound sterling is in… The Bank of England has decided to take 70% control of the Royal Bank of Scotland, and nationalization isn’t far behind for that bank, and a few others…

Yesterday, the Bank of Canada (BOC) lowered their official interest rate by 100 BPS or 1%… I told you long ago that the BOC would follow in the Fed’s footsteps, and they have… Canada had it all going for them last year, with gold rising, Commodities like Oil, natural gas, and metals all rising, but that curtain came down hard on Canada and their dollar / loonie. It will be some time before the loonie can recover… but… if my scenario of soaring inflation for the U.S. and rising Commodities again comes to fruition, then it won’t be that long, not in the scheme of things…

There was word yesterday that the Monetary Authority of Singapore (MAS) stepped in to support the Sing dollar after it had fallen to a 6-week low. This kind of intervention works in this case, as the Sing dollar is relatively small in circulation, and the intervention doesn’t have to be of size to stabilize a market… But, they (the MAS) need to know when to get out, and let the markets be… They gotta know when to hold ‘em, know when to fold ‘em….

Gold put in another strong performance yesterday adding $21 as I left for the day. Jennifer asked me during the day if this was a first, with Gold and the dollar rising… I said that I had seen it before, but it certainly doesn’t normally go that way… For Gold is another offset currency to the dollar… Which leads me to believe that it wasn’t so much dollar buying as it was euro selling yesterday…

The Boys and Girls at Morgan Stanley issued a report on Gold recently that called for Gold to reach a new record within the next 3 years. They call for the Gold to “average” higher each of the next three years through 2012, with the average this year to be $900, next year $1,000, the following year $1,050, and $1,075 in 2012… Personally, I believe their call to be quite conservative, something that we’re going to see a lot of in the next few years, as these research teams, back off the “hyper-calls” for assets, as they walk gently over eggshells in an attempt to not garner the spotlight…

At least they’re calling for higher Gold prices… You normally don’t see Wall Street firms going out of their way to talk up Gold… For that thought, you normally don’t see Bankers talking about Gold either… That’s where I’m different! I talk to one radio station quite often and they call me the “un-banker”! That’s right, baby! I’m not even your last choice as a “banker”… I’m a markets guy…

OK, enough of that self-promotion! HAHAHAHAHAHA!

Back to the markets… Well, the Obama bounce didn’t come in the first day of his Presidency, as the Dow sold off by 332 points! UGH! OUCH! That’s going to leave a mark! So far, one piece of the Obama bounce, the dollar, has rallied… But the other, stocks, have fallen on their face…. We’ll have to see what stocks think about the $850 Billion stimulus package that the Obama team is working on…

Here’s the skinny on the package, that could still grow… It certainly isn’t going to narrow! The stimulus plan covers 5 areas of spending and tax breaks… Health, education, infrastructure, energy, and support for the unemployed and the poor. All worthy areas… Unfortunately, we (the U.S.) don’t have the funds to pay for this… Now… If we weren’t already in a huge deficit hole, then a stimulus package to get the economy going might be the answer… But, that’s not the case! I told a radio station a week ago that the Roosevelt plan worked back in 1933, but it could have just as well failed, it was that touch and go, and if it weren’t for the war it might not have… This time, we’re starting in a deep, dark deficit hole… I sure hope it works… I just can’t get my arms around how adding $2 Trillion to our national debt this year helps…

How did I get to the $2 Trillion? Well… The Congressional Budget Office (CBO) has already told us the deficit in 2009 would be $1.2 Trillion. Recall I had a cow over that announcement! Well, the CBO’s budget forecast does NOT include the new stimulus plan of $850 Billion… I’ll tell you what it also doesn’t include… Any new military expenses… And the remaining TARP money that the Obama team just came into…

I just heard, and sang along with, out loud, good thing no one else is here!, one of my all-time face Chicago songs… Hard Habit To Break… Yes, the habit of deficit spending is a Hard Habit to Break apparently… So, where’s the change?

OK, Whew! I really went off on a tangent there, eh? Oh, some of that was from my radio interview, and some of it was from my good friend, David Galland, who recently put out a piece on the spending… David used to take my Review & Focus draft, and make music with it… What a writer!

I see where Christopher Cox, resigned from his leadership role at the SEC… I think back to the election process when John McCain was asked what he would do about the financial mess, and his first response was to say that he would fire Cox… McCain got all kinds of flak for that… But in hindsight, given the failure of the SEC to spot Madoff’s alleged ponzi scheme, that call doesn’t look so bad now, eh? So… According to Harvey Goldschmid, a former Democratic SEC Commissioner, the SEC was “passive” under Cox… Well, you can expect that pendulum to swing swiftly to the other side… As with all things in life… They go too far one way, and when somebody notices, they swing too far the other way… Never finding a “happy medium”…

Someone sent me a note yesterday and said I hadn’t mentioned the Swiss franc and why it had fallen on hard times, after posting a great 3-month return… I pointed back to a previous Pfennig that pointed out that UBS was involved in a bond scandal in Italy, and it reverberated all the way to the franc… Of course since then the euro has fallen from 1.34 to 1.29, and that has even more to do with the recent movement in francs… Remember… The euro is the Big Dog of currencies…

I’m currently reading a research report on China, in my “spare” time I might add! The research plays well with what I’ve been harping about for some time… And that is rising inflation in China, and how the Chinese officials should use a stronger renminbi to combat that inflation… There are a lot of people, researchers, pundits, out there calling for China to slow down their renminbi appreciation VS the dollar… I’m on the other side of that fence, as usual, right? I think the Chinese WILL use the renminbi as an inflation fighting tool… More later, when I have some “spare” time!

For readers of our monthly client newsletter, Review & Focus, you’re in for a special treat in February… The Big Boss, Frank Trotter, submitted a special report called “The March of the Presidents” which goes back to Nixon, and gives grades based on raw data, not sentimental, of “soft stuff” … Strictly numbers… Inflation, unemployment, etc. Look for it at a news stand near you!

Currencies today 1/21/09: A$ .6510, kiwi .5210, C$ .7925, euro 1.2925, sterling 1.3770, Swiss .8750, rand 10.2725, krone 7.04, SEK 8.3250, forint 220, zloty 3.3660, koruna 21.42, yen 89.80, sing 1.5025, HKD 7.7580, INR 49.11, China 6.8375, pesos 13.95, BRL 2.36, dollar index 86.20, Oil $41.29, Silver $11.40, and Gold… $860.70

Source: Gold Moves Higher With The Dollar

The single unit was higher within the 1.29 handle overnight than it is right now, as it has given back a bit of ground on the news that a European Union Commissioner, Buti, said that, “economic indicators point south very badly.” This is strictly, jawboning to keep the euro’s move VS the dollar in check, folks…

The Bank of Canada (BOC) did cut rates yesterday 75 BPS… You may recall me telling you yesterday that the “experts” thought the cut would be 50 BPS, but I thought it would be 75 BPS… Maybe, one day, these surveys of “experts” will include the Pfennig writer, as he seems to be more “on target” than the current “experts”! Now, Chuck, who would you be referring to here? HA!

I also said yesterday that I didn’t think the markets would care, and they didn’t, as the larger rate cut did little to hurt the loonie. In fact, the loonie rallied a bit on the news!

Again, I don’t understand the mentality here with these Central Bank rate cuts… It’s not the cost of the credit that’s keeping the credit crisis all locked up, it’s the availability of such credit / money! So… Here’s a memo to Central Banks around the world… “STOP ALREADY!” All you’re are doing is inviting inflation into your economy, and debasing your currency!

That glimmering light that I talked about the other day for the Credit Crisis is getting smaller all the time, as the Big 3 still don’t have their bailout from the Gov’t (read taxpayers)… It now looks as though it could get done today, but at a much smaller figure than previously discussed. It now looks as though the Big 3 will get $15 Billion and they had better smile and say “thank you very much” as they leave the room!

It also looks like the Big 3 will get the “Car Czar” that they so desperately fought to keep from looking over them. The “Car Czar” will have the power to call Chapter 11 on GM or Chrysler should they not deliver a sound plan by the end of March. Geez Louise, why do they get 4 months to some up with a sound plan? They should have had one to get the funds to begin with! OK, I had better stop there, I’m really pounding the keys right now… I think I’ll step away for a minute and cool off…

OK, I’m back now, hope you didn’t miss me, or that I was away too long! No wait, this is text, you have no idea how long I was gone! Silly me!

You know… I was thinking aloud in my car yesterday, and saying to myself that it sure looks like all those pundits that called for a breakup of the European Union by the end of the year, will have to put their tails between their collective legs, and fade away… You know, the European Union (EU) had more pressure on them in 2005, when the French voted no on the Constitution, and other things, and they held steadfast then, and if they could it then, then this little tiff with Spain and Italy will pass… These pundits like to point to the problems that Italy is experiencing… And I say…”What’s so new about that? Italy has had problems since I’ve been following currencies (1985 for those of you keeping score at home)! I truly believe that Italy and Spain like to complain about the European Union and the euro, but when they get behind closed doors, when they let their hair hang down, they thank their lucky stars that they were included in the Euro Club!

The boys and girls over at Bank of America (BOA) believe they are seeing the dollar repatriation flows waning… Now, I wonder how many research people they employ over at BOA, when all it would take is for one of them to read the Pfennig, to see that I said all that yesterday! Any way… Let’s listen to what BOA had to say about this… “The repatriation demand for the dollar may have run its course, we retain our core long euro-dollar exposure and add long euro-dollar exposure today”… Now… You would think that given the size of BOA that saying something like that could really “move the market”…

But, given the markets “don’t care” attitude until the credit crisis unlocks, I understand why it didn’t! The BIG POINT here is that we could very well be seeing all this dollar repatriation end. And… Like I said Monday, the risk takers were slowly dipping their toes back into the waters which is what it will take to get the currencies and precious metals on the rally tracks again. But, put these two things working together, and voila’ you’ve got the makings of what could very well be a Santa Rally…

The boys over at the Bank of Japan (BOJ) are at “it” again… Mom… He’s doing it again! He’s looking at me! Mom! He’s got his hand on my side of the car seat! OK, I’ll stop there… But the BOJ was “jawboning” again in an attempt to keep the yen from strengthening further VS the dollar. BOJ Gov Shirakawa reminded the markets last night that the Ministry of Finance has the option of intervening if necessary… The Ministry of Finance (MOF) are the signal callers for the BOJ, and they are the ones that determine if intervention is to come into play. For new readers… BOJ intervention means the Bank sells yen in the markets to keep it from getting too strong.

In the currency world, this is called a “dirty float”… And the MOF and BOJ like to keep it “dirty”…

OK, I was laughing when I wrote that last bit, but notice I didn’t carry on… Maybe I’m growing up! HA!

Down Under in the South Pacific, Australia saw a very nice rise in Consumer Confidence of 7.6%, adding on to November’s 4.3% gain. The index collapsed this summer, but with the rate cuts the Reserve Bank of Australia (RBA) have instituted, it seems to be rounding back into shape.

In New Zealand, Reserve Bank of New Zealand (RBNZ) Gov. Bollard, gave a speech titled “Everyone needs to play their part.” In the speech, Bollard, reminded everyone that New Zealand’s inflation rate is still very high (5.1%). Hmmm… Was that the “wink and nod” that interest rates are not going to go much lower? I think it was folks.. But I guess it all depends on if the rest of the world continues to think that by cutting rates they will unlock the credit crisis!

Both of these things for Aussie and kiwi could underpin the currencies at current levels…

And another “Commodity Currency” the Brazilian real really put on the Ritz yesterday with a very strong rally… Just another sign that the risk takers are dipping their toes again…

OK… I’ll slide away from the currencies for a minute to talk about a news article that one of my fave writers, William Pesek, provided to Bloomberg, titled: China Will Be Happy Geithner Isn’t a Goldman Guy… Here are some snippets of the article that can be read in its entirety HERE.

“Why does Goldman Sachs run your government?”

After seven-plus years in Asia, I’m no longer startled by this question. It was posed to me yet again recently — this time by Kuala Lumpur taxi driver Sumit Kotari.

“What’s wrong with America is that it’s run by investment bankers, mostly from the same bank,” the 49-year-old Malaysian said. “How can Americans stand for it? Is Barack Obama from Goldman Sachs, too?”

It has been reported in Asia that Neel Kashkari, assistant Treasury secretary in charge of the Troubled Asset Relief Program, worked for the same New York-based investment bank. President-elect Obama’s decision to seek advice from other former Goldman Sachs bigwigs, such as Robert Rubin, also grabbed attention.

Even the guy helping choose a replacement for Timothy Geithner at the Fed Bank of New York came from Goldman Sachs. It makes one breathe a sigh of relief that Geithner, who will be the next Treasury secretary, doesn’t have Goldman Sachs on his resume.

The point here isn’t to pick on Goldman Sachs. Yet it is seen by many in Asia as the gold standard of investment banks. Its name also is a byword for the perception of incestuous ties between Wall Street and Washington.”

OK, I’m back now… The point of the discussion is to acknowledge that to Asian, it appears that Goldman Sachs runs our country… Now, that may be perception, but as they teach you perception is reality. And you have to wonder if the Asian Central Banks are shaking their heads at what we’re doing, and how we’re doing it… Now, some might say, “Who cares what the Asian Central Banks think of what and how we’re doing it.?” Ahhh grasshopper… We all have to be very cognizant of what the Asian Central Banks think about us, because, you see… They hold most of our I.O.U.’s and they could make things very messy for us any time they wish!

So… How about the Illinois Gov. getting arrested yesterday? Could it be two Illinois Governors incarcerated? That whole story is pretty amazing that someone would do what he is alleged to have done, knowing that his phone was tapped!

Ok enough of that! We’ll see the Monthly Budget Statement / Deficit for November, today… Look for it to explode!

Currencies today 12/10/08: A$ .6590, kiwi .5465, C$ .7950, euro 1.2950, sterling 1.4830, Swiss .83, ISK 261, rand 10.21, krone 7.0475, SEK 8.1650, forint 203.50, zloty 3.05, koruna 19.99, yen 92.60, baht 35.50, sing 1.5010, HKD 7.75, INR 49.01, China 6.8835, pesos 13.50, BRL 2.4725, dollar index 85.71, Oil $43.80, Silver $10.02, and Gold… $792

Source: A Bailout For The Big 3

Yes… So, Obama’s call that the economy will get worse before it gets better, plays well with his pledge to spend more money…

This spending pledge really helped the currencies yesterday, otherwise I wouldn’t have spent 30-seconds talking about it! You see, the markets are slowly coming back to the fundamentals, the risk takers are slowly coming back too, and when that happens in earnest, we should see the end of this stupid Trading Theme that has gone on far too long for my taste! But back to the markets’ reaction to the announcement… Of course, you have to remember that we still have over a month before Obama takes office, and unless he’s going to pound this message in everyone’s heads every day until then, this could all be forgotten soon… And then we’ll be able to tell if the Trading Theme is a thing of the past, or if we have to continue to live with this for some time to come.

So, the currencies rallied throughout the day yesterday, but saw some consolidation overnight, and then very tight trading ranges this morning in Europe. The euro traded briefly with a 1.29 handle yesterday… This morning, German Investor Confidence as measured by the think tank, ZEW, unexpectedly rose for a second month. Apparently, Investors like the European Central Bank (ECB) rate cuts, eh? While this repot on the outside would appear to be positive for the euro, the markets are still focused on the Credit Crisis… So, it has had little to no impact.

The Bank of Canada (BOC) meets to discuss rates today… I’m sure they will cut them, why wouldn’t they follow the rest of the world’s Central Banks in a race to zero percent? The rate announcement will come around 9 am this morning, and the “experts” are forecasting a 50 BPS rate cut. But I say, why go so low? They can point to the rest of the world and say, see, we’re just keeping up with the Joneses… So… Yours truly expects 75 BPS… Canadian Housing Starts fell 22% last month! So… This, larger rate cut, won’t hurt or help the loonie, as the markets “just don’t care!” anymore… You can hear them singing… I don’t care anymore… I don’t care anymore… I don’t care, what you do…

OK, If I can’t play, then I’m taking my bat and ball and going home! Yes, the famous tantrum thrown by millions of kids over the years, looks like it’s being played out again over at the Brokerage that owns a bull… Yesterday, I told you about Merrill’s CEO John Thain, in a tiff over a $10 million bonus with the compensation committee. Well, yesterday Mr. Thain, according to the Wall Street Journal, said “no mas” , forget about it! He has announced that he will not accept a bonus this year. “That’s right, if I can’t have $10 million, I won’t take anything!” OK, the last quote was mine, but that’s what I hear him saying… Hey! Why not take the $10 million down to the Salvation Army!

Yes, I know, that’s all is “stuff” and not of currencies… So I digress…I couldn’t pass it by though, you know me!… So, I apologize! So, back to the currencies and economies, eh?

Well… It didn’t take the people that bought Anheuser Busch long to begin their cost cutting… The Anheuser-InBev people announced yesterday that 1,000 of my fellow St. Louisans will be cut from the payrolls… You can see them in the boardroom frothing at the mouth when the Jobs Jamboree was printed on Friday… This is how I see this going down… “Hey, did you see that 533K jobs were lost in November, Carlos? Yes, I did, and that gives us a chance to move up our job cutting to now, as we can point to the “economy” as the culprit in the job cuts.”

Hey, did you see the “Money and Politics Show” on TV last night? (I didn’t, as I’m sure I was in bed!) But, the former CEO of Bear Stearns, Alan Greenberg, was interviewed and he said that, “There’s no more Wall Street. That model doesn’t work because it’s at the mercy of rumors. The entire make-up of Wall Street has changed forever.”

Hmmm… Interesting take, don’t you think? Or could be just sour grapes, as his company was forced to sell at bargain basement prices to JP Morgan.

Are you following the hearing on the fall of Fannie and Freddie? Well, the Washington Post says that the House Committee on Oversight and Gov’t Reform will hear that… “Internal Freddie Mac documents show that senior executives at the company were warned years ago that they were offering mortgages that could pose dangers to the firm, hurt borrowers and generate more risky loans throughout the industry.”

There will also be a memo that circulated Freddie… “former Freddie chief enterprise risk officer David Andrukonis wrote that the company was buying mortgages that appear “to target borrowers who would have trouble qualifying for a mortgage if their financial position were adequately disclosed.”

I could really go into a tailspin right here, and head down the road that points fingers and calls for public hangings and that sort of thing, but I’ll stop right there! No need to rehash this stuff!

But doesn’t hearing that stuff just get your blood boiling!

The Tribune Company did indeed file for bankruptcy yesterday, as the rumors said they would.

OK… I was looking at a rate screen on the Bloomie yesterday, and noticed something that really struck me as interesting. The Fed Funds rate is 1/16th… But wait! Didn’t the Fed cut the Fed Funds rate to 1% at the last meeting? Yes, they did grasshopper, but… The people in the trenches are trading Fed Funds to each other at 1/16th… Does that tell you something? Well… It tells me that my inclinations that the Fed is going to move rates to near zero, are bang on! These daily transactions wouldn’t be trading this low, unless rates were going there! Bernanke-san… Just call him Bernanke-san, as you sing, I’m turning Japanese, yes, I turning Japanese, I really think so!

For new readers, that whole production is all about the fact that I believe that the U.S. is following Japan and Japan’s leaders in how they dealt with the decade of economic mess… If you go back to the mid-90’s you’ll find the Japanese economy circling the bowl, and the Japanese Gov’t and Central Bank, issuing stimulus package after stimulus package, building huge amounts of Gov’t debt, and cutting interest rates to zero… Now… Ask yourself, what country / Central Bank does that remind you of in 2008? By Joe, you’ve got it! You sank my battleship! It’s the U.S. / Fed!

Still no word on the Gov’t’s answer for the Big 3 automakers here in the U.S. We’re waiting for the final answers if you will on whether the Big 3 get bailout money, how much, and will they get a “Car Czar” to oversee them… The stock jockeys liked the news yesterday that it looked like a thumbs up for the Big 3… Until then… We wait.

The Chinese renminbi is back on the rally tracks VS the dollar after some hemming and hawing over the Paulson / China talks… I still don’t expect much from this, but slow positive moves are better than none!

Currencies today 12/9/08: A$ .6555, kiwi .5415, C$.7960, euro 1.2860, sterling 1.4775, Swiss .8245, ISK 261, rand 10.19, krone 7.12, SEK 8.17, forint 205, zloty 3.0590, koruna 20.03, yen 92.60, baht 35.45, sing 1.5040, HKD 7.75, INR 49.59, China 6.8734, pesos 13.46, BRL 2.4780, dollar index 86.16, Oil $43.45, Silver $9.88, and Gold… $770.50

Source: Spending More Money

And Japanese yen is “getting bought!” Yen is trading in the 93 range this morning… Strong, very strong!

When this all began, I truly believed that it would last through the elections and on to the end of the year… Then the magnitude of the problems were revealed, and I changed that to lasting probably through to spring. The longer it takes the “boys” Paulson and Bernanke, to get this credit market crisis unlocked, the longer it will take before we return to the fundamentals that continue to get worse by the day.

On Friday, Chris printed some thoughts I had left him regarding the data that printed on Wednesday, wasn’t that just downright scary? I know that a ton of you all had the day off on Friday, and didn’t see the Pfennig that day, so for those of you that missed class on Friday, here’s what I had to say about the data prints from Wednesday…

New-Home Sales Sink 5.3% to Lowest Level in 17 Years U. Mich. Confidence – new low since ‘80
Chicago PMI collapses Consumer Spending Fell to 7-Year Low in October (manufacturing for that region)
Americans’ Food Stamp Use Nears All-Time High

And can’t imagine what in the world the people that make the official call on a recession the NBER (National Bureau of Economic Research) are thinking… I called this a recession back in January, and they have yet to make the call… Amazing!

Of all that bad data, the only one that will have a good outcome in the end, is the Consumer Spending falling to a 7-year low. We’ve gone on with this spending more than we make, for far too long! Now, if we could just get the Gov’t to do the same!

Now onto this week… So, as I said above, the risk aversion theme is back… There will be a ton o’ data print this week with it all culminating on Friday with the Jobs Jamboree… Just peeking ahead at Friday, the “experts” believe the job losses for November will be 320K, with the unemployment rate moving to 6.8% from 6.5%. That’s downright ugly folks.

Speaking of ugly… Today, we’ll see the color of the Nov. ISM (manufacturing) Index, which collapsed to 37 last month, and is expected to have fallen to 32 in Nov. All this “bad data” does is put the Trading Theme front and center even more…

OK, The Chinese renminbi has fallen .73% overnight, which is the largest drop for the currency since dropping the peg to the dollar in July 2005. I find it interesting that the banking officials allowed the renminbi to drop by that large of an amount right before, U.S. Treasury Sec. Paulson is about to visit… Can’t you just hear the Chinese saying something like this to Paulson… “See, Mr. Treasury Sec. we can play games with our currency too, and so now if you’ll just get yourself back on that plane, and leave us alone, we’ll see where the currency goes next.”

The Chinese have their own problems right now, and making sure their currency continues to strengthen isn’t one of them! China has shifted from “inflation fighting” which requires a strong currency, to “promoting growth” which doesn’t! And with exports set to collapse next year, given the U.S. recession, a currency strengthening just isn’t on their agenda any longer.

There will be a truck load of Central Bank rate meetings this week, beginning with the Reserve Bank of Australia (RBA) tonight. The Reserve Bank of New Zealand (RBNZ), Bank of England (BOE) and European Central Bank (ECB) are all expected to cut rates this week, and then next week, we’ll see rate cuts from the Bank of Canada (BOC) and the Fed Reserve…

Global rates are going lower and lower folks, we had all better be prepared for this, as it is going to happen, no doubts. For instance, I fully expect the RBA to announce a 75 BPS rate cut tonight or tomorrow, whenever they do it…

Now… Enough rate talk… How about we visit the goings on with the bailouts? Oh, goodness gracious, no! I don’t want to go there! My blood pressure is doing just fine today! Oh? I have to? The little guy on my right shoulder is telling me to not go there, and the little guy on my left shoulder is telling me to do it, NOW! Hmmm… Ok, I won’t do it, but what I will do is give you a thought from a reader, who is an investment advisor regarding all of this and the Gov’t taking ownership of banks… Let’s listen in…

“Does anybody out there have any memory of the reason given for the establishment of the DEPARTMENT OF ENERGY during the Carter Administration? Anybody? Anything? No? Didn’t think so. Bottom line .. . we’ve spent several hundred billion dollars in support of an agency the reason for which not one person who reads this can remember. Ready? It was very simple, and at the time everybody thought it very appropriate. The Department of Energy was instituted 8-04-1977 TO LESSEN OUR DEPENDENCE ON FOREIGN OIL. HEY, PRETTY EFFICIENT, HUH? AND NOW IT’S 2008, 31 YEARS LATER, AND THE BUDGET FOR THIS NECESSARY DEPARTMENT IS AT $24.2 BILLION A YEAR, THEY HAVE 16,000 FEDERAL EMPLOYEES, AND APPROXIMATELY 100,000 CONTRACT EMPLOYEES AND LOOK AT THE JOB THEY HAVE DONE! THIS IS WHERE YOU SLAP YOUR FOREHEAD AND SAY ‘WHAT WAS I THINKING?’ Ah yes, good ole bureaucracy. And now we are going to turn the Banking system over to them?”

Now, that’s one of those things you say, Whoa There Partner! I’ve warned about this Gov’t sticking their hands into banks and acting like owners before… But that’s exactly what’s happening folks…

OK, enough… Let’s talk Gold a bit… Mark O’Byrne, executive director at Gold & Silver Investments, has his attention on the open interest numbers.

Comex gold futures open interest—the number of outstanding contracts—declined sharply this month, falling to 289,700 contracts in the week ended November 18, according to the Commodity Futures Trading Commission. That’s down 9.3% from a month ago.

What the low open interest means is “that nearly all the speculative froth has been liquidated and remaining longs are ‘strong hands’,” O’Byrne says. “This will encourage more long interest to enter the market and should contribute to markedly higher prices in the coming weeks.”

OK… But… We need to see the markets return their focus on the fundamentals to weaken the dollar before we get any “real traction” in Gold… At least that’s my opinion, although Gold did have its best month in 9 years in November, gaining 11%…

Well, the good news from the weekend was that the Black Friday retail Sales were stronger than expected… But what’s going to happen when, as I said above, job losses post a 320K figure at the end of the week? I think it takes the wind out of those sails in a heartbeat!

I’ve gone on a bit this morning, but there’s lot to talk about, and that means an Iceland update! Reuters reported on Friday that… REYKJAVIK, Nov 28 (Reuters) – Iceland’s parliament passed legislation on Friday to curb currency outflows and the central bank vowed to restrict credit as authorities moved to restart trade in the collapsed Icelandic crown.

“The bank will maintain tight control over the access of banks to central bank credit until exchange market stability has been achieved,” Sedlabanki said on its Web site.

It said temporary currency restrictions, which had been necessary for Iceland to function at a basic level, would be lifted in stages.

“A considerable proportion of crown-denominated securities are owned by foreign investors. Lifting restrictions by stages will make it possible to unwind their crown-denominated positions in a systematic way, as the external balance permits, without undue impact on the exchange rate.”

There have been quite a few individuals that have ripped us for our handling of the Iceland meltdown, but as you can read above, there WERE CURRENCY CONTROLS in place…

One industry that’s not experiencing slowing sales… Guns… Barack Obama apparently is the best salesman the gun industry has had in years! With many buyers worrying about higher taxes or limits put on guns and ammo, sales are quite brisk since the election… I sure wish I was talking about home sales being brisk, or computers, or something like that…

Currencies today 12/1/08: A$ .6425, kiwi .5355, C$ .8045, euro 1.2675, sterling 1.5040, Swiss .8285, ISK 230, rand 10.25, krone 7.0280, SEK 8.1825, forint 207.35, zloty 3.0425, koruna 20.2330, yen 93.90, baht 35.75, sing 1.5285, HKD 7.7518, INR 50.29, China 6.8842, pesos 10.25, BRL 2.3735, dollar index 86.71, Oil $52.07, Silver $9.94, and Gold… $794.00

Source: Back to Risk Aversion

Good day… And a Happy Friday to one and all! Looks like it could be a Fantastico Friday as traders are finally coming around to Chuck’s way of thinking regarding Fed rate hikes… And as traders remove their bets for aggressive Fed rate hikes, the luster begins to fade on the dollar rally. The meetings are over for this week (they start up again next week!), YAHOO! I get to spend the day on the trading desk… I’ve missed everyone!

OK… Front and center this morning, we have the euro (EUR) trading 1-cent higher, knock, knock knocking on Heaven’s Door, I mean, the 1.56 handle. As I said in the intro, it appears that traders don’t have the stomach to hold on to their bets that the Fed will aggressively raise interest rates this year. Recall, the other day, I told you that the bets were ratcheting up and had reached 75 BPS of rate hikes this year… I doubt we have any. In fact, as I told you the other day too, I believe that when the dust settles on the fact that the Fed isn’t going to raise rates, things will have gotten so bad here that the Fed will be entertaining thoughts of cutting rates again!

Japanese yen (JPY) had really been beaten about the head and shoulders this past week, as it re-visited the 108 handle… But with the stocks looking soft, it recovered a bit the past two days. The Royal Bank of Canada (RBC) says that the dollar is overbought versus the yen. Hmmm… I agree with that, but I think RBC’s call for a yen rally to 105.60 is not enough. That’s too conservative for me… But then, I get emotional about these things. I called for yen to rally to 100 this year, and while it got very close, it didn’t quite have the strength needed to reach that level. I based that call to 100 on the fact that we would have another “risk” event in the markets this year, which would lead to risk aversion, stock selling, carry trade reversal, and a yen rally! We still have half a year to go, but the year is moving fast!

Speaking of the carry trade… I receive dozens of emails each week from people asking me what the carry trade is… For long time readers, we’ve been through all this more times than you can count… But for new readers, well… It’s all new! So here you go! The carry trade is basically selling a low yielding currency (whose borrowing costs would be low) short, and taking the proceeds to buy a higher yielding asset. When the borrowing costs go up, or when the currency that was sold short rallies, it makes this trade very costly, and it then gets unwound/taken off.

OK… Back to currencies… Yesterday, I told you about Brazil’s Central Bank chief, and his calling out the Bank of England’s handling of inflation… Well, Mr. King of the Bank of England (BOE) heard that and came out with his own strong words… King said in an interview that the BOE needs to focus on rising inflation, not growth… OK… I’m with you there! The markets will take that to mean higher interest rates, considering the fact that inflation is well over the BOE’s 2% ceiling. And when that thought process enters the markets, the pound sterling (GBP) will be underpinned, and in fact it is rallying as I type my fat little finger to the bone here!

Here’s a story I doubt you saw on your news station yesterday… China said it will raise domestic gasoline and diesel prices by 17%-18%, as it responds to near-record crude-oil futures and criticism of its fuel subsidies. The surprise move is the largest increase in over four years, although local prices will still be below the international market. In case you weren’t aware… The Chinese government subsidizes fuel prices for their people… You see a country that has over $1 trillion in currency reserves can afford to do that! However, with the price of oil continuing to rise, even the Chinese had to say “no mas!”

I doubt this will be too heavy a load for the Chinese economy to bear… He ain’t heavy, he’s my brother! So… Expect the beat to go on in China, which means a slow, drip of currency appreciation at a time.

This news led oil prices lower for the day… And that’s OK in my books! And looky there! The euro just went back above the 1.56 handle! No more knocking… Someone’s knocking at the door, somebody’s ringing the bell; do me a favor, open the door and let them in… Why hello, Mr. Euro! How are you today? It’s good to see you back in the 1.56 neighborhood! Why thank you… It’s good to be back… I was lost in the 1.53 block for a long time, and people kept telling me I wasn’t worthy any longer, but I sure showed them, eh? HAHAHAHAHAHAHA!

OK, I’m back now, that was silly… But, you know me, once I get typing, I can’t stop, it’s simply a stream of consciousness!

Bank of Canada’s (BOC) Governor Carney gave a speech last night, that should be quite the underpin for the Canadian dollar/loonie (CAD). Carney indicated that the BOC was finished with their rate cuts and have moved to a neutral bias. He also talked about how a strong loonie would help exert a “dis-inflationary” influence. The loonie took notice and is rallying this morning.

Yesterday, we saw the color of the latest Philly Fed Index (manufacturing in that region), and it looked awful! The Index was “expected” to fall to negative -10, but instead it fell to negative -17… Uh-Oh! This leaves this index near the lows of earlier in the year. Significantly worse levels have occurred only in outright recessions. And you know me… I contend this to be a recession!

The data cupboard is bare today… No data, nothing, nada, zilch! And for the dollar, that’s probably a case of “no news is good news”!

Next week we’ll have the first Fed FOMC meeting since Big Ben began “fighting inflation”. The markets will be greatly disappointed when they leave rates unchanged, and leave the “downside growth risks” on the board… But don’t let that get in the way of dollar bulls still thinking they have the upper hand here… Too bad they’ll get that hand slapped next week (and the following weeks) when the Fed continues to do nothing, absolutely nothing, say it again!

Did you see that the ratings agency, Moody’s, announced that they were cutting the ratings of MBIA and Ambac, citing impaired ability to raise capital and write new business? Well… Just another item being swept under the rug! But you can depend on me to pull back the rug and expose these things!

And… Has anyone seen the warnings issued by the Royal Bank of Scotland (RBS)? Pretty scary stuff for a conservative bank to make this kind of a call, but they did, and I’m proud of them for going out on the limb! It gets lonely out on the limb all by yourself! Here’s the meat of the warning…

“The Royal Bank of Scotland, warned clients to be prepared for the biggest crash in stock and credit markets in the next three months as inflation and the dwindling fiscal growth continues to hit [the] world economy. The views were expressed in a report by the bank’s strategists Bob Janjuah, Kit Juckes, Tim Jagger and Richard Smith.

“The report stated, ‘Our macro economic road map is playing out – slow growth for longer, deep into 2009, with the pain spreading globally, gradually.’”

Well… That warning plays well with my warning that another “risk event” will play out in the United States this year… The liquidity/credit crunch losses booked so far will turn out to be merely the appetizer to this four course meal! Of course that’s my opinion… I could be wrong.

Courtomer, France Friday, June 13, 2008

First, a quick look at what happened in the markets yesterday.

The Dow rose 57 points. Oil held steady – but at a near record price of $136 a barrel. The dollar rose…and gold dropped $10.

The big news this morning is that retail sales actually went up last month – at 1%, twice what economists expected.

What? How can consumers continue to spend? They’re supposed to be cutting back. Maybe they’re spending those rebate checks.

Meanwhile, we find import prices up 2.3% in May, mostly because of higher oil prices. And the NY Times tells us that commodity price increases show “no let up.” Floods in the Midwest are aggravating the situation – driving up corn prices to new record highs.

“Inflation expectations rise sharply,” says the Financial Times.

The Fed’s ‘Beige Book’ tells us that the economy is “generally weak.”

We spent the week with a group of Internet marketers. The financial publishing business has gone electronic in a big way. In this business, you either learn how to publish on the Internet…or you fail.

Your editor, who grew up without air-conditioning, let alone without the Internet, finds it hard to keep up.

“You’ve got to understand the semantic dynamic of the bot-driven crawlers,” said one of the speakers. We had no idea of what he was talking about, but the others present nodded their heads in approval.

That is just one of the problems with growing older; you grow wiser…but wiser about things that no longer exist. When the car is slow to start, for example, we naturally think we need to clean the carburetor or check the points. Then we realize that there isn’t a carburetor and there aren’t any points. The cars have gone electronic too.

The other thing that has gone electronic is money.

In our decaying wisdom, we’re suspicious of the new electronic money. The old paper money was bad enough. Given the opportunity, central banks would print it up…far more of it than they should. Soon, there would be a lot more pieces of paper than there were things that it would buy. Now, the authorities who control money don’t even have to get ink on their hands. They can create money electronically. In fact, there is no limit on how much they can create – theoretically. Just add zeros. Add them electronically. The sky’s the limit.

But real wealth is not created so easily…

Real wealth is not electronic. It’s not just 1s and 0s – not just digital…not just phantoms that disappear when the power goes out. Real wealth is physical…things you can touch, eat, drive around in, and live in.

Real wealth and “money” are connected. But this new electronic money has plenty of stretch in it. Houses, for example, are real wealth. But in money terms, their value varies. In the ten years – 1996-2006 – for example, the price of America’s houses almost doubled. Of course, they were essentially the same houses…a little bigger perhaps…with a few more marble countertops, but otherwise not much different. What had happened that made them more valuable? Well, they weren’t really more valuable…just more expensive. America’s elastic money had stretched out to make them more expensive.

But now the elastic is snapping back. Houses are down 13% – according to Case/Shiller – from a year ago. And now an analyst at JP Morgan says they’ll probably go down about 30% before the snapback is finished in 2010.

This, he says, will cost Wall Street about $1 trillion in losses on mortgage-backed securities. It will cost the nation $4 trillion in “lost access to capital.”

Whoa! That’s the trouble with stretchable money – when the elastic snaps, it can hurt.

*** The other trouble with these new electronic systems is that they are hard to fix. When your car wouldn’t start in the ’60s, you lifted the hood…took off the distributor cap and checked for sparks. Or, you removed the carburetor and made sure it was working properly. Even when you didn’t know what you were doing, skinning your knuckles once or twice seemed to cure most minor mechanical problems.

But when an electronic system breaks down, it’s hard to figure out what is wrong…and almost impossible to fix. When money is in paper form, it is pretty easy to understand how it works. Simply count up the bills in circulation. If the supply is going up…prices are likely to follow. But this new electronic money has most people stumped. The Fed sends an electronic credit to the Bank of America, which in turn gives an electronic credit to its credit card holders. Now, they can go out and buy things. Do they have “money?” How much “money” is in circulation?

Then, the American shopper buys something made in China – where else? – so that the Chinese producer ends up with a credit in his account in dollars…which he trades with the Bank of China for yuan. The BoC doesn’t want the yuan to go up…so it creates more yuan, electronically, to trade for the electronic dollars it has received.

This was the ‘great money machine’ – an electronic machine – that was responsible for creating so much of the world’s liquidity…and the world’s bubbles.

But as we said yesterday, this machine seems to be slowing down…maybe even breaking down. America’s trade deficit is shrinking. In fact, it seems to us that the elastic currency is snapping back in America’s face. Its import prices go up…while its major asset – housing – goes down.

The import that people care most about is oil. It’s causing the highest gasoline prices Americans have ever had to pay. And it’s calling into question the whole ‘car culture’ society. In America, much more than in Europe, people live in individual, standalone houses – which are much more expensive to heat and maintain than row houses or apartments. They also live far from their work…their schools…their restaurants…and their shops.

Here in Europe, big shopping malls have become common. The small shops couldn’t compete with them on price or choice. Still, now that the price of oil has gone up so dramatically, the latest reports tell us that shoppers are turning their backs on the big malls; they prefer to walk out to neighborhood stores.

But in the United States, there are few neighborhood stores left…in fact, there are few neighborhoods. Instead, in many areas, houses were flung out like confetti from a parade float. They may have fallen a mile from a major shopping mall…or the wind might have carried them 50 miles away.

“Oklahoma’s painful car culture,” is changing the way people live, says an article on CNN Money. Out on panhandle, it is not unusual to drive 70 miles to get to work. In their big SUV and pickups, commuters might have to spend $50 a day – just to get to work. It’s not surprising that they are looking for alternatives – bikes, carpools, and buses.

Good day… And a Tremendous Thursday to you! Well… Euro 1.60 (EUR) didn’t last long. More on that in a minute… But first we need to address the question of whether or not the euro hitting 1.60 was a flash in the pan. I certainly don’t think so, but it sure looks as though that could be the case given how the single unit has tumbled since reaching that level on Tuesday.

So… There were lots of reasons for the euro’s decline yesterday… But the infamous straw for the euro seemed to be the German Business Confidence report as measured by the think tank, IFO, this morning. German Business Confidence – which had surprised on the upside the past three months – came out softer than expected in April, falling from 104.8 in March to 102.4. That was quite a tumble in business confidence, and apparently wipes out the previous three months of stronger confidence. It’s a “what have you done for me lately” world out there folks.

So, is this the mini-sell off I’ve been talking about since January? Could be… I had a sneaky feeling yesterday, so I asked my chartist friend what he was seeing. Here’s what he had to say…

“As far as the euro, I’m not seeing anything too exciting. There are some signs that it may be overbought in the short term. The weekly chart is absolutely beautiful (movement from lower left to upper right), but it is also showing that we may be due for a slight pullback (buying opportunity.)”

Risk appetite is really taking flight again in the markets, but I just can’t get my arms around this willingness to take on risk. There are just too many “risk events” out there (like Bear Stearns) but, that’s just me, apparently, the markets don’t think this way. And with the risk appetite on the rise, the fortunes of Japanese yen (JPY) and Swiss francs (CHF) are on the opposite side of that rise.

Here we go again… Investors taking on risk like there’s no tomorrow. I sure hope, for them, it doesn’t end up in smoke… But I have to think that it will. My chartist friend also had this to say about risk right now…

“What I am more excited to share with you is what is going on in the whole Risk vs. Risk Aversion Arena. As you have pointed out many times, the stock market and the high yielding currencies represent Risk. The Yen and Franc represent Risk Aversion. So, what does that mean?

“If you look at the stock market (S&P 500), there is major overhead resistance in the 1380-1400 area. We are currently in our fourth retest of this 1380-1400 area and we appear to be failing yet again. Each failure drains the confidence levels of investors, so we could be setting up for some dramatic downside movement. If this happens, then Risk will be on the run, which will mean Risk Aversion (Yen and Francs) could see some much needed love. Both of these low yielders look to be primed for strong moves upward.”

Theswoop.net had this to say about what’s going on with the Fed, their collateral for loans, and everything else that I’ve yelled at the walls about recently…

“The issue here is uncertainty. Despite some signs that the worst of the banking crisis may be past, officials from the Treasury and Federal Reserve concede in private that, with regard to certain complex financial products and relationships, their knowledge is imperfect. ‘The truth is,’ one Treasury official told us, ‘we don’t have a clue.’”

Oh my gosh! Did shivers just go down your spine when you read that? “We don’t have a clue”? The old saying about the inmates have taken over the jailhouse, comes to mind right now.

Are you keeping on top of the news of the rationing of rice? Brazil suspended their rice exports to protect their supply for domestic demand. I saw on the TV yesterday, a news story flash across that Wal-Mart and Sam’s Club are rationing rice. Yesterday, Chicago rice futures hit a record price above $25 (per hundredweight). And in Thailand, the world’s top exporter of rice, the price surged to $1000 a ton.

Right here, right now, in the U.S. of A. we’re rationing rice. Can you believe that? There are underlying stories woven into this that I won’t get into, but for now… We have this to think about… We have rationing in the United States.

So… The dollar is on the rise… The only good thing about that right now is the fact that when the dollar rebounds, the price of oil goes down. This all looks as though it’s a house of cards to me… But, give the dollar it’s due… I’ll bet a fiddle of gold, against your soul, ’cause I think I’m better than you! I have no idea where that came from, but Charlie Daniels in the morning ain’t too shabby!

You know all this talk lately by G-7 ministers claiming that the markets didn’t understand their Forex message? Well… The Bank of Canada’s (BOC) Flaherty said yesterday that G-7 did NOT have discussions about currency intervention.

See! I told you so! I told you that the markets wouldn’t take G-7’s message seriously, unless there was a threat of coordinated intervention… And that, I just didn’t see coordinated intervention in the cards, not as long as the United States is still banging on China to let their currency gain versus the dollar. And now, we know! There was no discussion of intervention!

That’s an “all clear” horn for currency participants… I guess they are now waiting for the bargains to appear.

The Reserve Bank of New Zealand (RBNZ) left rates unchanged last night. I didn’t expect any movement, and quite frankly had forgotten all about the meeting. Good thing they didn’t spring any surprises on me/us, eh? Here’s RBNZ Governor Bollard…

“Economic activity has weakened more markedly than expected in the Bank’s March Monetary Policy Statement. There have been sharp falls in consumer and business sentiment, exacerbated by tighter credit conditions, a further decline in the housing market and weaker prospects for world growth. Financial market turbulence around the world continues to add to an uncertain economic environment. Further, the very dry summer is also weakening short-term growth prospects.

“However, the labor market is still strong and New Zealand’s key international commodity prices remain high. Government spending plans and the possibility of personal tax cuts can also be expected to limit the economic slowdown.”

Good day… And a Terrific Tuesday to you! Front and Center this morning, we have the euro (EUR) attempting to reach 1.60 again. I know I gave the euro the Chuck Kiss of Death last week when I sang the praises of it reaching 1.60, so I’ll just let it fly under the radar this morning.

Yesterday when I signed off, the euro was pushing the envelope of 1.59. Later in the morning, ECB member Weber sounded off on inflation. Let’s listen in…

“EUROZONE INFLATION IS WELL ABOVE ECB’S TOLERANCE THRESHOLD”. WOW! And then he followed up with this… “ELEVATED INFLATION EXPECTATIONS COULD START WAGE-PRICE SPIRAL, CREATE SECOND ROUND EFFECTS, AND THE ECB WILL DECISIVELY AND ACTIVELY FIGHT RISK OF WIDESPREAD SECOND-ROUND EFFECTS”.

Now, that’s two consecutive days of ECB members talking hawkish… First Liebscher and now Weber, with Weber’s comments sounding more and more like there’s another rate hike up the ECB’s sleeve. At best, the ECB doesn’t sound like they are ready to CUT rates any time soon… So, the euro gets to hold on to its positive interest rate differential to the dollar… And so… The single unit heads higher.

You know… I really didn’t like the Fed bailout of Bear Stearns; I’ve chronicled that position here in the Pfennig… But the markets took the bait, hook, line and sinker… And for now, at least, there’s more calm in the markets and probably more since last August. I’ll tell you why I think that…

The stock market, seems to believe better times are ahead, and that risk aversion is no longer needed… (Yes, I’m aware that it sold off yesterday)… And then there was this story that flashed across the screen this morning… Interest in placing puts on Aussie dollars has dropped to the lowest level since last August. For those of you new to class… When someone places a put on an asset, they believe it will fall in price… They get to sell it at the price they placed the put on, and everyone’s happy, the peasants dance in the streets, and Marie Antoinette gets to eat cake.

Back to reality… So… With investors/traders no longer thinking that the Aussie dollar (AUD) had reached its high… Guess what? The Aussie dollar is going higher! Amazing! Truly amazing how that works! HAHAHAHAHA! And remember it was months ago, that I said that the Aussie dollar looked like it would reach parity, along with Swiss francs? Well, the Swiss franc (CHF) did it, and so can Aussie dollars!

However, the road to parity is full of potholes, much like the St. Louis roads after an awful winter! And the biggest pothole is the one that contains risk events. You know, risk events, like Bear Stearns… I’m still a believer of the thought that there will be more risk events this year. Look at these earnings that the Big Boys have been posting in the last week… Yesterday, Bank of America posted a gain in the last quarter, but it was down 77% from the previous quarter! I sure wouldn’t want to be the one responsible for explainin’ that to the shareholders!

The Wall Street Journal is reporting this morning that loan losses pose a potentially larger threat to more banks than the losses taken so far.

Today, we’ll see the color of the latest Existing Home Sales report here in the United States. The experts tell us that we should expect to see more rot on the vine here, with sales forecast to drop 2.3% to the $4.92 million annual rate, the lowest level since 1999. This is a pothole, and it could become an even bigger pothole, should the drop exceed the forecast. This housing meltdown has been something to behold… Most of the younger crowd has never seen this before; they were always told that their house would keep going up in value.

The Bank of Canada (BOC) meets today, and I’m expecting a large cut from them to keep pace with the U.S. Federal Reserve – 50 BPS, which should put some deep tissue pressure on the Canadian dollar/loonie (CAD). This is what I’ve been talking about with regard to the loonie…  Downward pressure applied from the BOC and their rate cuts, and upward pressure applied from commodity prices… Today, it looks like the rate cuts will have the upper hand, eh?

About a month or so ago, Goldman Sachs forecast a rate cut in Japan, which really hurt the yen (JPY) when it was trading around 100. Goldman Sachs has abandoned that call now… Hmmm… This sounds fishy to me. You don’t think that the Bank of Japan (BOJ) talked to Goldman… Nah… That’s too far fetched for even my conspiracy-laden mind! But maybe a screenwriter would like to make a movie from my thoughts? HA!

It will be interesting to see if Japanese yen can get back on the rally horse now… Of course we need for the carry trades to stop to see real gains here. And, as I said above, I still believe that we’ll see more risk events this year, which should put a real damper on the carry traders.

Two of my fave currencies keep pushin’, keep pushin’, keep pushin’ onnnnnn… There you go, a little REO Speed wagon to get your blood going this morning! OK, now back to the currencies of Norway (NOK) and Sweden (SEK)… Have you seen these two lately? WOW! The moves this year have been something to behold.

I have an acquaintance that’s an oil man. Every time I see him, he’s smiling like a Cheshire Cat… Well, I’m sure the oil people in Norway are smiling the same way! With oil hitting $117 and change yesterday, oil revenues are pouring into Norway, thus padding their positive balance of payments and removing their need for foreign capital. Notice, that we’ve not discussed any Norwegian Banks or Swedish Banks involved in the subprime write-downs?

Norway’s Norges Bank meets tomorrow, and I’m expecting the Norges Bank to hike rates 25 BPS tomorrow. This should help propel the krone even higher.

As I’ve told people for many years… When evaluating a currency, first look at its position in the world… Then think of the currency as the stock of that country, and evaluate it like you do a stock. What’s the yield? What’s the flow of investments? What’s the balance sheet look like? What’s the leadership like? Etc. etc. When doing so, you’ll find that it makes it an easier decision for you… And when you do this for Norway, or Sweden, you’ll find stocks that you would probably want in your investment portfolio.

Wouldn’t you know it? I come in, see the euro pushing the envelope of 1.60, and by the time I’m ready to go the Big Finish, it sells off, making what I wrote earlier look like I’m delirious! Oh well… I carry on, despite my challenges!

I’ll finish with the thought that what I explained about two years ago, regarding the Asian currencies is really taking hold these days. Japan, China, Singapore… All are seeing their currencies strengthen versus the dollar, and that’s good, and about time too!

You see… Inflation is really getting to these economies, and at least they understand that a stronger currency can help fight inflation. Ahhh… They Got The Inflation Memo!

Currencies today 4/22/08: A$ .9440, kiwi .7965, C$ .9930, euro 1.5940, sterling 1.9880, Swiss .9920, ISK 74.20, rand 7.6810, krone 4.9730, SEK 5.87, forint 158, zloty 2.14, koruna 15.72, yen 103.20, baht 31.48, sing 1.3510, HKD 7.7955, INR 39.95, China 6.9880, pesos 10.51, BRL 1.6640, Oil $116, Silver $17.61, and Gold… $921.45

That’s it for today… Hey! Did you see the nice story in the St. Petersburg Times this past weekend? The writer, Helen Huntley, came to see me when I was in St. Pete, and wrote a great piece! Now… The photo is a little old… I haven’t worn that tie in two years! Anyway… Great stuff! In case you missed it… Here’s the link…

The rain is back today. I’m guessing the water table here in the Mid-West is doing quite nicely! Time to eat my apple! I sure hope you have a Terrific Tuesday!

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