Chuck Butler (The Daily Reckoning):

Front and center on the currencies this morning, we have the fears of a default in Dubai, fading, and that brings the risk takers back out… So, we had one day of bloodletting on Friday, and come Monday, the tourniquet had been applied, and things are back on track. The Big Dog, euro (EUR) is off the porch, chasing the dollar down the street once again, and is trading at 1.5050, as I begin to write this morning.

I had a long time customer send me a note on Friday, asking me about the selling going on in the currencies and commodities because of the news that Dubai World was asking for help with their loans… I replied that the research I had read led me to believe that this would fade, in that the ruling families of Dubai and Abu Dhabi have bloodlines, and even though they had feuded in the past, blood would run thick, and the country would step in to help with the loans, which would mean a return to dollar selling once it all got straightened out… WOW!

This morning, there is news that the UAE will back the banks and the loans, so… It’s a “risk on” day once again!

After the Treasury auctions of last week, and a supposed “good covering,” the end result is that we have this pile of debt, and Treasury yields very reminiscent of something right out of the time warp of Eisenhower! But! Here’s the thing that US Treasury Secretary Geithner is hanging is hat on… These low yields reduce the interest expense for the US. Yes, Timothy, that my be true… But when you are issuing the amount of debt that’s on your plate to issue, then the “net” reduction to interest expense is a fallacy. Go ahead, do the math, Timothy… I dare you!

Can you believe that tomorrow is December 1st? WOW! Let the Holidays begin! But what comes to us on December 1st? That’s right, it’s the Reserve Bank of Australia (RBA) meeting. I’ve pinned my colors to the mast of another rate hike by the RBA tomorrow, and by the looks of it, Traders are beginning to pin their colors to that same mast! The reason I say that is the performance of the Aussie dollar (AUD) overnight. The Aussie dollar has a 91-cent handle this morning, which is far better than that 0.8998 figure that Mike reported on Friday morning!

Before I headed home on Wednesday last week, gold had pushed to a $25 gain in one day! WOW! I thought, “Can’t wait to see what the price looks like on Monday when I return!” But the Dubai loan problems took the wind out of gold’s sails, and the shiny metal lost $25 on Friday! UGH! Oh well, it gives buyers the opportunity to buy more at a cheaper level, I thought to myself… Then I thought… You should go check out what your good friend Addison Wiggin has to say about gold… So I did!

Click here for the rest of Mr. Butler’s article at The Daily Reckoning.

Good day… And a Terrific Tuesday to you! Well… Let the Data flow begin! And let Big Ben Bernanke’s “green shoots” wilt under the bright summer sun! Not that I want to see the U.S. in economic muck, but come on! He was banging the drum for these “green shoots” when they simply looked like weeds to me, and I just think for him to say those things when I believe he knew better was wrong… Very Wrong!

I came in this morning, and turned on the currency screens to see that the dollar has taken a step back for the 4th consecutive day VS the euro. The single unit is up to 1.41 again, as it makes those probes out beyond the 1.35-1.40 trading range we’ve had in place now for some time. Yield demand is what’s driving the dollar downward, and while the euro doesn’t exactly have a “yield differential” to the dollar, the thing to remember, as I always tell you… The euro is the “offset currency” to the dollar. So, just by nature of the crosses to other currencies, the euro benefits whenever the dollar is sold.

So… If Yield Demand is what’s beating the dollar up like a rented mule (no animals were hurt here, just a saying… ) Then the “high yielders” should be doing the beating… And as I look at the currency screens, that’s what I see! The Aussie dollar is trading above 81-cents, kiwi above 65-cents, rand is 7.75, and the Brazilian real which has to fight with the Central Bank for every inch of gain VS the dollar, is holding its own right now… A month ago, I was telling you about the gains VS the dollar since March 1st… Well, an updated look at the 3-month gains tells us that the move against the dollar has continued… Albeit with several steps backward along the way!

Shoot Rudy! Even the beaten and left for dead Mexican peso has rebounded in recent days as the “other” high yielders drag the peso along for the ride.

4 months of gains VS the dollar doesn’t exactly qualify this move as a “trend”, which is normally associated with long sweeping moves. This does look as though it could become a “trend” though, as it has all the qualities of a long sweeping move, just concentrated in a 4-month span… Like, when a “trend” is in place, it’s not a One-Way street, there’s volatility within the trend… And we’ve certainly experienced that! Personally, even if this does turn into a long sweeping downward move for the dollar, I would just say that it’s a return to fundamentals, and not a new trend… Simply a return to the underlying weak dollar trend that began in 2002, and saw a pause in 2005, and then another one from July 2008 to March of 2009…

OK… Remember when I made such a BIG DEAL out of China and Argentina agreeing to swap currencies in trade settlement and remove dollars from the equation? I told you then that China was trying to gain a wider acceptance for their currency, the renminbi. And… That China had locked up Southeast Asia with similar agreements, which led me to believe that since they had traveled to South America, that Brazil could be next in line… And, the rumors began circulating…

Mom… He’s doing it again! Yes… China and Brazil have agreed in principle to remove dollars from trade settlement, and replace them with renminbi and reals respectively! This follows up what I told you about 10 days ago, and that is that China had become Brazil’s number one trading partner, knocking the U.S. down a notch. So… If that’s so, it’s not like we’re talking small sums of money folks… No, this is the BIG KAHUNA for China, and that not so big kahuna for the U.S. / dollar…

So, while China claims to be on the dollar’s side, and “see’s no alternative currency”… They are working to get their own currency in the mix… Looks like it’s all a “plan” to me, folks… Before we know what hit us, renminbi will be everywhere!

But… Still manipulated as to it’s value VS the dollar by Chinese officials. So… Don’t think, for now any way, it could all change though, that you should sell everything you own and go out and buy truck loads of renminbi… I think you would find yourself to be a bit disappointed… That is, unless you have time on your side… Time is on my side, yes it is…

I got a HUGE kick out of my friend, The Mogambo Guru, reading his weekly letter on the Daily Reckoning site (www.dailyreckoning.com) I’m looking forward to catching up with the Mogambo in Vancouver in 3 weeks time. We keep missing those opportunities to meet up, with first my cancer, and then his stroke… But, there we will be together, two of the biggest smart alecs you’ve ever met in your entire life… I need to see if he’s up to going on the road with me to do a two-man show! HA! Any way… The thing I was going to talk about was that the Mogambo, told his readers yesterday, that in his latest visit to John Williams’ web site: Shadow Stats, he was surprised to see that inflation is really running at 6%, which is quite different from the stupid CPI the Gov’t tries to shove in our faces of -1.3%! Here’s the Mogambo…

“As for inflation, his calculation of the Consumer Price Index “reflects the CPI as if it were calculated using the methodologies in place in 1980,” which I note is back when inflation was a measurement of the change in prices of things that you buy, and not, as it is now after the villainous Alan Greenspan and Michael Boskin came up with their ludicrous “hedonic” measurements of inflation with which to disguise it.”

And… He also found that unemployment, which I tell you all the time is very, very, very, and maybe one more very, understated by the BLS, is… At 20%… 1 in 5 are unemployed…

So… Thanks to the Mogambo, and John Williams for giving us data that backs up what I’ve been spouting off about!

This morning, Norway got the data flow going early with Norwegian retail sales surprising to the upside in May, rising 1.9%! The experts had forecast a -.2% decline… This rise in May gives brings the year-on-year figure to a negative -1%, which still sounds bad… But much better than what was forecast… -3.2%!

Norway seems to be just sailing along, out to sea, without any wind in its sails, not joining the other Commodity Currencies like Aussie, kiwi, and South Africa and Brazil… I think that won’t last too much longer… You see, Norway had a governor put in its currency when it’s neighbor, Sweden experienced bad times due to the Latvian banking crisis… So, as more and more miles of road get put between the thoughts of Latvia and Sweden, the better it will be for Norway… That… And… Getting Oil’s price back to the rally mode!

Canada is another currency that is not gaining along with the other Commodity Currencies, even with Oil moving higher again… Here’s the diff… Those other Commodity Currencies all have YIELD! While Norway and Canada do NOT! However, having said that, I just don’t see these two energy driven currencies wallowing around in the mud too much longer. Playing catch-up with Aussie and the rest of the bunch will be difficult though, and the “other” Commodity Currencies have such a big head-start!

OK… Time for the data set-up for today…

The S&P/ CaseShiller Home Price Index for April will print this morning, and is expected to show a decline of -18.6%, which those that wear rose colored glasses will say, “Hey, Chuck, that’s down from previous declines”… To which I will respond… Yes, it is… But, not much… And if you chart out the monthly prints you’ll see that it hit the low of -19.01% in Jan… February’s print was -18.67, and March’s print was -18.7%, you’ll have to agree with me that the move to “down from previous declines” has been quite slow, eh? And… At this pace it would take until 2011 before we got back to 0% YIKES! So… While you’re wearing those rose colored glasses you might, just might, want to dig deeper into the data before you start sounding the “all’s clear horn”!

We’ll also see Consumer Confidence, which, because of the better times in stocks, is expected to inch upward to an index number of 55.3 VS 54.9 in May… While this data is more like what I believe it should be, it’s still higher than I would think… But then, so are stocks!

And… Then there was this… Recall last week, when Big Ben Bernanke gave his impression of Sgt. Schultz, when asked about pressuring Bank of America (BOA) to take over Merrill Lynch, claimed he “knew nothing”! I thought that he had thrown former U.S. Treasury Sec. Paulson under the bus… Well, today, Paulson will appear before the same committee that’s looking into this mess, that BOA Chairman Ken Lewis claims to have happened. I wonder what Paulson’s thinking after hearing Big Ben last week? I guess we’ll find out today!

It’s the last day of June, my younger brother David’s birthday… David was born when I was nearly in high school, while my youngest brother, Mike was born while I was in high school! Anyway… What I was going for with the last day of June, before my mind wandered, was that it will close the books on the 2nd QTR… And soon enough, we’ll begin to see earnings reports for the quarter… Should be interesting…

Currencies today 6/30/09: A$ .8140, kiwi .6520, C$ .8675, euro 1.4125, sterling 1.66, Swiss .9255, rand 7.7435, krone 6.3955, SEK 7.6630, forint 193, zloty 3.1555, koruna 18.3360, yen 95.80, sing 1.4465, HKD 7.7499, INR 47.90, China 6.8305, pesos 13.12, BRL 1.9565, dollar index 79.64, Oil $71.67, 10-year 3.48%, Silver $14, and Gold… $940.75

That’s it for today… Whew! What spanking by the Giants last night! OUCH! It’s bad enough to get shut-out on two hits, but when the other team hangs 10 on you… Like I said, OUCH! Now that’s going to leave a mark! Tomorrow, we turn the page on the calendar to July, which means the All-Star Game is almost here! I’m as excited as a kid at Christmas for this… You’ll have to look for me at the Home-Run Derby, and All-Star Game… I’ve got some primo tickets right at the end of the visitor’s dug-out (3rd base line), 2nd row! Now, you know why I’m so excited! Well, that’s enough of that… Mary and Suzy Q are here, so that must mean that I’m late! So… Let’s make this Tuesday Terrific, eh?

Souce: A Week Dominated By Data

Good day… And a Tub Thumpin’ Thursday to you! It was 95 here yesterday, and forecast to be even warmer, or should I say hotter, today! WOW! Like overnight, it turned to summer, after the coldest, most wet, spring I can ever recall… I know, I’ll get 100 emails reminding me that summer doesn’t officially start until next week… I’m just talking about the summer-like weather!

The currencies remained in that range I talked about yesterday, with a slight bias to sell dollars, but not much of one. Crude Oil prices moved higher on the day and overnight, which doesn’t play well with a dollar rally, and therefore, has pushed the dollar down a bit… But again, we’re talking minor moves. It’s as if someone (traders) are waiting for something BIG to happen with data, the Fed, the Treasury, before taking one direction.

Did you hear about the Gold vending machine in Germany? I saw this yesterday morning, and thought it to be a hoax… Then someone in the office brought me a print out of a story in the U.K. Telegraph… OK, so maybe it’s not a hoax… Any way… Here’s the skinny… In Germany, they’ve come up with a vending machine that can update prices of Gold every few minutes, and… Dispense 1 gram Gold wafers, 10 gram Gold bars, or coins… There’s about a 30% increase in the market price! WOW! Imagine that, you need some Gold in your pocket just for GP, and you simply walk up to a vending machine and buy some, as simple as getting that Zero bar, or Snickers!

OK… What gives a guy this kind of idea to make a vending machine that disperses Gold? It’s all about taking advantage of the times, folks… I may have told you this in the Pfennig before, I don’t recall, but I use it in my presentation for Gold… Investment in Gold increased 427% last year… To put it into Tonnes of Gold, retail investment purchases of Gold reached approximately 108 Tonnes of Gold in 2008, up from 36 Tonnes in 2007, and 28 Tonnes in 2006!

I was talking with the Big Boss, Frank Trotter, who, by the way scored a goal from about 30 yards out in his soccer match the other day… Ty Keough, our one-time national team player, and long time pro, was quite impressed, and that says a lot, because Ty has seen some soccer in his years… You may know Ty or heard of him… But do you know his dad? His dad is a soccer legend, playing on the U.S. national team that beat Great Briton in the World Cup in the 50’s, and then went on to be the winningest college coach, with multiple national championships at St. Louis University…

Oh, I digress, there, I’m so sorry… But once I got talking about soccer, of which I played a ton of in my youth, I just started typing… UGH! Any way, I was talking to the Big Boss, Frank Trotter, the other day, and Frank mentioned that he was concerned that Gold could be the next bubble… I assured him that I didn’t see it that way, not until my neighbors are asking if they can buy Gold at $1,200 oz! (I tried to get them to buy it at $800 oz, to no avail!)

Remember when we were kids? No wait, we wouldn’t all have been kids at the same time you dufus Chuck! OK, when I was a kid… We used to have these bomb shelters in our schools, and we would practice going into them… It was a different time, the cold war was strong, and the fear was put in all of us toward Russia… I had a teacher, many moons ago, that told the class that it was a good thing that Russia and China didn’t see eye-to-eye… Well… I wonder what he thinks about the news that China and Russia have agreed to use each other’s currencies and eliminate the use of dollars in their trade?

It kind of feels like Russia and China are ganging up on the dollar!

The other “new kid on the block” Brazil, is joining in with Russia and China… But that news didn’t help the Brazilian real yesterday, as it saw one of its worst days in weeks! But that’s the real… I watch it trade some days, and your eyes grow very wide open in amazement of the wild swings in this currency. It will move 2-3% in a day, either way, in a heartbeat! Which tells you that the “number of players” in real, is smallish when compared to the second most liquid currency in the world… The euro! So… If you’re going to own reals, you need to be aware that it has these wild swings!

Speaking of the euro… It’s getting a boost this morning from an improved outlook for risk today, as U.S. stock futures are stronger. The “Big Dog” looks a little tired of chasing the dollar, and then being pulled back on to the porch over and over again recently… But, as always, always I tell you tutor turtle, be yourself… No wait! I always tell you that all this is “noise”… Investment portfolio diversification into currencies and precious metals is a long-term relationship… The dollar didn’t lose over 90% of its value overnight! The euro didn’t gain over 50% VS the dollar overnight! These things are long sweeping moves, and you have to drown out the “noise”… Otherwise, you’ll become a currency and metals “trader”, and chasing these assets all over the board!

Pound sterling is getting hit on the chin this morning, as retail sales fell in May, which was the first drop in 3 months… Retail Sales fell .6% in May, and pretty much squashes those so-called “green shoots” that have been talked about for the U.K. economy… I think you can expect to see stuff like this for the next year… Up and down, in and out, green and brown shoots… And… Like I’ve said before, if it’s happening in the U.K. it won’t be long before we experience the same, as the U.K. just seems to be ahead of the U.S., time-wise…

The Swiss franc is stronger this morning than recent trading sessions as the Swiss National Bank (SNB) met, left rates unchanged, and made a statement that has given a green light to franc traders to buy… The SNB announced that they were not targeting a specific exchange rate for the currency. You may recall that the SNB had previously stated that they were not happy with franc strength, and had intervened on occasion to keep the currency from strengthening… I would be careful here, as this could be a “trap” Oh, you don’t think Central Banks set traps for traders? OK, well, maybe they don’t really set a “trap”, but they do send mixed messages that cause losses!

Big Al Greenspan was famous for these “mixed messages” that were called “Greenspeak”… After reading two books on Big Al, I can tell you that I personally think that “Greenspeak” was gobble-de-gook! Confuse everyone so they think you are some sort of messiah! Right Big Al? When… In reality, he was just “a guy”, who really screwed things up!

Today, we will see the Weekly Initial Jobless Claims, which for me has turned into watching the “Continuing Claims”… This part of the data tells me if unemployed people are being re-hired… I haven’t see that happening, as Continuing Claims have continued to grow larger in numbers… We’ll also see the Philly Fed Index, (manufacturing)…

The real meat (where’s the beef?) will come from a testimony before the Senate Banking Committee by U.S. Treasury Sec. Geithner, on the President’s plan to overhaul the U.S. Financial regulatory system… I doubt these Senators will understand what Geithner is talking about, and will “rubber stamp” the plan… Which means, folks… That the Gov’t gets its foot in the door further…

I know, I know, I get quite a few emails from people that take exception to me getting upset with the Gov’t getting more involved in the markets, etc. as they say, “Yeah, Chuck, and you think the “markets” have done a better job?” Well… The markets are the markets, folks… If left alone, they will act as markets should… What? You didn’t like the fact that the Mr. Market, as my friend, Bill Bonner, calls it, turned the whole credit, and deficit spending on its ear? Mr. Market was just trying to correct what was wrong… Getting the Gov’t involved is just plain, wrong! One foot in the door… Then next it’s the next thing, and the next, and pretty soon, the Gov’t is completely in the door, and hanging out on your couch!

Please… These are just my opinions… If you don’t like them, you have that right! It is still a free country for speech! Just delete it and go on with your life! OR… You didn’t pay anything for all this, that I’ve been giving to people since 1992…

In Norway yesterday, the Norwegian Central Bank, The Norges Bank, surprised me and the markets by cutting rates 1/4% of 25 BPS… I did say the other day that the Norges Bank was the only Central Bank that was meeting this week, that had some room to cut rates… The Norges Bank did say in their press conference after the rate announcement that rates were at the “bottom” and that they were looking toward the first quarter 2010 as the timing on the first rate hike!

Well, with traders so forward looking, this was good news for the krone, as the rate cuts was quickly put in the rear view mirror, and now everyone is looking forward to higher rates!

And under the heading of “dirty float”… The Reserve Bank of Australia (RBA) is reported to have sold the most A$’s in the month of May, since February 2004! Now, go back to May and recall the move in A$’s… The currency gained almost 10% in the month… So, the A$ would have gained even more if the RBA had not sold A$1.4 Billion A$’s in the month! I personally think the RBA was just trying to smooth out the trading the A$, which given this information would have been moving up the charts with a bullet in May!

I don’t think the RBA would get involved if the move was a slow, general appreciation of the currency… So, I don’t look for future intervention to keep the A$ from gaining the ground I believe it will gain rest of this year, as inflation fears grow stronger and stronger…

And on that positive note… I think I’ll head to the Big Finish!

Currencies today 6/18/09: A$ .7945, kiwi .6355, C$ .8835, euro 1.3935, sterling 1.6260, Swiss .9280, rand 8.1380, krone 6.37, SEK 7.8725, forint 204, zloty 3.26, koruna 19.16, yen 95.80, sing 1.4570, HKD 7.7503, INR 48.25, China 6.8350, pesos 13.46, BRL 1.97, dollar index 80.42, Oil $71.30, 10-year 3.69, Silver $14.25, and Gold… $938.20

That’s it for today… That’s a pretty interesting story about the Gold vending machine, eh? Here in the office we have one of those “honor snack trays”, where people pay for what they take… Can you imagine one of those that had Gold coins in it? HAHAHAHAHA! Another good win for the Cardinals VS the Tigers last night… Of course I can only watch 5 innings or so, before it’s bed time. I get up the next morning, and watch the highlights! This weekend is Father’s Day… Don’t forget your dad! More on that tomorrow… I just love this time of year when the daylight lasts until 9 pm… The daylight lifts spirits, I believe, and now spirits get lifted longer each day! HA! OK… How about making this a Tub Thumpin’ Thursday, eh?

Source: Gold Vending Machines!

As far as currencies and metals are concerned, seemed to be in place yesterday…

That’s right… The rout on the dollar was on (recall yesterday, Wayne and Garth playing street hockey… Game On!) and this time… Not only did the currencies rally VS the dollar, Gold and Silver took part in the proceedings too! It’s been a long time since we’ve seen this happen… For the most part, whenever the currencies (minus yen) rallied, Gold would back off, and vice versa… Not yesterday! For the first time in a long time, the negativity toward the dollar was front and center BIG TIME!

The currency rally began early in the morning, and really gained steam as the day went on, and especially after the minutes of the FOMC meeting printed. You see, the Fed Heads had discussed that the economy is in a weakened condition and the economic projections for 2009 and 2010 were actually revised lower. The thing I took out of the minutes was this statement by the Fed Heads… the housing market “remained depressed but seemed to have leveled off”…

Memo to Fed Heads… Better be careful with those kind of statements… Did you all make a similar statement late in 2007? Look how well that prognostication worked out!

So… This news from the Fed about downgrading the growth outlooks for 2009 and 2010, is the key folks… You see, during the July 2008 – Feb. 2009 timeline, we traded under a different Trading Theme, that was well documented in this letter. But for new readers, the Trading Theme threw fundamentals out of the window, and rewarded the dollar every time data indicated the economy to be deeper, darker, and more dangerous in the recession / depression. This was against all fundamentals…

But yesterday, with the Fed downgrading growth forecasts, the dollar got sold like funnel cakes at a state fair! Finally! A return to fundamentals! Well, at least for one day that is. We certainly need to see more than one day of this to make any kind of final change in the Trading Theme trend… But it sure was nice to see for one day!

The Big Dog, euro, led the way for the other currencies (little dogs) yesterday. The euro finally, traded above its key resistance of 1.3740. A level that had stopped the euro “cold” three previous times. You may recall about a week ago, I told you that this is what happens with currencies, in the time (since 1992) that I’ve followed currencies. They make a run at a resistance level, and get knocked down. They make another, only to get knocked down, and then another with the same result. Sooner or later, love is gonna get ya’, no wait! Sooner or later, traders and market participants either 1. take this as a challenge and push the currency through the resistance level, or 2. they give up, take the ball and go home… And the currency then falls back through previous gained ground.

In this case, the euro finally moved higher and through the 1.3740 level, and traded all the way up to 1.38 on the day… The good news for euro holders is that there has been little to no profit taking overnight, and the Big Dog is still trading with a 1.38 handle this morning!

Long time currency followers would have to admit that this all looks very similar to previous periods where the negativity toward the dollar was very strong, and seemed take on a life of its own. Even your run of the mill dollar bull, begins to see things they way his counterpart the dollar bear sees them…

I think that the markets have come to the realization that the U.S. has taken the road that leads to easy monetary policy… And everyone knows what’s at the end of that rainbow! Inflation!

A couple of weeks ago, I participated in an editorial roundtable with my publishers for my “other” newsletter, The Currency Capitalist, (shameless plug!) and in the meeting I was trying to get everyone to agree with me that China was up to something. This was right after the announcement of their currency swap line with Argentina… Someone raised the question, a very astute question I might add, about why would China want to see the dollar lose value, when they own so many Treasuries…

I then pointed out something I had researched… That China had been stealth-like in doing so, but had shortened their maturities to less then 3 years… Which would mean that they could allow these to mature and not sell them pre-maturely… Could this be a “time-line” toward the lines of thought that China wants to replace the dollar as the world’s reserve currency?

OK… That was a couple of weeks ago, in a meeting… But yesterday, Chris Gaffney sent me a story that appeared on Reuters… Here’s a snippet… “China has engineered a subtle yet significant shift in the investment of its foreign exchange reserves, a sign of how it is willing to act on concerns about financing an explosion of U.S. debt.”

And then this… “China’s move to the shorter end of the U.S. debt spectrum is a defensive tactic adopted by the wider market as well on the view that the United States will have to raise interest rates down the road to control inflationary pressures when the economy recovers from the financial crisis.”

So… Now there are “others” that are sniffing around this trail of tears I think I’ve discovered, for if there is no “long-term” plan by the Chinese to replace the dollar as the world’s reserve currency, then I’ll have egg all over my face! Well… The good thing for me, is that this is a very long tailed story… And I’ll get to point to it over and over again in the coming years!

Doesn’t that just make you get chills of excitement? HA!

A currency that “I like” but had fallen badly last summer, the Brazilian real, has really pushed higher in recent months (since March 1st). Yesterday it looked as though it would trade below the 2 handle for the first time in 8 months! (BRL is a European Style currency, where as the price goes down, it returns more value VS the dollar) For those of you keeping score at home, the real has gained 17% since March 1st… With Brazil being a “high yield” currency, the return grows even more… But, that’s in the past… And past performance does not indicate that future performance will duplicate… (that’s for the legal beagles!)

Well… Recall earlier this week I talked about pound sterling nearing its 200-day moving average? Well… Forget about it! Yesterday, Standard & Poors (S&P) decided to place the U.K. on negative outlook… And the pound sterling quickly became the G-10’s worst performing currency on the day… For those of you wanting to know what’s what with these ratings from S&P… When S&P imposes negative outlook they foresee a greater than 50% chance of downgrade within the next two years, this is compared to negative watch which implies a greater than 50% chance of downgrade within the next few months.

I said earlier that the euro (Big Dog) had seen little to no profit taking overnight, and was trading with a 1.38 handle this morning… It has just slipped below that level, as I prepare to go to the Big Finish… Data wise for the Big Dog, Eurozone PMI’s (manufacturing indexes) surprised to the upside for this month. Now… It’s true that this manufacturing data is still in negative territory, but this data supports the thought that the worst is behind the Eurozone… That remains to be seen… But for now, that’s good news!

In Japan overnight… In yet another sign that the Fundamentals may have re-emerged, if for only one night, the yen rallied with the other currencies. Yes, this has not been the case for several months now. When the dollar rallied, yen rallied along with it… But not yesterday and last night… Yen pushed to a 94 handle for the first time in 2 months!

The data cupboard comes back with a plethora of data this morning… The Weekly Initial Jobless Claims prints first, followed by Leading Indicators and the Philly Fed Index (manufacturing for the region)…

And then there was Gold… And Silver! Year-to-date, Silver is outperforming Gold! Silver is up almost 25% this year, while Gold is up 6.6%. Our newest member to the currency and metals desk, Aaron Stevenson, pointed something out to me the other day regarding Silver… “the Gold/Silver ratio has increase to about 64 from 51 this time last year.” Hmmm… Very interesting…

Speaking of Gold… I had a long discussion with a long time customer last week in Las Vegas at the Money Show. We were discussing Gold confiscation… Again, I said it before and I’ll say it again, I don’t believe the Gov’t would do this again… But… The customer gave me something to think about. In “his scenario” the Gov’t devalues the dollar, and pushes Gold to $10,000 an ounce… Well… Now that’s “out there”… But as a Gold holder, I certainly would love to see $10,000 an ounce… My problem is that I don’t want to see what the U.S. economy looks like with $10,000 Gold! It may not be worth it folks…

OK… Before I go to the Big Finish, I need to make certain everyone understands that the previous paragraph was just a “discussion” of scenarios… I’m not saying, and neither is my customer saying that we believe Gold is going to $10,000 an ounce! It was just a figure to use to see if I would “bite” at confiscation at that level!

Currencies today 5/21/09: A$ .7715, kiwi .6050, C$ .8765, euro 1.3795, sterling 1.5660, Swiss .9080, rand 8.3950, krone 6.4075, SEK 7.5990, forint 201.20, zloty 3.1850, koruna 19.35, yen 94.97, sing 1.4570, HKD 7.7525, INR 47.33, China 6.8247, pesos 13.03, BRL 2.0330, dollar index 81.18, Oil $60.73, Silver $14.25, and Gold… $940.67

That’s it for today… $7 Billion more being injected to GM by the Gov’t… The sound of that just doesn’t give me a warm and fuzzy!

Source: Fundamentals Return

The lack of volume on Friday didn’t yield any wild swings, and the currencies pared their losses from the day before (trade deficit plunges)… This morning, the currencies, led by the euro, are moving higher VS the dollar, but at this point it’s baby steps… The bias to sell dollars hangs over the currencies however… It seems to me that it’s very much like trying to hold a kid back from ripping open their Christmas presents… It sure seems inevitable, but when is the question… As I used to say in my presentations, imagine if you will a big old Ford rambling down an icy country road, and it begins to spin out of control… You know for sure that you’re heading toward that guard rail, and your Ford will make impact with that guard rail, it’s just a matter of time….

Well… Some water and time has passed under the bridge now and traders and investors are dipping their toes back into the risk waters again. The Mayo comments last week, really threw a spanner in the works for the risk takers… But, as I said, time has now passed, and the comments are in the rear view mirror now. With risk back on the menu, the high yielders are the first to get attention… And the Aussie dollar (A$) is soaring this morning, passing the 72-cent figure this morning… And the Brazilian real has really taken some HUGE strides recently… In fact, in the past 3 months… The real is up over 6% VS the dollar!

And do you know what currency is at the top of the heap with regard to performance VS the dollar this year? That’s right! It’s the real!

Speaking of high yielders… The South African rand, which I’ve always said is too volatile for my liking, is the best performer in the past 3 months… So… With the A$, real and rand all percolating… You can see that investors are growing tired of paltry yields, and looking to higher yielding countries. Of course, whenever the cold wet blanker of risk aversion is thrown over the markets, the risk takers head of the hills… But, for now they are taking on risk, and that spells Happy Times Are Here Again for the High Yielders…

Of course, I laugh out laugh (LOL) whenever I say “high yielder” as if they really have “high yield”… Compared to the majors like the U.S., U.K., Japan, Canada, and even the European Union, these “are” high yields!

OK… Did you read the news, this morning, when the paper landed in your yard? China’s currency reserves grew by 16% in the first QTR, VS a year ago… This puts China’s currency reserves at $1.9537 Trillion, at the end of March… Hmmm… Makes you wonder, why the rest of the world doesn’t treat China like E.F. Hutton, and listen to them when they complain about stuff, like the safety of its holdings… Yes, China has complained recently about the monetary policies the U.S. is using to keep the economy’s pulse pumping.

Speaking of the monetary policies being used… Friday, the Budget Deficit printed… And has, right now (which is before a ton of the spending is booked) tripled to $957 Billion! That’s in the first 6 months of the fiscal year… So… Let’s just say, we don’t spend any of the funds already allocated to revive the economy… That would put the annual deficit at almost $2 Trillion! And, then… Add in the spending already allocated… Remember, a couple of months ago, I told you that at first I calculated the deficit this year to be $2.5 Trillion, but then raised it to over $3 Trillion? Well, it sure appears that we as a country are well on the way to a $3 Trillion Budget Deficit this year, which should put our National Debt at around $14 Trillion dollars!

And… Of course that’s just a drop in the bucket, when you add in all the future payments we will owe on the endowments like Social Security, and Medicare… And, Oh, by the way, just where do those war expenses get booked? Is that the proverbial “off balance sheet item”? You bet it is folks…

Oh… I had better stop right there! I can get all geeked up whenever I begin talking about our deficits… I begin to wonder, no wait! I said I was going to stop! OK, onward and upward to something else! I’m going to step away for a minute, I’ll be right back…

OK, I’m back! I had to get up and walk around for a minute, that deficit talk just get right under my skin from the get-go! Then you add in the consumer debt, and you just go crazy! Yes, maybe Credit Card Debt is plunging, but Mortgage foreclosures are soaring, according to Reuters…

So… Gold, which has had a difficult time pushing back to $900, is up $5 this morning. I was checking the best returns this morning, year-to-date, and I noticed that Silver had pushed higher by over 9% so far this year… It’s out performing Gold, right now… The real winners this year, so far, are… Platinum and Palladium, up 32 and 27% respectively. WOW!

As I said at the top this morning, it’s Easter Monday, which means it’s a holiday in parts of the world, and that means we won’t be “fully staffed” in the markets again today… But the U.S. stock jockeys are back in the saddle, and that should add to the excitement of the day!

Well… Here in the U.S., the data cupboard is bare… But the remainder of the week, sees it get restocked daily! Tomorrow’s big report will be the Retail Sales for March, which given the indication of the BHI (Butler Household Index), should be a bit better than recent reports… Wednesday is Tax Day, and we’ll see the stupid CPI, and the TIC reports. Industrial Production and my fave, Capacity Utilization also prints on Wednesday. Thursday brings us a slew of data, of which the Weekly Initial Jobless Claims will be the most important. And we finish this week with the U. of Michigan Consumer Confidence report for this month.

So… With me dragging a bit, some countries on holiday, and no data today, I think I’ll head to the Big Finish… Will you join me?

Currencies today 4/13/09: A$ .7245, kiwi .5860, C$ .8165, euro 1.3210, sterling 1.4730, Swiss .8685, rand 9.0550, krone 6.6225, SEK 8.2240, forint 219.20, zloty 3.2910, koruna 20, yen 100.50, sing 1.5250, HKD 7.75, INR 49.87, China 6.8350, pesos 13.11, BRL 2.17, dollar index 85.44, Oil $50.84, Silver $12.51, and Gold… $887.40.

Source: Budget Deficit Triples!

Well… Our Fantastico Friday was interrupted by that horrific Jobs Jamboree number that printed Friday morning… 651K jobs were lost in February, which let me remind you is a couple of days shorter than other months. So, it could have been worse! Hard to believe that could be the case, but it’s true. The unemployment rate rose to 8.1%, from 7.6% in January. The jobless rate is the highest since 1983. The economy has now shed 4.4 million jobs since the recession began in December 2007, with almost half of those losses occurring in the last three months alone.

Remember a year ago, when I kept harping that we had entered a recession, but the NBER hadn’t announced one yet, nor were the Un-dynamic duo of Paulson and Bernanke agreeing with me, as they kept denying what was right in front of them, for if little old me, could see that we had entered a recession, then why couldn’t these two? Oh, well, we now know that the recession began in December 2007… And now we know that 4.4 million jobs have been lost since that time. Of course if the Bureau of Labor Statistics (BLS) didn’t add jobs throughout the year that didn’t exist, we would be even more worse, so I don’t know whether to thank the BLS or curse them…

One thing to not let slip by you, is the fact that the previous months’ totals of -577K and -598K were revised upward by large amounts to -681K and -655K respectively… So, you’ve now got to ask yourself if the Feb figure will be revised to -700K… Of course it’s my opinion that the BLS would never dare print that figure on a first run printing, but only as a revision, that can be swept under the rug.

So… The currencies reacted a bit differently on Friday than we had seen recently when bad news printed in the U.S. Recall, that the Trading Theme that rewarded the dollar, whenever bad economic data printed, had held a grip on the markets for some time… But Friday morning, I mentioned that the trading looked different, with no Trading Theme in place, and that carried on even after the Jobs data printed.

The euro was stronger for most of the day on Friday, but as I left the office at the end of the day, it was beginning to look a little worn around the edges, and as I turn the currency screens on this morning, I see that the single unit has given back some ground.

I got a kick out a story that a reader sent me over the weekend… It was a story that appeared on the Bloomie regarding rate cuts… I told him, “yes, this is the stuff I keep harping on about how it’s not the cost of the credit that keeps banks from making loans, so why keep cutting interest rates?” So… Here’s a snippet of the report so you can see what it is that I’m talking about…

“European Central Bank Executive Board member Juergen Stark said cutting interest rates won’t remedy the financial crisis and pushing them too low may backfire. The financial crisis can’t be solved with rate cuts, Stark said in an interview to be published in Luxembourg’s Tageblatt newspaper on March 9. Too low a rate level can even be counter-productive.”

Hmmm… Finaly a Central Banker with the intestinal fortitude to stand up and say the right thing! Of course, that didn’t stop the European Central Bank (ECB) from cutting 50 BPS last week! UGH!

Recall last week I was talking about how fundamentally speaking, Australia was looking healthier than other countries, but then they posted a contraction in their GDP the next day… Some egg on my face with that one, but Hey! I still think they are poised to pull out of this global financil meltdown on the fast track. Apparently, I’m not the only person that thinks that… Derivatives show that the worst is over for the Aussie dollar… And the Royal Bank of Canada (RBC) is telling their customers to buy the Aussie dollar VS Canadian dollars / loonies… I read that this morning, you don’t think I make this stuff up do you? It was there in on the screen…

I mentioned to Chris Gaffney last week, that I had been seeing more yen selling coming across the trading desk than I had seen in a long time. I said that these people, if they had held it long enough, were probably taking profits. And why not? In this day an age with deflationary pricing pushing most assets downward, when you see a profit, you take it!

The guy known as “Mr. Yen”, Sakakibara, told the press last night that he believed yen may rise to a record 70 VS the dollar… WOW! He also said that it would range trade between 100 and 70… He believes that the yen will be afforded the same kind of love the dollar has received since the financial crisis began in the U.S. With Japan posting a large economic contraction last week, Mr. Yen, is of the opinion that it will help the currency gain to 70.

Hmmm… I just don’t know about all that… For one, I’m not convinced the flight to safety that has underpinned the dollar with buying of Treasuries, will be duplicated in Japan… And two… The only thing I saw pushing the yen stronger in 2008 was the unwinding of the Carry Trade, which I said had come to end about a month ago. So… There you have it… I don’t like yen’s chances to go to 70, but do agree that it could hold 100… It’s darn close to 99 as I type…

Recall last week I told you about my neighbor that stopped me in the driveway and was all concerned about what he had heard on the radio that day, regarding the FDIC going broke… I said then, not to worry about it, as the Fed will print more money and keep the FDIC from failing… If they kept AIG from failing, they certainly would do the same with the FDIC… Well, on Friday I saw this… “the FDIC wants a permanent increase in its line of credit with the Treasury Department to $100 billion from the current $30 billion. FDIC Chairwoman, Sheila Bair told key lawmakers in letters Thursday that such an increase “would leave no doubt that the FDIC will have the resources necessary to address future contingencies and seamlessly fulfill the government’s commitment to protect insured depositors against loss.”

OK… I told you on Friday morning about Gold’s rebound to $940, but it failed to add to that figure even after the horrific jobs data. I guess you would have to say that Gold traders had “priced in the jobs data already”, eh? Gold is off by about $4 this morning, as it gets pulled down by a report regarding global inflation… The Economic Cycle Research institute assesses that U.S. inflation pressures are at their lowest since 1958, and likely to decline further…

But for every report attempting to pull Gold down, there’s one attempting to push it higher… What I’m talking about here is the report that our friends, NOT! At OPEC are going to maintain their 13% cuts in production put in place since September 2008. They may consider more cuts. Oil is trading higher this morning at almost $47, and oil traders believe it will be back to $50 within two months…

Quietly making noise for the past 3 months has been the Brazilian real… The real has gained 4% in the past 3 months, as investors around the world look for yield… And Brazil’s interest rates have had the allure of the Sea Hag’s song to Pop-Eye! But… There’s word out of Brazil that the Central Bank will look to cut rates by 100 BPS / 1% when they meet, later this week. That’s too bad, but Shoot Rudy, Brazil’s rates will still remain higher than you can get in most ports of call… And… Their GDP will be positive…. And… If traders and investors reward the real for cutting rates aggressively like they did over currencies, then the real has nothing to worry about, eh?

OK… So, for the past month I’ve given you my ideas for the countries / currencies that could be on the fast track to recovery, given their ability to remain off the rosters of countries with failing banks. Norway leads the pack, with Canada, and Australia close behind… I even told you about how Paul Volcker thought we should shift to the way Canadian Banks operate. Well… It’s always nice to see someone else follow up on my ideas, not that they read the Pfennig and said, “Hey! Let’s write about what Chuck wrote about”… Nah… That wouldn’t happen… HA! But, seriously, BNP Paribas’ research team has issued a report advising their clients to buy… You guessed it… Norway, Canada and Australia…

BNP said, “we remain friendly on commodity currencies like Norway, Canada, and Australia, and view today’s oil price rally as an indication for other commodities to follow. We are bullish on the Canadian dollar, Norwegian krone, and Australian dollar, but unlike last week we like trading these currencies long against the dollar.”

So… There you go! It’s not just me!

There is no scheduled data to print today, but the rest of the week is chock-full-0-data. On Wednesday, when I board a plane to Florida, we’ll see the Monthly Budget Deficit… That should be a doozy! On Thursday, we get the usual Weekly Initial Jobless Claims, and Retail Sales for Feb… I can tell you right now, that the BHI (Butler Household Index) tells me this report for Retail Sales is going to be very disappointing! Friday the 13th, we’ll see the Trade Deficit, Import Prices, and U. of Michigan Confidence. There are other 2nd Tier reports sprinkled in all week…

I really do think that the Retail Sales for Feb, is going to be bad… And that may weigh on the dollar, that is, if the Trading Theme keeps to the back of the room!

OK, as I head to the Big Finish, I see the euro has lost more ground than when I first came in… It just can’t stand prosperity!

Currencies today 3/9/09: A$ .6360, kiwi .4980, C$ .7735, euro 1.2590, sterling 1.3890, Swiss .8595, rand 10.5930, krone 7.1125, SEK 9.2050, forint 247.90, zloty 3.77, koruna 22.02, yen 99.15, sing 1.5515, HKD 7.7550, INR 51.88, China 6.8410, pesos 15.28, BRL 2.3750, dollar index 89.20, Oil $46.74, Silver $13.22, and Gold… $937.90

Source: A Horrific Jobs Report!

As I explained yesterday, we could see some “book squaring” today, which, depending on which way the “squaring” was going could cause some additional wild swings. The Japanese yen, however, is set to book a performance in 2008 that is the best we’ve seen from yen, in 20 years! WOW! Shoot Rudy, that’s longer than I’ve been writing the Pfennig! Yes, 2009, will mark my 17th year writing the Pfennig… Just think it began with hand written notes, of which I still have every one, and has turned into a letter that is read by 100’s of thousands of people each day! WOW!

But let’s get back to yen… If yen is going well, and the dollar is going well against the other currencies, it tells me that Risk Aversion has slipped back into the markets on a larger scale, which makes sense to me, given the fighting in the Gaza Strip.

The “star” currency yesterday though, was the beaten down Brazilian real. We saw a 6 whole figure move in real yesterday… There was no news, so once again it was thin volumes causing wild swings!

We did see two pieces of data yesterday, in the U.S., that played well with the financial meltdown in 2008… First we saw U.S. Home prices fall 18.% in October, and 2.2% from the previous month! OUCH! The S&P/CaseShiller Home price index showed this 18% fall, which turns out to be a record drop! This, will continue for most of 2009 folks… There’s still just too much inventory out there to deal with, and now, even people with good credit are finding it difficult to get loans… That problem will lessen as we move through 2009, and eventually, this will all get back to normal, whatever that is!

The second piece of data was Consumer Confidence… The Consumer Confidence index came in much weaker than expected in December falling to 38.0 from 44.7 in November. This represented a record low reading for household confidence. The “experts” had thought that the fall in gas prices would give Consumer Confidence a boost… But that failed to become fact! This index is finally about where I believe it should be… Look, I DON’T WANT it to be this bad, I just think that finally people are looking around and have finally taken off the rose colored glasses!

OK… So, we’re heading to the end of 2008… I thought I would share with you some “Chuck Speak”… Thoughts from the Cheap Seats, as I think when I retire, I’ll call my newsletter! So… Here goes…

As we put the finishing touches on 2008, we’ve seen a nice Santa Rally in the euro and other currencies, especially the Swiss franc, will this continue or do we go back to the Trading Theme of rewarding the dollar as things get deeper, darker, and more dangerous?

Well… Here’s what I think… First of all, we could very well see a very nice “Obama bounce” in the first QTR of 2009, as he takes over. This would encompass stocks, and the dollar. But unfortunately, the “Obama bounce” will come to an end quickly, as a touch of reality comes over the markets about June… So, for the first 3 months, we have the “Obama bounce” and the “ding dong the witch is dead crowd” will be coming out of the woodwork. But, as I said, then a touch of reality comes over the markets, as the $1 Trillion stimulus plan is put through. Then we’ll probably see three months of capitulation before the trap door springs on the latest bubble… Treasuries…

More Treasury issuance will glut the market and soon, everyone will be heading to the EXIT door, panic setting in, as Treasury yields go higher and higher, and their bond values go lower, and lower. Why higher and higher? Well, two reasons… 1. there will be so much supply, that the yield will have to go higher to attract buyers of all this debt. 2. Inflation will be returning…

Yes, yesterday I gave you my theory on how the asset price deflation will end, and new buying will take place. Someone asked me a good question, “how will these people get the money to spend?” Well, you see, I’m not talking about the Mom and Pops in the investing world, I’m talking about the BIG BOYS, Institutions, Hedge Funds, Sovereign Funds… OK, so, then inflation sets in and now we’ve really got problems on our hands!

So… By June, we could very well be seeing a true and earnest return to fundamentals, and a much weaker dollar. Recall that when this current Credit Crisis caused dollar repatriation, I said that it could last through the election and on through year-end… Then I revised that, seeing the rot on the economy’s and Credit Crisis vine, to say that it could very well last one year, just like the last mini-dollar rally in 2005… So that would put us around June!

And that’s where the asset deflation probably ends too… So… I’ll trade today, and come back in May, eh? Nah… Just kidding, I’ve got to be here for the fireworks that will go off IF I happen to get lucky enough to have nailed this scenario!

You won’t get this scenario from anyone else folks… Most writers out there are talking about deflation setting in on the U.S. like it did Japan… And I know that I’ve spent a ton of time talking about the similarities between Japan, circa 1990’s, and the U.S. now… But I draw the line at deflation setting in for a decade like in Japan! We, the U.S. buyer, be it consumers or hedge funds, will be experiencing the 7-year itch to buy assets at depressed prices next spring… I just can’t see it any other way!

Currencies today 12/31/08: A$ .6875, kiwi .5760, C$ .8175, euro 1.3860, sterling 1.4590, Swiss .9375, ISK 145.50, rand 9.3850, krone 6.99, SEK 7.81, forint 190, zloty 2.9775, koruna 19.07, yen 90.50, baht 34.60, sing 1.4390, HKD 7.75, INR 48.80, China 6.8275, pesos 13.81, BRL 2.3325, dollar index 81.27, Oil $39.90, Silver $10.85, and Gold… $863.15

Source: The End of 2008!

The legislation is an effort to move away from exchange fees associated with the dollar.

This from Mercopress:

Central banks [in Argentina and Brazil] won’t be charging the private entities clearing fees and deals will be agreed on the reference exchange rate to be fixed on a daily basis.

Another cost saving will be elimination of the commission normally charged by corresponding banks in New York that act as intermediaries.

However at this stage the system is voluntary so as not to force the private sector and if companies wish to return to the US dollar system they can.

This could be the first step to create a common currency among the Mercosur countries, Argentina, Brazil, Paraguay and Uruguay.

The currency and metals markets began the day rallying versus the dollar, as it seemed yet another huge financial firm was circling the bowl. But late in the afternoon the dollar came charging back, and gold fell back below $850 after surpassing $900, ARRGH! So what caused this quick reversal? Senator Schumer was credited with turning the markets around. He announced, mid-afternoon, that the Federal Reserve and Treasury were going to create a new government institution that would purchase all of the toxic debt instruments being held by Wall Street. Wall Street obviously thought this was just a fantastic idea, and the stock market immediately rallied, taking the dollar with it.

The details of the plan still aren’t available, but the markets have been desperately searching for a hero to come and rescue them, so even the hint of a rescue was enough to shoot stocks back up. The proposal currently being discussed in congress involves moving troubled assets from the balance sheets of American financial companies into a new government backed institution. The SEC also instituted a ban on short selling of financial stocks, copying a similar ban that was instituted yesterday in London. Chuck had a travel day yesterday as the FXU moved from San Diego to Dallas, but he was keeping an eye on the markets and sent me this last night:

“The SEC is contemplating a ban on naked short selling… WHAT? OK… So… This is a free country, and a free market, as long as you follow the government’s rules? Oh Geez Louise, I give up! Not that this has anything to do with currencies, but it does have something to do with the overall direction of this country, which in my opinion is socialist!

“All of you know that I’m a person that is usually happy… But I’m telling you now… These things that the government is trying to do to plug up the leaking damn, are useless! I’m really upset with all this… And I thank my lucky stars that I thought to sell every stock I owned last October! I’m tired of all this junk (read what you want here, because I can’t say it) and I’m not going to take it any more!

“I’m with well-respected investment analyst, Marc Faber, when he says that the hopes for the return of a Bull Market is in ‘fantasyland’…

“So go ahead and lock us down like a police state! I’ll guarantee you it won’t solve a darn thing!

“I had better stop now, because I feel my blood boiling…”

You can always count on Chuck to tell it like it is! He will be back in the saddle on Monday morning with plenty more to say about all of this week’s shenanigans in D.C. and Wall Street.

Bernanke and Paulson have been worn down from the one-off situations they have been dealing with, and finally came to the realization that the problem is much more pervasive than previously thought. Options that U.S. officials are considering include establishing an $800 billion fund to purchase so-called failed assets and a separate $400 billion pool at the FDIC to insure money-market funds. What’s next? Maybe the government will buy all of the Icelandic krona (ISK) that our customers still own. Nope, you and I are just ‘investors’ and have to live with the bad investments we make. That is why this gets me so angry. The folks on Wall Street who made all of these very poor investment decisions using huge amounts of leverage aren’t being held accountable for their actions. These guys should be made to walk the plank, but instead they are skipping away with nice severance packages.

And what does this do to the balance sheet of our federal government? You have to remember, Paulson made his name on Wall Street – where leverage is king and the short term is all that matters. Do you really think he is worried about the billions of debt he has saddled the U.S. taxpayers with? It is almost hard to keep track of all the obligations Paulson and Bernanke have transferred from Wall Street to Main Street. The Treasury has pledged to buy up to $200 billion of Fannie (NYSE:FNM) and Freddie (NYSE:FRE) stock to keep them solvent, while the Fed agreed on September 16 to an $85 billion bridge loan to AIG (NYSE:AIG).

The Treasury also plans to buy $5 billion of mortgage-backed debt this month under an emergency program and the Fed has begun to accept just about any collateral the banks want to pledge at the lending windows. Yes, these two scoundrels have turned the federal government into a giant dumpster for any illiquid assets which Wall Street needs to get rid of.

The question is just how much debt can the United States take on? We are already running deficits that blow my mind; and interest on all of this debt will squeeze out spending for ‘good’ governmental programs. Yesterday the Treasury announced $200 billion in special Treasury bill sales to help the Fed expand its balance sheet. Senator Richard Shelby of Alabama – along with some others in congress – are critical of these takeovers. “We cannot protect all risk in the market, and we shouldn’t do it at the risk of the taxpayer,” Shelby, the ranking Republican on the Senate Banking Committee, said in an interview on Bloomberg this week. But Shelby and others in opposition to more debt won’t be able to combat Schumer and the powerful lobbies of Wall Street firms. The rescue plan will go through.

But where does that leave currency and metal investors? The dollar rallied on the rescue news, with the euro (EUR) falling back below $1.4350. The yen (JPY) got sold off as the Wall Street investors actually started moving back into leveraged carry trade positions. And why not? When the U.S. government will be there to bail out your worst investments!! The carry trade moves actually helped investors in the high yielding currencies of South African rand (ZAR), Brazilian real (BRL), Aussie dollar (AUD), Mexican peso (MXN), and the New Zealand dollar (NZD).

Several readers have asked me to write about what has been happening to the Brazilian real, which has been one of the best performing currencies up until the last two months. The sell-off in Brazil has been due to the ‘deleveraging’ of carry trades. Some investors borrowed funds at a low interest rate to invest into the higher yields of Brazil. With the turmoil on Wall Street, these investors have had to reverse their leveraged positions, selling the Brazilian real and converting back into the Japanese yen or Swiss franc to pay back their loans.

So the sell-off has had nothing to do with the Brazilian economy. Brazil still has an abundance of commodities, including large deposits of minerals and oil, which will continue to be in demand. The stability of their political system is also not in question. The question now is just how much of the appreciation of the Brazilian real was due to the ‘carry trade’ investors, and just how far it will fall due to these reversals. I believe the proposed ’solution’ on Wall Street will not end the recent market volatility. With higher volatility, these carry trades will continue their on-again off-again pattern. Look for further volatility in the carry trade currencies over the short-term. Longer-term holders should be protected by the commodity resources of Brazil.

The South African rand rose against the dollar for a second day as demand for higher-yielding assets and a rally in gold stoked demand for the currency. The rand was the best performer versus the U.S. dollar yesterday and rose as much as 1.4% to 8.0632 per dollar paring its weekly decline against the U.S. currency to 1.3%. As I stated above, the Aussie dollar also rose close to 2% versus the U.S. dollar overnight and the kiwi rose just over 1%.

When the carry trades get put back on, the big loser is the Japanese yen. Financial firms who are having problem borrowing U.S. dollars have turned to the Japanese banks where they borrow yen and then sell them into dollars. The yen dropped over 2% versus the U.S. dollar overnight due to this borrowing.