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I don’t think Treasury Secretary Paulson is having as good a time as I did in the nation’s capital. When he came down from NY a couple years ago to take over the Treasury, he was Wall Street’s best paid CEO and looked to cap his career with a high-profile sojourn in public service. But his credibility has really taken a hit over the past year, and his update before congress yesterday didn’t quite go as everyone expected. Chuck left me the following to share with readers this morning:

“Yesterday I told you that Treasury Sec. Paulson was going to give an update on the bailout package… And instead of an update, he threw the markets a great big 12-6 curveball! Treasury Sec. Paulson laid out his plans for the next stage of the financial market rescue package, announcing he has shelved a plan to buy troubled mortgage assets and is moving his attention to non-banks and consumer finance.

And… in a striking admission, Paulson said that buying mortgage assets “is not the most effective way” to use government funding. Geez Louise! I could have saved him, Congress, and the whole country a lot of time and stress on this if he would have just listened to me at the time! I said when it was first announced that the Gov’t had no business buying up these troubled assets, and getting involved in what used to be known as “free markets”! He’s changing horses in the middle of the stream! What gives? And… All this unknown stuff now, put the Trading Theme in overdrive, buying dollars in the deep, dark days of the U.S. economy!

There’s a silver lining here folks… And I believe that Sec. Paulson is seeing the seized up credit markets unlock. This development might just be nascent, but he believes it’s there. And when this problem with the credit markets eases, a return to the fundamentals could very well be in store. In fact, I would bet a dollar to a Krispy Kreme, those fundamentals are going to come home to roost once this credit market problem is in our rear view mirror.

Now, back to the bailout package… Now, the Treasury Sec. wants to put the government’s money toward unlocking student loans, credit card receivables, and auto loans… Some are calling this move a U-Turn, but in essence it isn’t… Before the Gov’t was going to buy toxic bonds made up of residential home loans… Now, they will be buying bonds made up of consumer loans, which in my opinion may end up more toxic than the first choice, given the fact that we’re in a recession and the recession will work out to be one that is protracted.

While these things “might” get the credit markets unlocked, they might miss the mark too, and until we get these credit markets unlocked, the markets focus will remain on the crisis and not return to focusing on the awful fundamentals in the U.S. economy. These awful fundamentals need to rise to the top again for risk takers to come back, and until the risk takers come back, currencies and commodities like euros and Gold, will continue to be put into a corner by the dollar.

We get a new Treasury Sec. in January when the new administration takes over… The new Treasury Sec. will have their hands full for sure!

On the side… OK…. Yesterday morning… I looked up to the TV and saw that knucklehead Jim Cramer on the Today Show… I swear.. He said this to Meredith… “I have been honest on this show, Meredith, and I “try” to be honest on my show”… He Tries to be honest? OMG!”

I agree with Chuck, whoever decides to take over as the new Treasury Secretary will certainly have their work cut out for them. I’ve heard they may bring back Volker to take over for Paulson. That would be an interesting choice, as he has ‘been there, done that’ crushing inflation during the 1980’s. But his high interest rate policies which he pushed caused the US to dip into a deep recession, and he also played an important role in bringing the US off the gold standard back in the early 70’s. Even if he doesn’t take the Treasury position, Volcker is one of Obama’s advisors, and will certainly have some influence on the new administration’s monetary policies.

Paulson’s curve ball put the markets in a sell mode, with investors moving back into the relative safety of US treasuries and money markets. The dollar strengthened after his bombshell, but started to fall again in Asian trading. The Japanese yen which has been one of the most volatile currencies, rose to a two week high against the euro after Paulson’s curve caused cuts in purchases of higher-yielding assets. But the yen reversed some of yesterday’s sharp gains overnight as currency traders worried about BOJ intervention. These concerns were heightened by comments from Japanese Finance Minister Nakagawa who warned that Japan would protect the yen against sharp volatility.

Despite the prospect of intervention, the yen remains a buy according to a report by Goldman Sachs group. Goldman believes the yen will strengthen 6 percent against the US dollar due to a continued unwinding of the carry trade. The dollar will weaken to 90 yen in three months, before gaining to 100 yen six months from now, Goldman said. “Deleveraging and funding constraints have likely created a new source of foreign-exchange demand and supply,” the Goldman analyst wrote. “We expect deleveraging patterns to continue into year-end, driving the dollar and yen stronger and putting pressure on higher-yielding currencies.” As readers know, Chuck has been talking about this carry trade reversal for some time, and we agree that this reversal will likely last through the end of the year and into the 1st or 2nd quarter of 2009. Look for further dollar strength during this time period, but watch out below once the dollar reverses course.

The reversal of the carry trades has led to a fall in the value of the Australian dollar, a move which accelerated yesterday. The currency drop became too much to bear for the Reserve Bank of Australia who intervened in the markets to protect the AUD$. An RBA spokesman confirmed the central bank bought its own currency, putting a floor under the currency after it dropped over 2 cents yesterday morning. This intervention is a good sign that the RBA is now concerned with the value of the Aussie dollar and won’t let it slip too much further than the current levels. With the RBA’s support, and the possibility of a bottoming of commodity prices, these could be excellent levels to buy into the Australian dollar.

The German economy, Europe’s largest, contracted more than economists expected in the third quarter, pushing the nation into the worst recession in at least 12 years. German GDP dropped a seasonally adjusted .5% from the second quarter, when it fell .4%. The economy is officially in a recession, as it has now contracted over two consecutive quarters. Traders increased bets that the ECB will reduce interest rates. The euro had been sold off before the announcement, hitting a low of 1.2389 vs. the US$, but then rallied back above $1.25 in early US trading.

This week has been a pretty slow data week here in the US, but today we have two important releases. The US trade deficit probably narrowed in September as retreating oil prices reduced the value of imports. The sharp increase in the value of the US$ over the past 6 months has also helped reduce our trade deficits. But I don’t think the commodity price slump will last, and also believe the US$ will turn back around sometime next year. So this narrowing of the trade deficit won’t last. We will also get the weekly jobs report today, which will likely show another big bounce in first time filings for unemployment. The labor market in the US is bad and getting worse, and I would be surprised to see a number below 500k for the weekly initial jobless claims. This is one of the factors which caused the Treasury Secretary to reverse course on the bank bailout, as he now moves his focus to the growing consumer credit crisis.

We talked about China’s big stimulus package earlier this week, and the impact it will have on China’s US$ reserves. But the stimulus package will have another impact on the markets. Most of the $586 billion stimulus will be focused on infrastructure building projects. These projects will mean China will continue to import large amounts of copper, iron ore, cement, and other building materials. They will also continue to demand a greater supply of oil and feul. This new demand will help offset some of the drop in commodity demand from the slowing western economies. Commodity prices have fallen dramatically as traders priced in the global slowdown. But China’s economy is still the fastest growing among the world’s 20 largest, with a growth rate close to 8 percent, and this latest stimulus announcement should cause a bounce back in the prices of these commodities. The countries supplying China with raw materials should also benefit, including the currencies of Brazil, Australia, and Canada, all of which have been beaten down lately.

Finally, Chuck let me know some great news for our St. Louis readers: There’s going to be a screening of Addison Wiggin’s movie, I.O.U.S.A. here in town… The screening will be Nov. 18 at the Missouri History Museum, part of the Community Cinema Series, co-sponsored by KETC and the History Museum. “I.O.U.S.A.” will be shown at 7, followed by a panel discussion.

Currencies today 11/13/08: A$ .6389, kiwi .5557, C$ .8113, euro 1.2535, sterling 1.4838, Swiss .8404, ISK (No Quote), rand 10.3166, krone 7.096, SEK 8.0703, forint 215.51, zloty 2.9765, koruna 20.095, yen 96.03, baht 34.99, sing 1.5119, HKD 7.7501, INR 49.2925, China 6.8298, pesos 12.97, BRL 2.305, dollar index 87.43, Oil $56.81, Silver $9.41, and Gold… $717.66

Source: Paulson throws the markets a curve…

— Here’s a cheery way to start your week: More than two-thirds of American Gen Xers — those aged 27-42 — don’t think they will ever be able to stop working. And don’t think they’ll ever see a dime from Social Security or Medicare.

“The Gen X group is the most anxious about their finances,” Chris Moloney of Scottrade told Reuters last week.

Of the 1,000 people they talked to who were 18 and older, nearly 40% percent said they had saved less than $25,000 for retirement. Conventional wisdom suggests if you want to live for 20 years on about $50,000 per year — whatever that will be worth at that the time — you’ll need to have $1 million stashed away.

“Gen X is in the middle of a ‘retirement perfect storm’ of very high expectations, low retirement savings and massive concern about the future of Social Security,” Moloney says.

Thirty seven percent said they would like to have between $1-5 million saved for retirement — even if their ability to save this money leaves such sums in the realm of wishful thinking.

Not that we want to reignite the debate among readers about which generation is “to blame” for the state of things, but we also note that 64% of baby boomers say they’re ready to retire — and aren’t worried.

Take that.

Worth the paper it’s printed on…

— Retail sales were up in March…but mostly because gasoline keeps costing more.

The Commerce Department says retail sales rose 0.2% in March, a tad more than the flat reading analysts were expecting. But throw gasoline out of the equation, and they were ruler flat, indeed.

If the figures took inflation into account, which they don’t, the outlook for retailers would be even more discouraging. Still, a 0.2% increase in March looks better than, say, the revised 0.4% decline in February…

— U.S. stock markets began the week moving sideways, taking a breather after GE’s earnings disappointment Friday and before Citi and Merrill reveal whatever they’re going to reveal later this week.

But Goldman Sachs isn’t waiting to make its call: Earnings season has had an “awful” start and stocks will head downward this spring.

“Early signs are awful,” says a Goldman report out today. “We expect generally disappointing results and a swath of lowered profit guidance that will drive the Standard & Poor’s 500 Index lower in coming weeks,” perhaps as low as 1,160, before a rebound by year’s end to around 1,380 — which would put the S&P down 6% for the year.

That’s a remarkably gloomy call for David Kostin, Goldman’s new chief forecaster — at least compared to his predecessor, the ever-optimistic Abby Joseph Cohen.

— Wachovia needs cash, and quickly. Ho-hum. The bank plans to float $7 billion in new shares and slash its dividend by 41%. It’s the second time Wachovia’s had to scramble for capital just this year.

Wachovia jumped into the adjustable-rate mortgage pool with both feet at the most frothy stage of the bubble in 2006 by purchasing Golden West — whose business was focused on one of the most airheaded states, California.

— But that’s just the beginning of the financials’ pain this week, as many of the top firms reveal first-quarter earnings… and probably more write-downs, too. Citigroup will likely write down $10 billion in debt this week…which would add up to a first-quarter loss of $3 billion. Merrill Lynch will likely write down another $5 billion, for a loss of $2.7 billion.

That’s still a drop in the bucket given that write-downs industrywide total $250 billion to date…and that everyone from George Soros to the International Monetary Fund is forecasting $1 trillion, give or take, by the time all is said and done.

— Citi’s announcement last week that it will unload about $12 billion in debt onto private equity at 90 cents on the dollar highlights another problem — one that’s “entirely separate from subprime mortgage lending,” writes Strategic Short Report’s Dan Amoss. “It’s another symptom of the credit bubble disease.”

The $12 billion is money Citi hoped to raise in the credit markets to finance leveraged buyouts. But when the credit markets seized up last summer, Citi had to take the deals onto its own books.

“Investment banks are stuck with an estimated $250 billion worth of this buyout debt on their balance sheets,” says Dan, “or in off-balance sheet entities for which they’ve made guarantees. Until they get rid of it, credit will remain fairly tight.

“Financial stock bulls point to this $12 billion sale as evidence that the leveraged loan sector of the credit markets is thawing. But I remain a financial stock bear, because this sale is only a tiny part of the market and only one of the many other credit-related problems plaguing investment banks.” For ways to play Dan’s skepticism, see the Strategic Short Report.

— Asian stock markets tanked overnight, fearing the worst from U.S. financials this week. Shanghai was down 5.6%, Hong Kong 3.5%, the Nikkei 3%.