Good day… And a Wonderful Wednesday to you! OK… Are you up on these “pirates” stories going on right now? That’s pretty unbelievable, eh? And… We are all fans of “pirates” here on the Currency Trading Desk, but these guys now are giving “our pirates” a black eye!

The currencies range traded yesterday in a very tight range, as Treasury Sec. Paulson, didn’t give in to the lawmakers and allocate $25 Billion of the TARP (Troubled Asset Relief Program) funds to automakers. King Henry said, “The rescue (read bailout!) package was not intended to be an economic stimulus or an economic recovery package. The $700 Billion TARP was designed to stabilize financial markets and the flow of credit, and it not a panacea for all our economic difficulties.”

Well… For once, I’m not going to take King Henry to the woodshed… The lawmakers were banging on him and Fed Chairman Big Ben to dole out funds to anyone that was in dire straits… But they held their ground… And therefore did not cast any “unknown” shadows over the markets. But U.S. stocks didn’t like it, and sold off after the testimony and questions on Capitol Hill.

The thing to think about with these automakers is the fact that they have become such HUGE finance companies, which is where, I believe I read, they “really make the money”… Shutting them down because they haven’t run their businesses correctly over the years isn’t the issue… It’s what to do with those financing companies… I could be totally wrong here, off base and picked off by a wily veteran lefty, but it’s the way I see it…

OK, well, for the currencies… Like I said above, they were stuck in the mud, in a tight range, with no where to go and no one to see. I was reading a note from well respected and famous analyst, Richard Russell yesterday… Let’s listen in to see what Mr. Russell had to say…

“Please remember, all these billions of dollars that the government is throwing at entities – all this money represents additional DEBT.

How the US dollar will hold up against this building-tower of debt is the question.

Ultimately, the trillions of newly-created dollars could lead to hyper-inflation.”

Yes… But the question that I keep getting asked, and I would ask of anyone that makes a statement like that is “when?” When do the markets wake up and smell the coffee? When do the markets realize that they’re on the wrong side of the road? I keep saying that it will all happen when the credit markets get unlocked… But that certainly doesn’t look like it’s going to happen any time soon… I just getting frustrated by all this… The signs are there for dollar weakness… It’s like they are glowing neon signs in bright colors, pointing to the dollar with exclamations like “should be weak”…

Remember when I used to write about how the debt level in New Zealand would come into focus once the hype over the high interest rates and Carry Trades were history? And for years people would write me and cuss at me about how they sold their kiwi because I said it would be in trouble when the interest rates and Carry Trades were history… But I held my ground, then… And I’ll hold it now… In fact, I’ve got company… By good friends over at Casey Research, including the guy that inspired me to write more and more, David Galland, had this to say yesterday….

“The foreign debt of New Zealand, which includes private debt, is a serious problem for them and is why their currency has fallen from NZD 0.80 to NZD 0.60 to the USD.

What will happen when the world finally realizes that the U.S. government debt (that is not even accounting for private debt) is already in excess of $10 trillion and well on its way to exceed $12 trillion in 2009? This is at a time when our $13 trillion GDP is sure to contract by a couple trillion. I am afraid the U.S. chart next year will not be that different, which bodes well for gold as the only real substitute to the fiat currency that will be created to cover the deficits.”

OK… Let’s talk about what’s going on in the markets right now… Not the future, which is unknown to all of us… We can only speculate about the future based on the data we have now, and the knowledge of history… What’s going on, as Marvin Gaye used to sing, is simply that the sentiment in the markets right now is so terrible and fragile, which is keeping the risk takers on the sidelines and investments centered around risk aversion on the burners. Any time the risk takers go out on the limb, another deep, dark, dangerous piece of data prints, or our “leaders” (read Paulson and Bernanke) make some stupid comment, which leads to a dollar rally, and the risk takers get squeezed.

Speaking of deep, dark, dangerous data prints… How about the news that Citigroup is liquidating its CSO hedge fund after it lost 53% of its value last month? This news won’t be looked at as anything but deep, dark and dangerous!

Speaking of data… Today, we’ll see the stupid CPI (consumer inflation), some Housing data, and the last FOMC meeting minutes… I would think the Fed Heads wouldn’t have any surprises in their minutes, like the Bank of England (BOE) did in theirs… The BOE’s minutes showed that the 150 BPS rate cut that was delivered earlier this month (which also begs the question as to why the BOE can issue their minutes within two weeks, while it takes the Fed over a month?) Anyway, the BOE minutes showed the 150 BPS rate cut was unanimous… Plus… There were quite a few calls to go to 200 BPS! WOW!

So… Ok, the stupid CPI, I’ve beaten this horse to death (no animals were hurt!) here with why I feel that CPI is stupid… And when those that have payments tied to CPI see today’s print they will fully agree with me. CPI is expected to have fallen .9% YOY… To 4%… Of course you and I, and those on the payments ties to CPI believe that inflation is really around 10% or more!

The Housing data today is the October Housing Starts, and Building Permits, of which both are expected to be weaker than September’s data…

I met Dan Ferris a year or so ago… A quiet, soft spoken guy, that when you look at him you just know he’s got a lot of brain matter… Real intelligent! I follow his writing from time to time, and Ty Keough sent me a note from Dan… This was in the Stansberry Research letter… “The money we use every day in the U.S. is debt. It is lent into existence. This record level of Treasury borrowing is the inflation engine itself, tank filled with gas, hood popped up, revving into the red zone right before your eyes.”

OK… I just saw / read a story that came across the Bloomie, that Bank of America (BOA) and Barclays Capital, are calling for a Aussie dollar rally next year, as they believe Australia will skirt a recession, that Europe, Japan and the U.S. are mired in. They even called for a rise to 70-cents in the next 6 months. Hmmm… I guess they’re of the opinion that the Carry Trade unwinding is coming to an end.

I, on the other hand, don’t believe that the Carry Trade is anywhere near an end… So, do with this information in your individualistic manner!

The data yesterday, saw PPI fall -2.8% in October… Which was mainly made up by the fall in oil prices… The TIC Flows showed the improvement I said we would see in this data, as the October flows showed an positive balance of $66 Billion, VS the $21 Billion in Sept. This still does not cover what’s needed to finance the Current Account Deficit, and Federal Direct Investment. And should have been expected to be so robust, given the flight to safe haven Treasuries…

Currencies today 11/19/08: A$ .6480, kiwi .5495, C$ .8115, euro 1.2650, sterling 1.5080, Swiss .83, ISK 182, rand 10.38, krone 7, SEK 8.02, forint 214.75, zloty 3.0425, koruna 20.3390, yen 96.80, baht 35, sing 1.5280, HKD 7.75, INR 49.99, China 6.83, pesos 13.19, BRL 2.3590, dollar index 86.98, Silver $9.45, and Gold… $738.30

That’s it for today… Well… Anheuser Busch is no longer, as the InBev deal closed yesterday… I was so focused on getting the Pfennig out yesterday that I totally forgot to send some love and congratulations toward Albert Pujols, the National League MVP for 2008! Way to go Albert! And… Hey! This IS HUGE NEWS! The good folks at Agora sent me the news yesterday that the movie I.O.U.S.A. has made the cut from 94 Documentaries to the final 15 that will be voted on for an Oscar! WOW! And to think I was interviewed for that movie, but was left on the cutting room floor! Congratulations to my good friend Addison Wiggin, and the other folks at Agora that had the idea to put this together in the first place! No improvement in the eye yet, still some pain to deal with, but I have to believe it will get better! Thanks so much, once again, to all of you dear readers that sent along good wishes and prayers for me. I feel bad that I have to keep announcing this stuff, but it is what it is, and life goes on. God willing… OK… Time to go… I hope your Wednesday is Wonderful!

Chuck Butler

Source: King Henry Keeps His Cash!

Good day… And a Wonderful Wednesday to you! Well, the Junk Yard Dog got a hold of the euro yesterday, and even though the U.S. Banks, thus the majority of currency desks, were observing Veteran’s Day, the move down in currencies VS the dollar, led by the euro, was drastic!

The Junk Yard Dog I’m talking about is Jean-Claude Juncker, chairman of the Euro group… I stopped the euro in its tracks from its nascent rise in the past month, by saying the “euro’s recent rise was undesirable”… He also deep sixed the euro, and thus all the currencies save yen, by saying he “didn’t see any reason there couldn’t be more rate cuts by the ECB”… (the ECB is of course the European Central Bank) Well… These two comments tore through any gains the currencies had mounted VS the dollar in recent weeks, like a Junk Yard Dog tears though some raw meat! It was a knife to the euro’s heart…

And so it was to be, a massive dollar rally, on Veteran’s Day. And it didn’t get any better in the overnight markets, as Japan, and then early European trading has taken the dollar even higher and the euro drops to the 1.25 handle… A handle it thought it had left in the rear view mirror back in October… Boy! If comments from a guy that’s not even the President of a Central Bank in the Eurozone, can deep six the euro like that, you have to sit back and wonder what’s going on… Was it simply a case of watching the euro rally in recent weeks, and even get within spittin’ distance of 1.31 last week, and needed to stem the rise? Well, if that’s the case, the plan worked! And like Col. John “Hannibal” Smith used to say… “I love it when a plan comes together!”

And it just so happens that Bank of England (BOE) head Gov. Mervyn King added to the currencies’ worries by announcing that the BOE policy makers are “prepared to cut interest rates again to prevent a recession pushing inflation below its target.” All this on a day when most U.S. currency desks were absent… Hmmm… Sure seems to me as though this was a “planned” jawbone intervention to support the dollar…

So… Like I said above, the currencies, save yen, got whacked yesterday… But not Japanese yen! When things get really dark in the U.S. and with all the investment choices except U.S. Treasuries getting sold, that’s when the dollar and Japanese yen shine… Which to me is still a strange phenomenon, that the dollar can be strong VS almost every currency on the face of the earth, but losing ground to yen. You would think that the other currencies would get some love just based on the dollar / yen cross!

Recall, I’ve explained the currency pairs and crosses before, and how one major pair’s (like dollar / yen) usually carries over to the other currencies… But since the dollar and yen were the two major currencies used to fund the Carry Trade, they are getting bought at the same time, causing all kinds of ripples in the currency karma…

Looks like the good folks over at Bank of America, have been reading their Pfennigs each and every day! I say that because, there is a report out this morning that Bank of America (BOA) issued a report that; “U.S. dollar gains are increasingly at risk toward year-end as declining credit market rates switch investors’ focus to the slowing economy.”

WOW! If that’s not just rewording what I’ve been saying in the Pfennig almost daily for a couple of months now, then I’m a monkey’s uncle! The go on to say that, “A weak economy and declining stock prices are not a solid foundation for any currency over time. Persistent strength in the dollar is more related to the unwinding of long positions in the euro and pound and not a sign of optimism about U.S. economic prospects.”

It’s nice to see someone other than me, keeping my eye on the ball here… OK, I know all too well that it’s not just me, but it sounds good, eh?

Well.. There’s another “bailout” plan, although the media now calls them “rescue plans”, being talked about… This one is for the automakers… The Speaker of the House wants the bailout package NOW! Unfortunately, for her, and the automakers, it doesn’t look like a bailout package will be passed with this “lame duck” Congress… The “new guys” don’t come into office until January 6th. Maybe, just maybe, this thought that every freaking business that runs into trouble because they didn’t run their business correctly, and therefore “deserves” a bailout from the Government, which will mean in the end, taxpayers, will go away… I doubt it… But there’s always a chance, somebody, someone, somewhere, at sometime, comes up with a hoola-hoop, and we don’t have to go down this bailout road any more!

Hey! What ever happened to U.S. Treasury Sec. Paulson’s “bazooka” that he threatened to aim at the U.S. credit crisis back in July? A quick check of the financial scorecard since then, shows that stocks are circling the bowl, the Fed has had to step in to conduct commercial paper operations, U.S. Consumer Confidence is at 1982 low levels, and loans are still difficult to get on the books… I’d say his bazooka was much like the bubble gum I used to chew as a kid, with the Bazooka Joe comic inside the wrapper… Sweet and satisfying at first, but soon petered out and the taste was gone, soon to be disposed of properly!

Speaking of Treasury Sec. Paulson, or King Henry, as I so named him during his ascent to the top of decision making with regard to the financial crisis, will be speaking today! King Henry will be giving an update on the Bailout packages… Should be interesting…

Our friends down under in New Zealand think they are far removed from the financial mess going on in the U.S. and Europe… But then, the European thought they were far removed from it too before the walls began crumbling down on top of them with bad debt! But, in New Zealand’s case, I think they are on top of it… Mainly because the strong Central Bank… The Reserve Bank of New Zealand, (RBNZ) is big on fiscal discipline, and stated in their quarterly Financial Stability Review, that… “we are far from seeing the final impact of the financial and economic disruption. However, Kiwi banks and the Australian parents of the majors, are well positioned to withstand the economic downturn.”

It would a HUGE feather in the RBNZ’s cap, and further the kiwi’s cap should the financial meltdown pass them by without causing major problems… The Kiwis get a glimpse at the state of their economy tonight when Sept Retail sales are printed.

Well… The euro is creeping back up as I get ready to head to the Big Finish this morning…

You know… On Monday I talked about the Chinese announcement to provide $586 Billion worth of renminbi liquidity to their economy, and how that had gotten the currencies around the world excited… And yesterday I talked about how that excitement dissipated… But there’s one more thing to discuss here… And that’s the fact that if the Chinese are going to focusing on keeping their economy going and their billions of citizens happy, they won’t be focusing on buying U.S. Treasuries… And the funding problem that still exists, even though its not the markets’ focus right now, will get even trickier for the U.S. and the U.S. dollar…

And… One more thing before I head to the Big Finish… Oil has fallen below $60 for the first time since March 2007! WOW!

Currencies today 11/12/08: A$ .6610, kiwi .5755, C$ .8260, euro 1.2590, sterling 1.5285, Swiss .8450, ISK 182, rand 10.45, krone 6.9830, SEK 8.0150, forint 215.50, zloty 2.9920, koruna 20.21, yen 97.30, baht 34.98, sing 1.5050, HKD 7.75, INR 49.25, China 6.8298, pesos 13.06, BRL 2.2665, dollar index 86.93, Oil $58.40, Silver $9.70, and Gold… $732.42

That’s it for today… Mervyn King also said… “we are living in unprecedented times” Oh, thanks! Like we didn’t already know that!

Source: The Junk Yard Dog Bites!

I guess the stock jockeys figured they weren’t going to get any bad news out of the credit markets, which were closed, so no news is good news!! The rally was certainly welcomed, and hopefully some of the gains will stick today as we return to a normal trading environment.

And I guess some of the credit for the stock rally has to go to finance ministers around the globe who finally agreed on a plan which seems to be able to work. The leaders of a majority of the worlds largest economies borrowed a page from Warren Buffet’s playbook and decided to invest directly into some of their largest financial institutions. The Bush administration announced it would invest $125 billion in nine of the biggest US banks. The US move came after France, Germany, Spain, the Netherlands, and Austria committed $1.8 trillion to guarantee interbank loans and take equity stakes in European banks.

The investment represents a new approach for US Treasury Secretary Henry Paulson, who first promoted a bailout targeted at buying up illiquid mortgage-related assets. The government will obtain its stakes by purchasing preferred shares with warrants similar to investments that Berkshire Hathaway Inc. made recently in Goldman Sachs and General Electric. The move could be just what was needed to ‘unfreeze’ the credit markets and restore some liquidity in the markets.

I really think the new president should do all he can to try and convince Warren Buffet to at least take an advisory position in the new administration. Now that we have followed his lead on the $125 billion we should see what he suggests for the rest of the $700 billion ‘rescue’ package. Just think, with his guidance maybe the US taxpayers can come out of this whole episode with a bit of a profit!

The move got the backing of former Federal Reserve Chairman Paul Volcker who said the inevitable recession in the US would be made ‘more manageable’ by the new government plans to invest directly into American banks. The bailout measures were ‘distasteful’ and ‘not consistent with a capitalistic system,’ Volcker said at a lecture in Singapore today. ‘But however distasteful, they are necessary to restore stability to the financial system.’ But Volcker also warned that the global financial system is in ‘intensive care’ and will remain there for a considerable time before things return to normal.

The largest mover in the currency markets yesterday was the Australian dollar which has surged up 12% vs. the US$ since late last week; the biggest two day gain since it began trading freely in 1983. The Australian dollar gained as investor’s confidence was restored and stock markets rallied. Australian Prime minister Kevin Rudd announced a A$10.4 billion spending package aimed at bolstering Australia’s economy, adding to his Oct. 12 pledge to shore up the nation’s banks. These moves by the Prime Minister should provide some support under the Australian dollar which had been falling fast. But the Aussie dollar will likely still be subject to some volatile swings, as investors continue to buy the Aussie dollar on carry trade investments, which have proven to be very erratic.

With investors moving back into carry trades, and some confidence returning to the equity markets, the Japanese yen fell against the higher yeilders. The yen headed for a record decline vs. the Australian dollar, but fell less against the US$. Japan’s currency has become an excellent gauge of risk appetite in the markets, and the currency has risen as investors exited highly leveraged ‘carry trades’ over the past few months. But risk appetite has returned as we have exited the ‘panic mode’ and investors have started to move money back into these leveraged trades.

The Bank of Japan said it will hold an unscheduled monetary policy meeting today to discuss ways to make it easier to add funds to money markets. The bank said yesterday it’s considering offering an unlimited amount of dollars to financial institutions, following a move by European counterparts to provide lenders with as much of the currency as they want to reduce short-term borrowing costs.

This recent flood of US$ into the markets has seemed to stabilize them, but what will it do to inflation in the US? One of the first lessons in Economics is that increasing money supply causes an increase in inflation. The billions or trillions (I can’t keep up with all of the ‘rescue’ packages they keep announcing) of US$ which have been placed into the markets will eventually create a big up tick in inflation. And the huge amount of dollars which are being printed and pumped into the credit system will undoubtedly lead to an erosion of the value of the dollar. Simple supply and demand tells you that if we continue to throw unlimited supplies of US$ into the market, the value of these dollars will decrease in value.

And who is holding most of these dollars? China! China’s foreign-exchange reserves rose to a world record $1.906 trillion at the end of September. Currency holdings rose 32.9% from a year earlier, the People’s Bank of China said on its website yesterday. These reserves have helped to strengthen China’s finances as the credit crisis threatens to trigger a global economic slump. The world’s fourth biggest economy can still expand 10 percent this year and 9 percent in 2009 according to the central bank. Close to $2 trillion in foreign reserves provides China with a strong foundation and more room to adjust policies to enable it to maintain relatively fast growth. The worlds economic engine will continue to purr despite the slowdown in the US and Europe. Internal demand among these fast growing Asian economies will take the place of some of the exports which will undoubtedly slow. I look for the Chinese currency to continue to be a rock solid performer, with no big movements either way.

In an all out effort to ease the credit freeze, the Federal Reserve recruited help from the ECB, Bank of England, and the Swiss central bank to flood the market with US$. These central banks will auction unlimited dollar funds with maturities of seven days, 28 days, and 84 days at a fixed interest rate. This move is unprecedented, as all previous dollar swaps were capped at a maximum amount while these auctions will be for unlimited funds.

Chuck spoke about these dollar swaps a few weeks ago, explaining that these trades partially account for the huge rally in the US$. Central banks around the world are purchasing US$ to lend out to the markets, at the request of the Federal Reserve.

Policy makers from the G-7 pledged this weekend to take “all necessary steps” to stem the markets’ dramatic slide. European leaders agreed to guarantee new bank debt and use taxpayer money to keep distressed lenders afloat after the worst rout in European’s stock markets in two decades. But they didn’t come up with any coordinated measures, other than saying they need to attach the crisis on a unilateral basis.

Chuck had this to say about the G-7 and G-20 weekend meetings:

“The G-7, G-20 meetings didn’t leave the markets much to go on… They issued a communiqué that said, “The will take the necessary steps to stem Global Financial Crisis” I would think that the markets were looking for something with a little more meat to it, don’t you? I doubt the credit markets are going to magically unlock on that communiqué… And so the beat goes on… ”

The Euro rose the most in three weeks against the dollar in early European trading, moving up over 3 cents from Friday’s low of 1.3259. The British pound also advanced against the dollar on speculation the government’s bailout plan will avert a banking collapse. In the near term, the plans give investors confidence that there won’t be further banking failures. In today’s world, everyone is constantly looking for where the next big financial failure will occur, so the European plan to shore up their banks has led to a pretty good rally in the Euro and Pound Sterling.

The Japanese yen, which has been the best currency year to date traded in a rather tight range right around 100 yen per dollar. Some currency research departments are now suggesting that the yen will rally all the way to 95 as investors reverse carry trades. With the global slump in equities, Japanese investors have started selling some of their more than $1.3 trillion in overseas assets to bring money home. Chuck mentioned that he has seen this before, and wanted me to share the following with readers this morning:

“It has been a very tumultuous week, and I just want to make certain that you are aware of this trading pattern that is existing these days… It is Japan circa 1995-1998, when the Japanese stimulus packages and budget junk didn’t work, and the economy was circling the bowl. But… The yen was rallying to 85! It was a repatriation of the offshore investments to bring home to squirrel away and have “under the mattress” in case things get even more bleak…

Sound familiar? That’s what’s going on right now with the dollar… It’s a “the worse things get in the U.S. buy the dollar, and if it looks like Armageddon won’t happen in the U.S. sell the dollar trend… Nothing more, nothing less…”

Two of the biggest movers over the weekend were the high yielding currencies of Brazil, New Zealand, and South African rand. The Brazilian real was the biggest mover, up over 5% vs. the US$ in the past 24 hours. The rebound in stock market overseas has made investors more comfortable with moving money back into the emerging markets. But this rally could be short lived, as the reality of a global recession sinks in and investors continue to de-leverage their positions. At this point I think it is best to take advantage of rallies in the high yielders to exit and reallocate funds into more ’stable’ currencies.

Two which would fit this description are the Norwegian and Swedish currencies which rose against the euro and the dollar on this weekend’s news. But these gains could again prove short lived, as Norway’s central bank is expected to lower interest rates later this week. Norske Bank pushed forward its regular interest-rate meeting from Oct. 29 to Oct. 15. The bank kept borrowing costs on hold last week while Sweden’s Riksbank cut its main rate a half point as part of a coordinated effort by central banks, including the ECB, to revive interbank lending.

This from the Daily Pfenning:

This has been quite evident in Japanese yen overnight, as stocks sold off 11%, the currency rallied to a 98 handle from 101 yesterday… And… Then in dollar trading, other than yen, the dollar is stronger this morning, pushing the euro back to the 1.35 handle. The high yielders, which enjoyed a day in the sun yesterday before U.S. stocks took a turn on the slippery slope, got whacked hard overnight! UGH!

When I told you the other day that this is darndest thing in the financial markets that I’ve ever seen, and that I had begun my career in the brokerage industry in 1973, I wasn’t kidding… I was dead serious… And I started tracking currencies in 1985 when we began the WorldCurrency desk at the old Mark Twain Bank. The reason I take you on this journey back in time is to illustrate the fact that the Aussie and kiwi dollars have fallen so much this week, that you have to go back 25 years to find another week like this one for these two currencies. 25 years! 1/4 of a century! 1 score and 5 years! Simply unbelievable that strong countries like Australia and New Zealand, full of natural resources and located near China, would go through these daily beatings…

When I arrived this morning, the TV was on, and Bill O’Reilly was talking about that crazy Jim Cramer, and how he told everyone earlier this week to get out of stocks…. O’Reilly said something to the affect of: you shouldn’t pay attention to Market Analysts’ advice on TV… And then he said, “and those stupid newsletters”… I thought for a minute… And then said, “it’s OK Chuck, he said “giving advice”… You don’t give advice, just opinions!” Whew! I thought for a minute he was calling the Pfennig “stupid”!

OK, back to the task at hand… And that is reporting on this financial market meltdown… I don’t mean to sound flippant there, this is serious stuff folks! Looks to me as though the Fed is going to have to round up the posse once again and get another coordinated rate cut, because the one they made earlier this week, hasn’t produced the W-2 they need to unlock the seized up credit markets.

The Wall Street Journal reported that the U.S. Government is considering following the UK’s lead by guaranteeing billions in bank debt and temporarily insuring all US bank deposits. This did little to appease the markets. What is going to appease the markets? The Fed and Gov. has turned over a lot of rocks, but the credit markets are still locked / seized up…

There are rumors going around this morning that today will be the “settlement” of the Lehman Brothers (LEHMQ) default… And while normally this wouldn’t cause problems, it has this time, because of those darn Credit Default Swaps (CDS)! Here’s something to think about folks… a CDS allows the holder of some debt (e.g. a portfolio of subprime mortgages) to get insurance on the risk of default of that debt from a third party such as a bank, insurance company or other entity. In this case, buyers of Lehman Brothers bonds and other debt securities are looking for the payoff of credit default swaps they purchased.

In this case… Banks are hoarding cash in expectation of pay-outs on up to $400 Billion of defaulted credit derivatives linked to Lehman Brothers and other institutions, according to analysts and dealers. This is when, we’ll find out “who owes who” and if they have the cash to pay their obligations should they fall into the category of a “who that owes who”!

The Fannie and Freddie settlement went off at 98-99 cents, thus not a “default” and didn’t cause as much of a ripple in the markets as first feared… But this Lehman thing is a horse of the different color, folks… We’ll have to see how the markets deal with this today… Could add more fuel to the trading theme of: if it’s bad for the U.S. buy the dollar, and if things get better in the U.S., sell the dollar… Strange, I know, but I’ve seen this before back in the 90’s…

Have you been tracking the fall in the price of Oil? This is just as amazing as the run-up in the Oil. Could we actually see the return of less than $3 gas? Now that would be amazing as far as I’m concerned. It has fallen almost $5 overnight! This has led to the sell off in Canadian dollars / loonies. The loonie has fallen to an 18-month low of 86-cents! UGH!

The fall in the price of Oil also is probably going to help the Trade Deficit, which prints this morning. The August Trade Deficit is expected to narrow from $62.2 Billion in July, to $59 Billion. This would be a huge indicator that not only 1. the price of oil has fallen dramatically, but 2. the U.S. consumer is finally spent! And that my friends is another nail in the coffin of a long painful recession…

Yesterday, I read this in the Wall Street Journal… “The U.S. economy has sunk into a recession and government action is critical to stem the damage, according to economists in the latest Wall Street Journal forecasting survey. On average, the 52 economists surveyed now expect gross domestic product to contract in the third and fourth quarters of this year, as well as the first quarter of 2009. If those predictions bear out, it would mark the first time U.S. GDP — the total value of goods and services produced — has contracted for three consecutive quarters in more than a half century.”

I don’t mean to say I told them so… But if those knuckleheads had listened for the past year, they would not be surprised now to say the U.S. is in a recession! It’s been staring us in the face since January… But those that the U.S. consumer depend on to lead them told them there was no recession, and that everything was just peachy!

Gold is back above $900 again this morning… I find Gold’s performance in the face of a falling Oil price and a stronger dollar to be very impressive indeed! But, in reality, I’m still scratching my head over why Gold isn’t soaring, given the lack of supply of the physical metal… Someday, this will all be very clear to everyone what went on… But for now, we scratch our heads and wonder…

And in my, what now is required due to the severity of the situation, daily update of what’s going on in Iceland… Yesterday, I was thinking about the white knight for Iceland, and I began to wonder where the heck the IMF is during all this? What are they doing? The should be there to iron out the problems and provide a streamlined clearing mechanism. But they are no where to be found! Well, the Netherlands has provided 20 Billion euros to Iceland financial institutions… That news came through last night. There still doesn’t seem to be a “quote” available in krona, and that’s very concerning to me. Maybe the Netherlands’ 20 Billion euros will get the bank operations going again…

The U.K. is all mixed up in this Iceland mess, and has frozen Icelandic assets in the U.K. in hopes of getting some their U.K. depositors’ funds out of Icelandic banks… This problem with Iceland has really caused some problems for pound sterling, as if pound sterling didn’t already have enough problems of its own, now it has Iceland weighing on it too!

OK… Here I am again, getting close to going to the Big Finish, and I’ve been nothing but gloom and doom all morning, and that’s not how I like to go into a Friday! So… Let’s see… Oh! Japanese yen is trading with a 98 handle! This has been long overdue, and held back by the Carry Trades… But now the Carry Trade is dead (for yen), but who knows… Maybe if the U.S. Fed keeps cutting interest rates to deal with the recession, the dollar might end up taking the yen’s place as the funding currency of the Carry Trade!

Currencies today 10/10/08: A$ .66, kiwi .5950, C$ .8635, euro 1.3555, sterling 1.6965, Swiss .8970, ISK (no quote), rand 9.3350, krone 6.2090, SEK 7.12, forint 195.50, zloty 2.6350, koruna 18.4910, yen 98.90, baht 34.40, sing 1.48, HKD 7.7580, INR 48.29, China 6.8359, pesos 13.60, BRL 2.2825, dollar index 81.65, Oil $81.50, Silver $11.75, and Gold… $916

Source: Who Owes Who?

What did the markets make of these monetary decisions? Not much. European stocks, as measured by the Eurofirst 300, closed down 0.4%. The FTSE 100 was down 0.3%. Again, be grateful if you didn’t invest in Icelandic stocks. The Icelandic index, two-thirds of it bank stocks, is down 80% over one year!

“Banks minor cut offers little respite,” says the FT headline of the UK cut. “We haven’t had enough of a slowdown to give the Bank carte blanche to cut…”, says Deutsche Bank economist George Buckley. Not yet, at least, but the consensus has it that the base rate trend is down. A stance of little help to those with mortgage rates which are moving quite regularly the other way. But then we’ve gone from feast to famine in the mortgage market within a year.

In the battle to keep a lid on inflation, the currency markets are backing the European Central Bank’s Teutonic inspired determination over that of their more flaky Anglo-Saxon rivals. The euro touched a new record yesterday against both the US dollar ($1.5912) and the pound (80.29p). It’ll buy 115 Icelandic krona too, against 92 at the start of the year.

Continues below …

Recommended

Legally pick-pocket £4,064 a month from the UK’s largest companies…

Would you like to rake in a potential £19,500 – £48,000+ a year TAX FREE with this clever little money-maker?

Because all you need is 20 minutes a day, an Internet connection…and the desire to dip your sticky fingers into a multi-billion pound honey pot!

In 2007 you could have ‘hit up’ Northern Rock, M&S, Barclays, BSkyB and dozens more companies like them – for ‘cash injections’ ranging from £95 to £3,880 in as little as 8 days.

What will you make in 2008?

Click here to find out more

Aside from the prospect of a dearer holiday for Brits traveling on the continent this year, a weak pound adds fuel to the inflation problem. “Import price inflation reached a 14-year high in February as the weaker pound drove up the cost of imported goods,” reports the FT. The annualized rate, according to government statistics, is in double digits at 10.4%. A further worry is that UK wage settlements are starting to go up too. Median pay was up 3.5% in the first quarter but two-thirds of settlements in April are “at or above 4%,” according to Incomes Data Services.

Elsewhere, another day another housing market survey. The FT Acadametrics survey bases its read on all property transactions in England and Wales. It reports “static prices” in March, with annualised growth continuing to trend down. Now 5.4% from 6.1% in Feb. It’s a picture that looks set to continue for the time being, but the fundamentals of supply and demand, employment and interest rates continue to be favorable says statto-in-chief, Acadametrics chairman, Dr Peter Williams. He adds:

“Although expectations seem to be set for widespread falls in actual house prices, the facts remain that demand continues and mortgages are still being supplied in volume reflecting the relatively strong economy. The next few months will be critical in terms of likely outcomes with much turning on the part played by the Bank of England.”

*** For all our sophisticated technology, it’s back to basics for investors. Agriculture is the place to be, says Eclectica asset management. It makes the investment case:

The real cost of food has been declining for 35 years; the world’s population has been growing by 1.5% pa; land has been lost to water shortages and urbanization; supply has been lost to subsidized biofuels; emerging economies are drives demand for land intensive protein and dairy products and for eight of the last nine years the world has consumed more food than it has produced.