The currencies had a split personality while I was gone too… At first, they rallied like there was no tomorrow, but then sold off, and then range traded. So, we’ll finish the year on a down note for most of the currencies, but knowing all too well that the markets are beginning to realize that the debts the U.S. is chalking up are not going to go away, and in fact they’re just going to get worse, and that spells bad times for the dollar… Eventually…

I did a lot of reading on my vacation, and the book I read the most was one by Christopher Wood, titled: The Bubble Economy… Now, on first take you would think that he was talking about the U.S…. But that would be wrong… This is an old book, and was written about Japan’s economy in the 90’s… I’ve spent a ton of time talking about the similarities between Japan then, and the U.S. now. And this book, just brings those thoughts even closer! For instance… In the book he quote the Levy Institute circa 1991… “monetary policy would not, on its own, be able to restart a depressed economy suffering from asset deflation and widespread financial crisis, for lower interest rates cannot motivate fixed investment when the market is glutted with existing assets worth much less than it costs to replace them.”

Oh my! We’re turning Japanese, I really think so!

So… Then this weekend, a Pfennig reader sent me a link to a story on Bloomberg regarding the Japanese… Here’s a snippet… “Japan should write-off its holdings of Treasuries because the U.S. government will struggle to finance increasing debt levels needed to dig the economy out of recession, said Akio Mikuni, president of credit ratings agency Mikuni & Co.

The dollar may lose as much as 40 percent of its value to 50 yen or 60 yen from the current spot rate of 90.40 today in Tokyo unless Japan takes “drastic measures” to help bail out the U.S. economy, Mikuni said. Treasury yields, which are near record lows, may fall further without debt relief, making it difficult for the U.S. to borrow elsewhere, Mikuni said.”

Well…the “rest of the story” can be read by clicking here.

As I write, the euro is back on the attack VS the dollar, with it trading above 1.43 once again. There has been a 2 figure move up in the euro from just last night, as it appears that the markets are running from the dollar with the Israeli / Gaza thing going on. The Swiss franc is back above 95-cents, and so on… I also noticed, while on vacation, that the Aussie dollar bounced nicely off its 65-cent level. And Commodities staged a nice rally / comeback while I was gone. Gold is trading around $880 again…

When I left, I had told you about a Santa Rally for the euro, and it did just that, even with the profit taking after reaching 1.45, it’s still much higher than it was when I said that we should look for a Santa Rally. I also was hinting that the Trading Theme that we’ve seen in place since July, was beginning to show chinks in the armor. Those chinks are becoming major exposed areas, as the markets are returning to focus on the fundamentals the hang over the U.S economy and dollar like the Sword of Damocles.

So… I see that the Fed has opened the door to grease the tracks to make GMAC a “bank-holding company” Why? Ahhh grasshopper… If GMAC is a bank holding company, they would be eligible for TARP funds, which would put them on the fast tracks to obtaining taxpayer bailout funding.

The thing I see happening now is that “everyone and their brother” is going to line up for taxpayer bailout funding… We’ve already set the stages for car loans, and student loans, and next we’ll get real estate guys and who knows what else! Everyone is lining up at the Government bailout trough…

So, thanks guys… Thanks for running up the taxpayer costs… Thanks for making it possible that my grandchildren will be burdened with these unbelievable financing costs of all this debt we’re building… Thanks… But no thanks!

It’s all sort of like Humpty Dumpty isn’t it? You know, all the king’s men and all the king’s horses couldn’t put Humpty Dumpty back together again. All the Big Ben Bernankes and Henry Paulsons are trying to put the economy back together again, but it “ain’t happenin”! Just shows to go you that they should have left it all alone… Let it fail… Then pick up the pieces and begin again… I’ve had a few people along the way that tell me that I don’t offer solutions all I do is pick at the wounds… But they just don’t read into what I’m typing each morning… I’ve said all along that we would end up in a debt ridden society if we didn’t stop spending… So, there’s one solution… STOP SPENDING! And then I warned that these bailouts that began last spring with the $150 Billion in checks to consumers, was going to put us on the road to turning Japanese, and we should have let things go their normal business course… There was another solution!

Now, that we’re here in this quagmire of debt and there’s more coming folks… I recall telling Chris while I was gone that there are rumors that the next bailout amount could reach $1 Trillion! But now that we’re here, what’s a poor boy to do? Well… For me, it’s called savings… And when things look really bad, and prices have fallen to the core, then I’ll put those savings to work, and if everyone does the same, the economy will grow once again, but from a lower base, which is a good thing. Of course, should everyone begin to spend their savings at once, this will bring about inflation that comes out our ears, but let’s worry about that then, eh? Besides, like no one really thinks that with interest rates near zero, and all this money going into the system, that eventually we won’t have an inflation problem do they?

OK… Now, that was a lot to get off my chest on my first day back, eh?

We didn’t see any economic data on Friday after Christmas, so one would think that there’s some catching up to do this week to end the year. But the data cupboard is empty today too! And it looks like those that are responsible for restocking the data cupboard, have taken this week off too… One piece of data we will get is the ISM (manufacturing) Index for this month… And remember when this index was hovering around the contraction/ expansion level of 50 and I kept saying that it was going to go below it and fall? Well, the index number in Nov. stood at 36.2, that’s a long way from 50, eh? And the “experts” have forecast another fall to levels not seen since 1980! UGH! Now… Early last fall I fretted about the reversal in the weak dollar and its affect on manufacturing… Exports had just posted a strong performance in the 2nd QTR, boosting GDP, because the dollar was so darn weak! Well, I said then, that those wishing for a stronger dollar had better be careful for what they wish for…

So, with the trading desks still undermanned the volumes will be thin for the most part, unless… We see a ton of “book squaring” today, to settle before the end of the year… Either way, we need to be aware of the fact that thin volumes can cause wild swings in the currencies… Take last night’s action for instance. When I went to bed the euro was trading 1.4130, and that looked pretty darn good to me… But when I turned on the screens, here in the office, this morning, what did my wondering eyes did appear, but the euro trading at 1.4350!

This rally means the euro is only down 2.5% from a year ago, which is far better than it was showing a month ago! And the best performer of 2008? Like you didn’t know! It was Japanese yen, up 24.7% since last year! WOW! Of course there are some real “problem children” in the currency performance roster… Aussie, kiwi, pound sterling, loonies, and krone are all showing pitiful performances for 2008… But, if the recent price action is any indication of what could happen in 2009, if we return to the fundamentals, then these pitiful performances might get put in the rear view mirror…

U.S. Treasury Sec. Henry Paulson is just about at the end of his “tour of duty”, and you’ve got to think that he can’t wait for the new administration to take over! I don’t doubt for a minute that the new Treasury Sec. will pull back on the bailouts… But what I do question, with Paulson leaving, is what happens with China? Paulson didn’t make the progress with China that he set out to make, but what he did do is keep the knuckleheads in D.C. from slapping trade tariffs on China… I have to wonder if that will be the direction of the new Secretary… If it is, then that won’t be good for the dollar, as protectionism is never viewed as a positive for a currency. So, those questions and more are on the docket for 2009…

I received quite a few emails from readers while on vacation with a question about something that another newsletter writer wrote about the euro / dollar… The writer believed that deflation was going to be a big problem for the U.S. next year, and that would be a good thing for the dollar, thus pushing the euro to parity. Hmmm… Well, that may be true, for I don’t know what’s going to REALLY HAPPEN! But! I would just have to say that since we’re mirroring Japan so much, let’s go back and look at what deflation did for the yen in the late 90’s when deflation was so prevalent… Oh, it doesn’t look like deflation did yen any favors then… And I doubt it will do the dollar any favors this time around… So, there’s my answer to that call by someone else… To me, though, this is all good, as it still means that there is a two-way trade, and that not everyone is on the same side of the ship!

So… Before I head to the Big Finish, let me re-cap today’s action so far… The dollar has been hammered overnight on fears that the Israeli attacks on Hamas in the Gaza Strip will disrupt oil supplies to the U.S. This has driven the price of oil higher to $40.40, and has caused a traders to unload dollars… The data cupboard is empty today, and trading desks are undermanned, which could cause wild swings in the currencies this week.

Currencies today 12/29/08: A$ .6965, kiwi .5850, C$ .8210, euro 1.4355, sterling 1.4670, Swiss .9585, ISK 143.20, rand 9.55, krone 6.95, SEK 7.67, forint 186.10, zloty 2.9050, koruna 18.54, yen 90, baht 35, sing 1.4370, HKD 7.6710, INR 48.42, China 6.8525, pesos 13.46, BRL 2.3450, dollar index 79.70, Oil $40.40, Silver $11, and Gold $885.80

Source: A HUGE Currency Rally!