Good day… And a Marvelous Monday to you! My weekend turned out to be quite grand, as all the things I said that would make it special came to pass! My Cardinals clinched their division. My beloved Missouri Tigers won on Friday night, and my little buddy’s 8th grade Flyers won their game against their arch rival… WOW!

Well… Here we go with the last 3 days of September… A month that saw Gold return to $1,000, and the non-dollar currencies all return to levels they held a year ago, having withstood the onslaught of flight to safety trades that benefitted the dollar after the Lehman Bros collapse.

We’ve seen the Fed Chairman sound the “all clear horn” and me question, why anyone would still be listening to this guy! And our country is becoming quite divided over the health care issue… So… There we have it… September all rolled up in a nice package, to take out the trash!

Ok, we’re all caught up now… On Friday, the currencies gravitated toward weaker levels, as the dollar buying continued, with stocks leading the risk assets lower… But it hasn’t been a “taken to the woodshed event” for the currencies yet… So, the question remains if this is the correction we’ve been waiting for or not…

Last week I gave you some quotes by Nassim Taleb, but forgot to tell you that he was the author of the book, “The Black Swan”… Nassim Taleb was talking to a group of business people in Hong Kong this weekend, and asked the same question I’ve been asking, as he wanted to know why Big Ben Bernanke, and Treasury Sec. Tim Geithner kept their posts after failing to foresee the collapse in global credit markets. Taleb said, “Bernanke, Geithner, and Summers didn’t see the crisis coming so why are they still there? Bernanke is like a pilot who didn’t see a hurricane.”

Good stuff, eh? Especially, when you read the Washington Post and see that the Fed was ignoring pleas from Consumer Groups, as far back as 1999, that subprime lending was expanding… Turning a deaf ear on the Consumer Groups, the Fed left rates low, and accommodating… What the heck do we have these guys for any way! The Fed has been the root cause of every financial problem we’ve had in this country since they were created in 1913…

OK… Last week, the Financial Times ran a story regarding the dollar laying claims to being the top Carry Trade Currency… Let’s read a bit from the FT… “For years, the yen was the currency of choice to fund international Carry Trades. Analysts say negligible U.S. interest rates, its quantitative easing measures and little sing that the country is set to withdraw from its ultra-lose monetary policy anytime soon leaves it in a similar position to Japan at the start of the decade.”

Well… I had already told you all that, but when you see it in the FT, it obviously gives it more credence, eh?

But, let’s talk about that for a minute… If the dollar begins to become the new funding currency of the Carry Trade, that means that people will be selling the dollar short, and using the proceeds to buy a higher yielding asset… Well, in today’s markets, there aren’t what we would traditionally consider to be “high yielding assets”… For the Carry Trade is quite risky, therefore you need to have some cushion from the “buy side” asset… The only “real interest differential” in the world resides with Brazil… But the real is traded on a non-deliverable forward, which means it’s just as liquid as say Aussie or kiwi, which were the main beneficiaries when the yen was the funding currency.

So… This new Carry Trade, might have to wait a bit before getting into 4th gear. When the Reserve Bank of Australia (RBA) begins their rate hike cycle, probably by year-end, then it might begin to make sense… Which is just another thing in the gauntlet the dollar has to run through every day!

Speaking of the Japanese yen… The yen reached a 8-month high of 89.30 overnight. I told you last week that yen is getting a lot of love from Japanese exporters that are repatriating their profits in yen, ahead of the end of the month / quarter.

I had to laugh out loud when I read a story about the Japanese Finance Minister, Fujii, who apparently hadn’t gotten the memo about how Finance Ministers are supposed to jawbone the yen lower… Recall, I had told you that he said over and over again that he supported a strong yen… Well… That all changed once he got the “memo”… Fujii said last night that, “people were mistakenly saying he supported a strong yen.”

Hey Fujii, got the memo now? Is it clear?… Crystal… OK, now go out there and jawbone the yen weaker, or you’ll be falling on a sword!

This week is chock-full-o-data all over the globe… In the U.S. we’ll end the week with the Jobs Jamboree, while Japan will print their latest Tankan report (which checks the pulse of the economy), Canada will print their latest GDP, China will print their latest Manufacturing Index, and Australia will report on Retail Sales…

In the Eurozone, Germany re-elected Angela Merkel as chancellor… Now, she just needs to figure out how to deliver those tax-cuts she promised during the campaign!

The euro had climbed back to 1.4720, but the election results were not taken as “euro friendly”… Remember, I told you that there could be tax-cuts coming in Germany, which is the Eurozone’s largest economy. Tax-cuts are great, if you are in a fiscal position to do so… Germany has a nascent recovery at best going on right now, so the timing is not what traders are happy with… Therefore the euro dropped like a stone to 1.4570, but then bounced off that is back to 1.4635 as I write…

And the Reserve Bank of Australia, (RBA) which I mentioned earlier was in the news overnight, as the RBA Gov. Stevens gave a speech, that was hawkish… Stevens mentioned that the interest rates needed to move off their “unusually low levels”. He also pointed out something that should be quite recognizable by all Central Bankers now, but apparently not here in the U.S…. And that is that “imbalances build up when rates are left too low for too long.”

Well… The highly touted G-20 meeting last week ended not with a bang, but with some newfound strength as a group… Recall on Friday I told you that they would replace G-8 as the watchdog for the economies of the world. That news was announced later on Friday… G-20 ended with leaders from the G-20 nations saying that they plan to cooperate on an overhaul of financial regulations to prevent arbitrage in the global system. By the end of next year, banks will be required to hold more capital, and compensation policies will need to be linked to longer-term performance.

You know… When the media reports “Bankers compensation” they’re not talking about real Bankers, per se… They’re referring to the Merrills and Goldmans of the world that pay out Billions in bonuses, or did at least… Just thought I would clarify that point…

And then there was the British Pound sterling, which I kept saying over and over again, that this dance is gonna be a drag, no wait! I kept saying over and over again, that the pound sterling strength was a house of cards… Well, that house of cards is collapsing under the pound sterling… Even the speculators that were buying it because it was a part of the mix of currencies that made up the IMF’s SDR’s (Special Drawing Rights), are backing out now…

Data in the U.S. besides the Jobs Jamboree at the end of the week, include the S&P/ CaseShiller Home Price Index for July which will print tomorrow, along with Consumer Confidence, which is expected to be stronger… I guess the people they surveyed haven’t seen the Bernanke video collection of his statements that couldn’t be more wrong, and still believe him when he says it’s all OK! Wednesday brings us the final print of 2nd QTR GDP. Thursday has two of my faves, Personal Income and Spending, and then Friday’s Jobs Jamboree…

So, if the data continues to show some strength, but nothing to speak about… I would think that the risk takers will remain confused, and it could lead to further selling in stocks, and other risk assets… Don’t really know… Just an opinion on what might happen…

OK, to recap… The dollar has rebounded, but nothing too strong to speak of as of this morning. G-20 is the new world economic watchdog, there’s a ton o’ data to print this week, all over the globe, and Japanese yen continues to outperform the other currencies VS the dollar.

Currencies today 9/28/09: A$ .8665, kiwi .7135, C$ .9135, euro 1.4650, sterling 1.5870, Swiss .9695, rand 7.44, krone 5.82, SEK 6.9750, forint 184.20, zloty 2.88, koruna 17.22, RUB 30.11, yen 89.30, sing 1.4190, HKD 7.75, INR 47.98, China 6.8274, pesos 13.57, BRL 1.7890, dollar index 76.90, Oil $65.77, 10-year 3.32%, Silver $15.99, and Gold… $992.10

That’s it for today…I hope your Monday is Marvelous!

Chuck Butler

Source: A New Carry Trade Currency?

Years of debt and securitization finally caught up to the FIRE (finance-insurance-real estate) sector of the economy. The titans of finance refused to come clean about the real value of the ‘assets’ they sat on…and finally it came time to pay the piper.

Dan Amoss, whose recommendation of Lehman put options generated 462% gains earlier that summer, wrote in this space a year ago, “Think about how much better off Lehman Brothers would be if its management hadn’t put off the process of reporting losses, dumping impaired assets and raising new capital. Would its stock be 26 cents today? Probably not.”

So the heavy-hitters of the finance sector have surely learned their lessons and proceeded to mark down their “assets” to realistic levels over the last year, right?

You wish. Even mainstream economists like the Nobel laureate Joseph Stiglitz say we’re in a worse pickle now. “In the US and many other countries, the too-big-to-fail banks have become even bigger,” Stiglitz told Bloomberg over the weekend. “The problems are worse than they were in 2007 before the crisis. It’s an outrage.”

And how do ordinary people feel about the response their government leaders have made to the crisis? Americans are, as our friend Doug Casey would put it, ‘a bunch of whipped dogs.’ Rather, they’re supremely sanguine, compared to much of the rest of the world.

For all the honeymoon-is-over talk surrounding Obama, we’re struck by how much grumpier people seem to be elsewhere. Americans are as satisfied with the actions of Obama and Congress to the same extent Russians are satisfied with those of the Putinocracy.

We should note here that Russian GDP contracted at a breathtaking 10.9% last quarter, while consumer prices are rising at a better-than-10% clip.

Source: Have the Titans of Finance Learned Their Lesson?

What is most remarkable about the world a year after Lehman fell is that so little seems to have changed. Even the papers have noticed.

“A year after Lehman, little change on Wall Street,” says the headline on today’s International Herald Tribune. “Backed by huge U.S. government guarantees, the biggest banks have re-structured only around the edges. Employment [on Wall Street] has fallen just 8% since last September.”

“Obama to push banking overhaul,” says another headline at the Telegraph. Yes, the pols will try to convince the world that they have regulated risk out of the market. Perhaps they will limit salaries… or insist on more disclosure… or require that the capitalists hold onto more of their capital. Then, they will stand before voters and say they have made the world safe for democratic capitalism. Don’t believe it; their bailouts have made it more dangerous.

We don’t know whether this was what Nobel prize winning economist Joseph Stiglitz had in mind. But he has come to the same conclusion:

“Stiglitz says banking problems are now bigger than pre-Lehman,” says the Bloomberg report.

Yes, Wall Street has a good gig going. The whole industry now benefits from the hedge fund formula – ‘heads I win, tails somebody else loses.’ When the hedge funds play the game, it’s their clients who lose money. But the way Wall Street banks play it, the big loser is the US government, directly, and US taxpayers and bondholders indirectly.

When the going is good, the bankers make millions in profits – which they take home as salary and bonuses. An analyst at JPMorgan (NYSE:JPM) estimates that American and European banks will pay their 141,000 investment banking employees $77 billion in 2011… or about $543,000 per employee. Since they pay out so much of what they earn, they lack the capital to survive a crisis. But when they’re threatened with extinction, the feds step in to bail them out. No wonder they have no fear of a meltdown…

Wall Street was quiet on Friday. The Dow was down just 22 points.

The most exciting news was that gold closed at $1,006. But if gold buyers were afraid of inflation they neglected to mention it to the folks over in the bond market. The US 10-year Treasury note yielded all of 3.34% on Friday. Which is to say, fear of inflation is probably NOT what is driving up gold. But we’ll come back to that tomorrow… We’ve been doing a lot of thinking about gold… Stay tuned.

Meanwhile, the Financial Times says world equity markets have rallied 65% since their lows in March. There is no longer any sign of panic. Or fear. People seem to think the crisis of over. This has reinforced their illusions. They desperately want to believe that their financial authorities have the matter under control. So long as things seem to be stabilizing – or actually getting better – they figure they can relax.

‘Nothing has really changed,’ they tell themselves. ‘It was just a hiccup… nothing serious,’ they say. They look out their windows and see the same trees, same buildings, same automobiles; it certainly seems as if nothing had changed.

Of course, when you set out on a drive from Manhattan, it takes a long time to get out of the city. For a long time, the buildings… the landscape… and the people still look the same. But you haven’t even crossed the Hudson yet! It is only later, after a lot of driving, that you realize… you are a long way from home. We suspect that there’s a long trip ahead of us too. We have begun the process of reversing a half-century of credit expansion. Since 1945, debt per person has increased. Now it is decreasing –with vast consequences. If we’re right, the financial sector will shrink for many years. Profits will be hard to come by. A job will be difficult to get too. And the part of the world dominated by Anglo-Saxons will diminish.

Fear will make a comeback… when people realize where they’re headed…

And more thoughts…

*** As you’ll recall from Friday, between the fall of the Berlin Wall and the fall of Lehman was perhaps the happiest, most worry-free period in American imperial history. The country had no military challengers (it had to pretend that a handful of muslim fanatics armed with box cutters represented a serious threat). Finance was the world’s highest margin business… and New York’s hustlers were good at finance – rivaled only by those in London. And English was the world’s dominant language. With these advantages behind them, Americans (and Brits) saw nothing before them but growth and prosperity. They had gotten used to living off the kindness of strange lenders. They thought they could get away with it forever. But when Lehman went down, so did hopes for the eternal reign of the anglo-american financial empire.

Now, savings rates are going up in America. Spending is down. So are salaries and prices. It’s a deflationary world… Practically everything is deflating…

Consumer prices… inflation is negative in the US and Europe…

Wages… household income is down in the US. Unemployment is up and the length of the average workweek is down. Result: lower wages.

Housing…“house price decline [in England] will continue after false dawn fades,” says a headline at today’s Telegraph. A study by Ernst and Young predict a 1.6% drop in British house prices in the first half of next year, after an 11.4% fall this year.

Net household wealth… down too, caused by falling house prices and falling incomes.

Oh… but here’s one thing that is up: government deficits. The US posted a deficit of $111 billion in August. A few years ago, that would have been a frightening deficit for an entire year. Now, we have hundred-billion deficits every month… with no end in sight.

*** As forecast, protectionism is on the rise. The Obama administration put a tariff on tires imported from China. It was done do to protect American tire manufacturers from competition. Free trade? Sure, when it suits us.

But China is getting huffy about it. In an “unusually strong riposte,” Beijing, using diplomatic language of course, said to the US roughly what Serena Williams said to her net judge:

“I swear to God, I’m f**** going to take this f**** ball and shove it down your f**** throat…”

Why’s China so upset? In an expanding world, everyone greedily grabs market share. Even if they’re not as fast as the next guy, they still feel they’re making progress. In a deflating world, on the other hand, if you give ground… you’re not just losing market share…you’re losing money!

*** This weekend we traveled back to Paris to take part in a panel discussion on freedom. Liberty is not a hot topic in Paris. In a metropolitan area of some 4 million people only about 50 turned out to hear our talk – and half of them were American or English. Still, we were surprised there were so many. Liberty is a popular word. But freedom has never been much in demand. Millions of books are sold that promise to reduce your weight. How many are sold that promise to increase your freedom? We don’t know of any. Our guess is that the bookseller who makes freedom his market niche will soon have dust on his books and cobwebs in front of his door.

Still, the little group was enthusiastic. Assembled in a stuffy miniature theatre off the Rue Mouffetard, the freedom enthusiasts had a number of ideas for promoting their cause. One wanted to infiltrate the government with closet libertarians. Another suggested a takeover of academia. Still another suggested engaging taxi drivers in Socratic dialogues.

We looked for a fire alarm. Clearly, the heat was getting to them. They needed a good hosing down. We live in a world dominated by rules, laws, edicts, taxes and regulations. But it is not because the masses have never heard of liberty. They know what freedom is; they just don’t want it.

Instead, what they want is an edge, an angle… a law that protects them from honest commerce… a special tariff that gives them an advantage… a monopoly… a privilege…

They want food stamps and unemployment compensation. They want free medical care for their parents and free schools for their children.

They want what we all want… growth and prosperity, without corrections. And they want to go to heaven without dying.

Source: No Fear

Demand for physical gold is soaring so much that it is almost impossible to get hold of right now. And gold production is lower than in 2000. Andrew says all this means it will soon be gold’s time to shine…

More from Investor’s Daily Edge:

Gold dropped from $915 to $859 on Friday. That’s not supposed to happen while the market is crashing. What’s going on?

It’s not that gold has lost its luster. But institutional investors were forced to sell gold on Friday to meet margin calls.

If equity and hard assets continue to lose value anywhere near the rate of last week, margin liquidation will continue. And gold could go down even more.

But make no mistake about it. With the market crashing and dozens of governments printing money like there’s no tomorrow, investors want to be in gold.

Before the sell-off on Friday, the price of gold was up more than 20 percent following Lehman’s collapse.

The demand for physical gold this month has surged to what one trader calls “unprecedented” levels. The US Mint has doubled its gold-coin production but it hasn’t been enough.

Gold dealers have had to turn away customers wanting to buy coins and bars.

But it’s the physical demand (for jewelry) that ultimately decides the price of gold. Jewelry demand accounts for 60 percent of total gold demand and it’s down so far this year.

Will it pick up? The world’s biggest gold consumer is India and Diwali – the festival of lights –begins October 28th. Gold sales usually surge with the approach of this festival.

Then there’s this: Gold production today is lower than it was in 2000.

Gold is rarer than ever. The markets are going to hell. It’s gold’s time.

Source: Has Gold Lost its Luster?

Here is the latest top news and commentary about the crisis on Black Monday:

Stocks Battered (CNN)

Oil and Commodities Prices Plunge (FT)

Turmoil Boosts Yen and Swiss Franc (FT)

Gold Surges $25 as Financial Crisis Deepens (Market Watch)

AIG shares fall 52 percent (Reuters)

Pimco, Vanguard, Franklin Are Biggest Bond Fund Losers in Lehman Collapse (Bloomberg)

Abu Dhabi to ‘Wait and See’ on Troubled Banks (Hemscott)

Stocks stumble amid new Wall Street landscape (AP)

Paulson’s Fannie, Freddie Takeover Diminishes Financing Options for Banks (Bloomberg)

Oil futures tumble 5% to trade below $100 barrel (Bloomberg)

Buffett Is Thought to Be in Discussions With AIG, Insurance Insider Says (Bloomberg)

Wall Street awakes to 2 storied firms falling (AP)

After Frantic Day, Wall St. Banks Falter (NYT)

Lehman’s Carcass Ripe for Picking (NY Post)

“The air will be clean within the next one month and we can get a fairly good rebound starting from the middle of October until the spring of next year,” he said in a Bloomberg Television interview.

Faber also warns that AIG (NYSE:AIG) may be a “much bigger problem” than Lehman…

In June Faber said, “If I’m a bad businessman and I go out of business, who’s gong to help me? But Bear Stearns and the Wall Street elite, because they are tied into the Treasury and the Federal Reserve and they have lunch together, it’s a club and so forth, they’re bailed out. It’s a joke!”

“I think a lot of banks are already bankrupt … but they hide their rotten assets … in categories where you don’t really need to value them,” Faber said. “I think the financial sectors, by-and large, has much larger problems than is perceived by the investment community and the stock market to some extent is telling you that.”

Investors should go into gold as its price did not rise as fast as that of other commodities while the central bank keeps printing money, Faber said.

The Fed has been “misleading” investors on wanting a strong dollar, Faber said, as it kept lowering the interest rates. “When it comes to action, they show no concern about inflation.”

He also blamed the central bank for forcing investors to abandon safe deposits in banks for riskier strategies by keeping rates so low.

“The Federal Reserve is the greatest speculator—they force people to speculate,” he said.

“I think they should have stopped cutting rates at say 4 percent … you could stop cutting rates and pursue a tight monetary policy. You can take other measures, mop up liquidity,” Faber added.

Let me see if I get this right. A week ago, Lehman was running around reassuring everyone it had enough cash to stay in business. Not exactly high cotton. Investors are worried about a bank run, and insiders think it might be too small to qualify for a Fed bailout should it fail.

On top of this, claims that nasty short-sellers are spreading false rumors are making rounds—the company denies the rumors, but they persist, and the company has not showed anything strong enough to stop them cold.

This sale of preferred stock was supposed to raise capital to put the rumors to rest and show how strong the company is. But why does it need this new massive new capital transfusion this very moment, and at such high cost, if it really doesn’t have a money shortage, as it claims?

The company has cut employees by almost 20% already—which hardly signals growth going the right way, does it? It got into trouble with debt, too. It just wrote down $1.8 billion in bad mortgage assets in its recent quarter. If it does that again, everything it raised in the convertible sale will be eaten up by the write-offs.

The preferreds carry a 7.25% yield, which will cost the company an extra $290 million a year to pay. When converted to regular shares, they stand to dilute earnings per share by about 15%. All I can think is that analysts who stand too close to Lehman’s shadow on Wall Street need to step back for a bit of light.

Shares in the Wall Street bank Lehman nearly half their value yesterday on the coattails of the Bear Stearns meltdown, before finishing down 19%.

Lehman’s fiscal first-quarter earnings, announced today, fell 57% due to a steep decline in its capital markets business, but its shares soared as it easily beat Wall Street forecasts.

“The government bailout of Bear Stearns puts the increasing vulnerability of banks front and center,” says Andrew Gordon.

“They have a long way to go before they get a clean bill of health. Heck, they have a long way to go before they hit bottom and start turning things around.

“We can’t wait that long. Even in their weakened state, we need banks to do what they do – lend. Somebody – Ben, are you listening? – needs to administer a shot of adrenalin to these moribund financial institutions. And the sooner the better.”