Chuck Butler (The Daily Reckoning):
As I checked the currencies throughout the day yesterday, I noticed that as the day went on, the non-dollar currencies were stronger, led by the Big Dog, euro (EUR)… But then late last night, and I mean late last night, I checked them, and those gains had been wiped out.

So, when I arrived here this morning, I had one thing on the top of my list of things to do, and that was to find out what happened… Come on, I said to myself, it had to be more than the “risk on, risk off” stuff that’s been hanging over the markets like the Sword of Damocles! But, when you get right down to the nitty gritty, that’s all it was… For once again, there was some data, or story, or rumor, that spooked the markets into believing the global recovery isn’t going to happen, and the “risk off” came into play.

So what was it that spooked the markets… Well… The only thing I can find was the report yesterday about falling Housing Starts that Chris told you about… Did you know that about 14% of US homeowners were either delinquent on their mortgage or in some stage of foreclosure? That is the highest rate since the group started collecting the data in 1972!

But there was something else that was announced as the day went on, that I think probably spooked the markets more than anything else… And that is a key House panel approved two amendments to a sweeping financial-overhaul bill that would give federal watchdogs new authority to audit the Federal Reserve, and would establish a fund of as much as $200 billion to help dissolve large, troubled institutions. Rep. Ron Paul (R., Texas) offered the amendment seeking to subject the Fed to audits.

The House Financial Services Committee voted 41-28 to approve the amendments, wrapping up weeks of debate but postponing a final vote on the bill until after Thanksgiving.

OK… More deficit spending for sure, and I’m positive that this was “hung on this bill” to audit the Fed as the only way it would get through the gauntlet.
Click here to finish Mr. Butler’s article at The Daily Reckoning.

Good day… We had a very busy day on the desk yesterday, as our newest MarketSafe offering, based on the BRIC currencies, is making the phones ring off the hook. But while we were busy, the currency traders had another slow day as the dollar just drifted throughout the day. The return chart for the last 24 hours shows only one currency made more than a .5% move vs. the US$; and that was the South African Rand which increased .75%.

The markets were watching Ben Bernanke’s congressional testimony through most of the day, but those waiting for a surprise were disappointed. Bernanke stuck to the script which he had laid out the day before in the Wall Street Journal, and the members of the House Financial Services Committee couldn’t get him to commit to any ‘new’ stimulus programs. Bernanke said the economy is showing “tentative signs of stabilization” but the central bank intends to continue to maintain its “highly accommodative” monetary policy for “an extended period”. He indicated that the Fed stands ready to tighten policy, but only after the economic recovery takes hold and pressures holding down inflation diminish.

The Fed Chairman also reiterated his desire to keep the Fed independent from additional congressional oversight. As Chuck reported a while back, 275 legislators sponsored a bill to repeal the immunity of the central bank from audits of monetary policy. Bernanke said the bill would “open a Pandora’s box” for Congress’s Government Accountability Office to probe monetary policy. While I don’t necessarily think the folks in Congress are any more adept at handling the financial crisis (more on that later), I am a fan of opening up the books and letting the ‘owners of the government’, (the taxpayers) see just what all of their taxes are being spent on. Again, I’m not advocating that the Fed should seek congressional approval for every move they make, but I do think an after the fact audit is a good thing. I just get the feeling Bernanke and his pals are trying to hide something.

When pushed about this bill to audit the Fed, Bernanke pushed back at Congress and told them they need to cut the ‘unsustainable’ budget deficits. The Senate took a somewhat symbolic step toward this yesterday, by killing the F22 Raptor fighter jet program. If you hadn’t been following this, it is an excellent example of how spending can spiral out of control. Back in April, Defense Secretary Robert Gates decided, with President Obama’s backing, to scrap the program once it had delivered the 187 F-22s already in production. F-22 supporters in Congress ignored what the military wanted, and went ahead and budgeted another 2 billion dollars to continue production. I know 2 billion is next to nothing with the trillions that we have been talking about, but every little bit counts. If the US Government is going to get spending under control, they have to start somewhere; and killing a program that creates a plane that the military says they don’t need, and don’t want is a good first step.

Budget deficits aren’t the exclusive problem of the US. The Pound Sterling has been coming under some selling pressure lately as the UK budget deficit swelled to a record $21.4 billion in June. This was the largest monthly budget deficit ever recorded, and is increasing pressure on Prime Minister Gordon Brown to commit to a credible plan to cut spending. Recent data coming out of the UK doesn’t paint a pretty picture of the economy. Yesterday data showed that UK house price declines will persist until 2012, and another report predicted gross domestic product will keep falling until the final quarter of this year. BOE policy makers voted unanimously to maintain their asset purchase program in July, another sign that they still feel the UK economy is on shaky ground.

While the BOE and the Fed continue to use their reserves to purchase their own debt, China announced it would be looking to use its huge stash of cash to make purchase assets which have a bit more intrinsic value. A story in the FT yesterday stated that Beijing will use its foreign exchange reserves, the largest in the world, to support and accelerate overseas expansion and acquisitions by Chinese companies, according to Wen Jiabao, the country’s premier.

In an interview published in state-controlled media, the chairman of China Development Bank said Chinese outbound investment would accelerate but should focus on resource-rich developing economies. “Everyone is saying we should go to the western markets to scoop up [underpriced assets],” said Chen Yuan. “I think we should not go to America’s Wall Street, but should look more to places with natural and energy resources.”

This is a shot across the bow for the US, and a huge boost to countries which are commodity rich, including Australia, Brazil, and Africa. This is further evidence that China is looking to slow its purchases of US treasuries, and reduce its reliance on the US dollar as its reserve currency. Investments will focus not on monetary instruments, but on physical assets in resource rich developing economies.

This may account for some of the increase we saw in the South African rand yesterday. The South African rand is now the best performing currency vs. the US$ in 2009, with an increase of over 22.5%. The news will also benefit the Brazilian real which recently climbed to the highest in more than nine months as stronger earnings and higher metal prices bolstered the outlook for Latin America’s largest economy. The Brazilian real is the number two performer year to date vs. the US$, with an increase of approx. 21.5%. Anyone want to guess at #3 on the list?

It is the Australian dollar which has gained just over 15% vs. the US$ in 2009. Australia’s economy is performing better than expected, with GDP rising .4% in the first quarter, helped by consumer spending and increased commodity exports. Policy makers have left interest rates unchanged two weeks ago for a third month, but the bias seems to be shifting toward tightening rates. Australia could end up being the first of the major economies to start raising rates again, which would be a big boost for this currency.

The Bank of Canada will announce their rate policy today, and are expected to leave rates unchanged. Commodity price rebounds have helped push the Canadian dollar higher, and the loonie’s strength could threaten Canada’s nascent recovery. The big boss, Frank Trotter traveled out to Vancouver to join Chuck yesterday, and had this to report after his plane landed:

“Making the approach into Vancouver has always been a treat. This time, for my first time ever we landed to the west – drifting down down along the Fraser River Valley with Ranier on the left and the Olympic Peninsula in the distance affording a great view out to Vancouver Island across the straights. Once down I jumped in the cab and headed for the Agora Financial ‘Decade of Reckoning’ Conference.

“So are you guys picking up down south?” I was jolted out of my observation of the heavy traffic at 2pm. “Haven’t hit bottom yet I suspect” I replied to the cabby with an understatement. He told me that business was down, but okay. That restaurants were not full but they weren’t closing. That work continues for this winter’s Olympics, but everyone wonders if people will have money to travel. I’ll check in after hearing what some of the experts say at the conference over the next couple days; until then this is a pretty decent place to build a gulch.”

I look forward to sharing both Frank and Chuck’s views from the big Agora Financial Conference up in beautiful Vancouver.

As I mentioned in the opening paragraph, or new BRIC MarketSafe CD is proving to be extremely popular with investors. One reason is the tremendous upside potential of these 4 emerging market currencies without any downside risk. It also gives investors the opportunity to invest into the Russian ruble, a currency which we are not able to offer in any other investment. The ruble has shown some good strength vs. the US$ recently, gaining over 2% in the past 5 days. The ruble has rallied 16 percent in five months, as oil prices have climbed. While recent moves have been excellent, the Russian ruble continues to be a very volatile currency. The only way I would suggest individuals invest into this currency is with the downside protection provided by our MarketSafe CD.

Currencies today 7/22/09: A$ .8158, kiwi .6566, C$ .9064, euro 1.4216, sterling 1.6447, Swiss .9371, rand 7.7793, krone 6.2904, SEK 7.609, forint 191.15, zloty 2.9993, koruna 18.1720, yen 94.43, sing 1.4430, HKD 7.750, INR 48.5225, China 6.8313, pesos 13.286, BRL 1.8980, dollar index 78.897, Oil $64.80, 10-year 3.48%, Silver $13.475, and Gold… $947.40

That’s it for today… And for me the rest of the week. I am heading out to San Diego tomorrow morning for a family reunion. Mike Meyer will be Pfilling in for me and Chuck for the next two mornings. The phone calls are already starting up again this morning, so I’ll hit the send button and log into the phones. Hope everyone has a wonderful Wednesday!

Source: Bernanke Sticks to his Script

After the various eurozone finance ministers gather for the traditional ‘family photo shoot’, “there will be some speeches, the cutting of a 10th birthday cake and then a closing concert”, says Raphael Anspach, a spokesperson for the ECB, rather enthusiastically. Sounds fun.

But before the string section pipes up, we recommend that the organisers have a think about sticking a cork in the trombones.  The second ten years are going to be a lot less triumphant than the first ten…

When the euro fell to 90 cents to the US dollar in the early 2000s, it was derided as a ‘toilet currency’ by nationalistic curmudgeons and currency traders alike. One single currency, it was thought, couldn’t possibly represent a jumble of nations on different economic cycles, not to mention a cacophony of countries with wildly divergent industrial bases and monetary needs.

The hidden weaknesses of the euro countries

How things have changed. The euro is up 60% against the US dollar since George Bush first came to power, as both Gulf states and Asian countries have begun ditching the greenback for safer stores of value. And the euro’s share of global foreign currency reserves rose from 18% back in 1999 to more than 25% by 2007. But that doesn’t necessarily mean that the fundamental position of the euro is any better than it was eight years ago. Investors may have fled the US dollar, and watched the eurozone grow relatively fast against its lagging American counterpart, but they’ve ignored the hidden weaknesses on this side of the Atlantic.

This year’s first-quarter GDP growth across the eurozone flipped up a good 0.7%, but that figure was skewed upwards by the rollicking performance of the German economy. German GDP growth climbed 1.5% on the back of a roaring manufacturing base oiled by booming exports. In contrast, Italy only managed expansion of 0.4% and Spain 0.3%, while in Portugal, growth actually fell by 0.2%.

Meanwhile, inflation is on the rise, led by a good 4.6% in Spain and 5% in Ireland. Both are well outside the ECB’s 2% target. The spectre of stagflation – a stagnant economy plus rising inflation – is rearing its ugly head. Indeed, “stagflation is a situation that we experienced some years ago, it could return,” said Spain’s Economy Minister Pedro Solbes earlier this month.

Why a strong euro is disastrous for Ireland

And that’s not the only problem. A strong euro might be good news for Germany, given the strength of its economy, but for Ireland, whose main export destinations are the UK and the US, it’s disastrous. Ireland has begun to lose its competitive advantage against other destinations for multinational companies, says Professor Rodney Thom, head of the School of Economics at University College Dublin, as it becomes more expensive to export pricey euro-denominated goods and services abroad.

“I never saw any advantages to us joining the euro”, says Professor Thom. “The last thing we needed was low interest rates when the economy was overheating”, and now that the currency has risen against sterling and the US dollar, “we’re losing our competitive edge. Ireland is on a limb”, he says, because it has given up one of the most significant economic levers open to any country – the ability to set its own interest rates.

In the 1990’s, when sterling depreciated 5% against the deutschmark, “the Irish central bank did something very clever”, he says. It let the Irish punt depreciate half way between the two currencies “to keep a balance. Now we can’t do that. The euro has given us a headache that we didn’t need.”

So there are plenty of things for Europe’s finance ministers to think about when they’re quaffing their champagne and gobbling their cake this Monday.

Source: It’s the ECB Birthday Party, but not Everyone gets Cake 

OK… The Fed’s FOMC meeting minutes caused quite a stir in the currencies yesterday, so let’s go to the tape. The Fed noted that prior easing had provided a better balance to the risks to inflation and growth, although the risks were still towards downside growth. In addition, the Fed downgraded their outlook for growth and pointed toward higher inflation… In addition, the Fed noted that “much weaker 2008 growth, inflation to remain elevated in 2008, jobless rate to rise significantly.” Ooooh, now that doesn’t give me a warm and fuzzy, and it shouldn’t give you one either!

So… If that’s what they “really” talked about, then why on earth did they go ahead and cut interest rates? They put in print that they believe inflation is going higher, and they went ahead and cut interest rates! OMG! These guys (and gals) are something… They are really something.. What? I don’t believe I can say what they are in this letter, as this is a family letter! But, I’m sure my friend, the Mogambo Guru will have something to say about this, in his special Mogambo way… Can’t wait to read his letter next Monday!

The Fed notes sent a message to currency traders and the message said… “with low growth forecast, and higher inflation forecast, the Fed doesn’t have a clue what to do” Which means there isn’t a strong feeling about an interest rate hike now either.

Last night, after getting home from my little buddy Alex’s baseball game, I checked what was going on in the Asian markets… I did this because the Fed FOMC minutes printed after Asia and London had gone home for the day, and I wanted to see how the Asians took the FOMC minutes… At that time the euro was close to 1.58 again…

But something funny happened on the way to the forum for the euro this morning… So, let me explain what happened… It’s called jawboning. The dollar was falling too far too fast again, and something had to be done to slow down the fall, a governor if you will on weakness! And that something came in the form of a report showing that futures traders are adding to bets that the Fed will raise interest rates before year-end…

Well… With inflation (in my terms) at 11%, I would think they would be raising interest rates well before then… But, then, that’s just me… And if the Fed does raise rates, what good will it do if they wait till year-end? By then, inflation will probably be around 14-15% (in my terms) and the price of oil will be… Oh, who knows how high it will be by year-end?

So… The euro has lost about 1/2 cent overnight on this news… Still, the euro has made a nice recovery this week, and all those banging on the drum for and end to the weak dollar trend have crawled into the back seat and shut their traps this week…

OK… Enough on the Fed and their ineptness! Under the category of: “It’s about time they agree with Chuck”… Banks including Royal Bank of Canada, and ABN AMRO Holding NV. Believe that the Aussie dollar is going to parity with the green/peachback. So, the “parity watch” is on… With champagne bottles chilling and party hats all ready to be worn… The “parity party” is being planned… Too bad these Big Banks with their Big Research Departments don’t read the Pfennig…

Just kidding… These guys are great at what they do! But, how about that Aussie dollar? I’ve spent most of this week talking glowingly about the Aussie dollar… Yesterday, it hit a 25-year high!

The New Zealand dollar / kiwi, finally got off its duff and moved higher last night… Kiwi had lagged the Aussie dollar lately, but finally saw some love when a more expansionary than expected budget for 2008 was printed… I still like Aussie more than kiwi, as New Zealand’s debt situation is just too much for me to try to sweep under the rug!

U.S. stocks lost another 200 points yesterday… And we all know what that means… So a quick look at Japanese yen and Swiss francs shows some nice gains this week. This all plays well with what I’ve been talking about… (stocks to fall, and Carry Trades unwind) It’s too early to tell if this will continue, but for now, it sure looks like another “plan” has come together!

A couple of weeks ago I talked about the Indian rupee, and how it had weakened for no apparent reason, therefore laying the blame on the Indian Central Bank… It now appears that a credit market slump has led to this weakness… Corporate Treasurers in India believe this credit market slump has passed and the currency will rebound 8% in the next year.

Yesterday, Reuters reported that Warren Buffett has this to say about the dollar… “BUFFETT SAYS DOLLAR WILL CONTINUE TO DEVALUE, POLICIES NEEDED TO CORRECT SLIDE HAVE NOT CHANGED”

Sounds like Warren Buffett has been reading the Pfennig! Doesn’t that all sound familiar? Of course it does… Because that’s what I keep saying over and over again! The fundamentals remain awful!

OK… Today, we’ll see the Weekly Initial Jobless Claims, which are forecast to have jumped to 373K, which would be equal to the level at the start of the 2001 recession… We’ll also see the OFHEO House Price Index for the 1st Qtr, which is expected to show a 1.3% decline, which if that number prints it would equal a record low since the data began in 1975… UGH!

Fed Head Kroszner is going to talk today about the recovery and “repair” of the mortgage markets… What recovery? What repair? This ought to be interesting!

Bank of Canada’s Gov. Carney will speak today, but after Canada prints March Retail Sales, which are forecast to show a rebound from the Feb. report. The Canadian loonie continues to move higher VS the green/peachback, so expect some “jawboning” from Carney to slow the loonie’s rise…