Good day… And a Marvelous Monday to you! A Home Run Derby Monday to boot! I have no Idea what’s going on this morning, as I just woke up, and it’s very late in the morning! I was very careful to set my alarm last night, and I’ve never been one of those people that hit the snooze button when it goes off, but here I am, waking up late… UGH!

So… I’m writing from home, and then I’ll shoot in to work… We’re short handed this week, so, I’m sure everyone will be arriving to the office, not see my car, and be a little ticked… So, I’ve got a surprise for them, something they’ve never seen… Me come in late!

Well… It looks like Risk is under pressure once again… And the only thing I can see that’s causing this Risk Aversion, is the Corporate Earnings Season… For instance we get 4 banks reporting this week, Goldman (yes, remember they’re a bank holding company now… They ex-chief, and ex-Treasury Sec. Paulson, made sure that the change was made so that Goldman would qualify for TARP last year!) We also have JP Morgan, Bank of America, and Citi…

Data wise, there are a few top shelf reports out this week, and the thought of them showing more dandelions instead of green shoots, is probably wearing heavily on the risk assets this morning too.

So… The euro is sitting just below 1.40 this morning at 1.3985, so no real harm being done at this time, but still the bias is to sell the risk assets like currencies and commodities as we start the week.

You know, I’ve harped about this for so long now, that I sound like a broken record, OOOPS! For the younger crowd that would be a scratched CD! What I’m talking about is the fact that the risk assets like currencies and commodities being thrown into the same barrel has stocks… And how I was just wishin’ and hopin’ and thinkin’ and prayin’ that we would return to the fundamentals of these asset classes not having anything in common with the stocks! I just knew… No wait, I can’t say that… I just knew, not that I know anything on the inside, that is… That stocks were going to be under pressure from the Corporate earnings season, and with the “link” still in place… That wouldn’t be good for currencies and commodities… Let’s hope I’m wrong!

The one piece of data we get today is the Budget Statement… Last month, the Budget Statement printed an awful deficit of -$189.7 Billion (May)… Historically, June prints at a surplus… But Historically, so did April, and April was no where near a surplus this year! Year-to-date receipts for the Gov’t are down 18%, and Year-to-date outlays are up 19%… That doesn’t bode well for “history to come into play here”…

Last week, on Thursday, reported Friday in the Pfennig (thanks Chris!) was the Weekly Initial Jobless Claims, which printed the lowest level for this data series in more than 6 months, at less than 600K! But still, the number is still staggering, and one of the reasons that Commercial construction in the U.S. is set to decline 16% this year, followed by a 12% fall in 2010. No jobs… no need to build offices for the “ghost jobs’ that the BLS adds each month, because… THEY DON’T EXIST!

No need to get me started on the BLS (Bureau of Labor Statistics) this morning… I have to be clear and concise to get this out the door and me off to work!

Well… With the risk aversion back on the table… The two main beneficiaries remain to be Japanese yen and the U.S. dollar… Swiss francs are on the “kids table” but still a part of the beneficiary crowd…

The High Yielders like Aussie, kiwi, and South Africa get taken to the woodshed, when Risk Aversion comes to town… The Brazilian real is seeing a bias to sell, but for the most part has hung in there… Of course I remember saying that exact line early last fall, only to watch the real play catch up, until the turn-around in March of this year. So… I guess, what I’m saying is be careful!

So! Did you hear that Russian President Medvedev, showed off the “new world currency coin” at the G-8 meeting last week? He said.. “We are discussing both the use of other national currencies, including the ruble, as a reserve currency, as well as supranational currencies. So… Here it is! This is a symbol of our unity and our desire to settle such issues jointly.”

He then pulled a new coin out of his pocket and displayed to the attendees… Now… Don’t get all tied up and twisted over this at this point. This was simply a “symbolic” move, there aren’t mints all over the world rushing to get these coins minted and out the door… But, if you get the “symbolic” part, then you understand what Medvedev was attempting to do here… He was simply showing the G-8 attendees that if they really thought about it, they could see the need to move from a dollar reserve system, and to help them visualize it, he had a coin to pass around!

I can’t believe that right now, with the whispering campaign to get an alternative reserve currency, that the dollar isn’t getting sold, as I like to say, like funnel cakes at a State Fair! I guess the whispering will have to get louder, for this to make any real waves….

You know, I’m not for this “global currency”… I just wanted to make that clear! I’m not for removing the dollar as the reserve currency, for I know all of the “perks” that go along with it being the reserve currency! I’m just here to report the facts, and give my opinion / market commentary on how I think it will affect things…

I do believe, however, that given our deficit spending, and every growing to the moon National Debt, that the dollar deserves getting whacked, it’s how things are done! Treasuries will get their comeuppance too one day… You can’t just keep printing and printing and thinking that “buyers” will be there at the auction every time you print more… It’s not going to happen that way… At least in my thoughts it won’t!

OK… Time to go to the Big Finish… I know, I know, little shorter than usual this morning… But Hey! It was still chock-full-o-news!

Currencies today 7/13/09: A$ .7750, kiwi .6225, C$ .8605, euro 1.3980, sterling 1.61, Swiss .9240, rand 8.2930, krone 6.4830, SEK 7.9025, forint 198.10, zloty 3.1475, koruna 18.62, yen 92.10, sing 1.4650, HKD 7.75, INR 49.08, China 6.8328, pesos 13.71, BRL 1.9965, dollar index 80.16, Oil $59.96, 10-yr 3.30%, Silver $12.50, and Gold… $912.70

That’s it for today… Went to the Futures Game yesterday, to sit through a 4-hour rain delay… UGH! Let’s hope the rain stays away for the next two days! Home Run Derby tonight, All-Star Game tomorrow night. The family is all going to the Fan-Fest today, while I’m at work… Hey! Somebody has to work! HAHAHAHAHA! My beloved Cardinals went into the All-Star Game break on a good note, winning 6 of 10 on the road trip to end the 1st half of the season… This will be a very busy week for me, lots of writing to get done, and all the All-Star festivities… I go to my new oncologist this afternoon for the results of my scans on Friday, so all that and doctors stuff on top! UGH! Oh well, next Monday I head to Vancouver for the Agora Financial Wealth Symposium, their 10th year anniversary of the conference! And then I head off to vacation! So… Busy, busy, busy… Time to hit send, Hope your Monday is absolutely Marvelous I tell you!

Source:  Back To Risk Aversion!

Good day… And a Terrific Tuesday to you! Well… Let the Data flow begin! And let Big Ben Bernanke’s “green shoots” wilt under the bright summer sun! Not that I want to see the U.S. in economic muck, but come on! He was banging the drum for these “green shoots” when they simply looked like weeds to me, and I just think for him to say those things when I believe he knew better was wrong… Very Wrong!

I came in this morning, and turned on the currency screens to see that the dollar has taken a step back for the 4th consecutive day VS the euro. The single unit is up to 1.41 again, as it makes those probes out beyond the 1.35-1.40 trading range we’ve had in place now for some time. Yield demand is what’s driving the dollar downward, and while the euro doesn’t exactly have a “yield differential” to the dollar, the thing to remember, as I always tell you… The euro is the “offset currency” to the dollar. So, just by nature of the crosses to other currencies, the euro benefits whenever the dollar is sold.

So… If Yield Demand is what’s beating the dollar up like a rented mule (no animals were hurt here, just a saying… ) Then the “high yielders” should be doing the beating… And as I look at the currency screens, that’s what I see! The Aussie dollar is trading above 81-cents, kiwi above 65-cents, rand is 7.75, and the Brazilian real which has to fight with the Central Bank for every inch of gain VS the dollar, is holding its own right now… A month ago, I was telling you about the gains VS the dollar since March 1st… Well, an updated look at the 3-month gains tells us that the move against the dollar has continued… Albeit with several steps backward along the way!

Shoot Rudy! Even the beaten and left for dead Mexican peso has rebounded in recent days as the “other” high yielders drag the peso along for the ride.

4 months of gains VS the dollar doesn’t exactly qualify this move as a “trend”, which is normally associated with long sweeping moves. This does look as though it could become a “trend” though, as it has all the qualities of a long sweeping move, just concentrated in a 4-month span… Like, when a “trend” is in place, it’s not a One-Way street, there’s volatility within the trend… And we’ve certainly experienced that! Personally, even if this does turn into a long sweeping downward move for the dollar, I would just say that it’s a return to fundamentals, and not a new trend… Simply a return to the underlying weak dollar trend that began in 2002, and saw a pause in 2005, and then another one from July 2008 to March of 2009…

OK… Remember when I made such a BIG DEAL out of China and Argentina agreeing to swap currencies in trade settlement and remove dollars from the equation? I told you then that China was trying to gain a wider acceptance for their currency, the renminbi. And… That China had locked up Southeast Asia with similar agreements, which led me to believe that since they had traveled to South America, that Brazil could be next in line… And, the rumors began circulating…

Mom… He’s doing it again! Yes… China and Brazil have agreed in principle to remove dollars from trade settlement, and replace them with renminbi and reals respectively! This follows up what I told you about 10 days ago, and that is that China had become Brazil’s number one trading partner, knocking the U.S. down a notch. So… If that’s so, it’s not like we’re talking small sums of money folks… No, this is the BIG KAHUNA for China, and that not so big kahuna for the U.S. / dollar…

So, while China claims to be on the dollar’s side, and “see’s no alternative currency”… They are working to get their own currency in the mix… Looks like it’s all a “plan” to me, folks… Before we know what hit us, renminbi will be everywhere!

But… Still manipulated as to it’s value VS the dollar by Chinese officials. So… Don’t think, for now any way, it could all change though, that you should sell everything you own and go out and buy truck loads of renminbi… I think you would find yourself to be a bit disappointed… That is, unless you have time on your side… Time is on my side, yes it is…

I got a HUGE kick out of my friend, The Mogambo Guru, reading his weekly letter on the Daily Reckoning site (www.dailyreckoning.com) I’m looking forward to catching up with the Mogambo in Vancouver in 3 weeks time. We keep missing those opportunities to meet up, with first my cancer, and then his stroke… But, there we will be together, two of the biggest smart alecs you’ve ever met in your entire life… I need to see if he’s up to going on the road with me to do a two-man show! HA! Any way… The thing I was going to talk about was that the Mogambo, told his readers yesterday, that in his latest visit to John Williams’ web site: Shadow Stats, he was surprised to see that inflation is really running at 6%, which is quite different from the stupid CPI the Gov’t tries to shove in our faces of -1.3%! Here’s the Mogambo…

“As for inflation, his calculation of the Consumer Price Index “reflects the CPI as if it were calculated using the methodologies in place in 1980,” which I note is back when inflation was a measurement of the change in prices of things that you buy, and not, as it is now after the villainous Alan Greenspan and Michael Boskin came up with their ludicrous “hedonic” measurements of inflation with which to disguise it.”

And… He also found that unemployment, which I tell you all the time is very, very, very, and maybe one more very, understated by the BLS, is… At 20%… 1 in 5 are unemployed…

So… Thanks to the Mogambo, and John Williams for giving us data that backs up what I’ve been spouting off about!

This morning, Norway got the data flow going early with Norwegian retail sales surprising to the upside in May, rising 1.9%! The experts had forecast a -.2% decline… This rise in May gives brings the year-on-year figure to a negative -1%, which still sounds bad… But much better than what was forecast… -3.2%!

Norway seems to be just sailing along, out to sea, without any wind in its sails, not joining the other Commodity Currencies like Aussie, kiwi, and South Africa and Brazil… I think that won’t last too much longer… You see, Norway had a governor put in its currency when it’s neighbor, Sweden experienced bad times due to the Latvian banking crisis… So, as more and more miles of road get put between the thoughts of Latvia and Sweden, the better it will be for Norway… That… And… Getting Oil’s price back to the rally mode!

Canada is another currency that is not gaining along with the other Commodity Currencies, even with Oil moving higher again… Here’s the diff… Those other Commodity Currencies all have YIELD! While Norway and Canada do NOT! However, having said that, I just don’t see these two energy driven currencies wallowing around in the mud too much longer. Playing catch-up with Aussie and the rest of the bunch will be difficult though, and the “other” Commodity Currencies have such a big head-start!

OK… Time for the data set-up for today…

The S&P/ CaseShiller Home Price Index for April will print this morning, and is expected to show a decline of -18.6%, which those that wear rose colored glasses will say, “Hey, Chuck, that’s down from previous declines”… To which I will respond… Yes, it is… But, not much… And if you chart out the monthly prints you’ll see that it hit the low of -19.01% in Jan… February’s print was -18.67, and March’s print was -18.7%, you’ll have to agree with me that the move to “down from previous declines” has been quite slow, eh? And… At this pace it would take until 2011 before we got back to 0% YIKES! So… While you’re wearing those rose colored glasses you might, just might, want to dig deeper into the data before you start sounding the “all’s clear horn”!

We’ll also see Consumer Confidence, which, because of the better times in stocks, is expected to inch upward to an index number of 55.3 VS 54.9 in May… While this data is more like what I believe it should be, it’s still higher than I would think… But then, so are stocks!

And… Then there was this… Recall last week, when Big Ben Bernanke gave his impression of Sgt. Schultz, when asked about pressuring Bank of America (BOA) to take over Merrill Lynch, claimed he “knew nothing”! I thought that he had thrown former U.S. Treasury Sec. Paulson under the bus… Well, today, Paulson will appear before the same committee that’s looking into this mess, that BOA Chairman Ken Lewis claims to have happened. I wonder what Paulson’s thinking after hearing Big Ben last week? I guess we’ll find out today!

It’s the last day of June, my younger brother David’s birthday… David was born when I was nearly in high school, while my youngest brother, Mike was born while I was in high school! Anyway… What I was going for with the last day of June, before my mind wandered, was that it will close the books on the 2nd QTR… And soon enough, we’ll begin to see earnings reports for the quarter… Should be interesting…

Currencies today 6/30/09: A$ .8140, kiwi .6520, C$ .8675, euro 1.4125, sterling 1.66, Swiss .9255, rand 7.7435, krone 6.3955, SEK 7.6630, forint 193, zloty 3.1555, koruna 18.3360, yen 95.80, sing 1.4465, HKD 7.7499, INR 47.90, China 6.8305, pesos 13.12, BRL 1.9565, dollar index 79.64, Oil $71.67, 10-year 3.48%, Silver $14, and Gold… $940.75

That’s it for today… Whew! What spanking by the Giants last night! OUCH! It’s bad enough to get shut-out on two hits, but when the other team hangs 10 on you… Like I said, OUCH! Now that’s going to leave a mark! Tomorrow, we turn the page on the calendar to July, which means the All-Star Game is almost here! I’m as excited as a kid at Christmas for this… You’ll have to look for me at the Home-Run Derby, and All-Star Game… I’ve got some primo tickets right at the end of the visitor’s dug-out (3rd base line), 2nd row! Now, you know why I’m so excited! Well, that’s enough of that… Mary and Suzy Q are here, so that must mean that I’m late! So… Let’s make this Tuesday Terrific, eh?

Souce: A Week Dominated By Data

Well… Our Fantastico Friday was interrupted by that horrific Jobs Jamboree number that printed Friday morning… 651K jobs were lost in February, which let me remind you is a couple of days shorter than other months. So, it could have been worse! Hard to believe that could be the case, but it’s true. The unemployment rate rose to 8.1%, from 7.6% in January. The jobless rate is the highest since 1983. The economy has now shed 4.4 million jobs since the recession began in December 2007, with almost half of those losses occurring in the last three months alone.

Remember a year ago, when I kept harping that we had entered a recession, but the NBER hadn’t announced one yet, nor were the Un-dynamic duo of Paulson and Bernanke agreeing with me, as they kept denying what was right in front of them, for if little old me, could see that we had entered a recession, then why couldn’t these two? Oh, well, we now know that the recession began in December 2007… And now we know that 4.4 million jobs have been lost since that time. Of course if the Bureau of Labor Statistics (BLS) didn’t add jobs throughout the year that didn’t exist, we would be even more worse, so I don’t know whether to thank the BLS or curse them…

One thing to not let slip by you, is the fact that the previous months’ totals of -577K and -598K were revised upward by large amounts to -681K and -655K respectively… So, you’ve now got to ask yourself if the Feb figure will be revised to -700K… Of course it’s my opinion that the BLS would never dare print that figure on a first run printing, but only as a revision, that can be swept under the rug.

So… The currencies reacted a bit differently on Friday than we had seen recently when bad news printed in the U.S. Recall, that the Trading Theme that rewarded the dollar, whenever bad economic data printed, had held a grip on the markets for some time… But Friday morning, I mentioned that the trading looked different, with no Trading Theme in place, and that carried on even after the Jobs data printed.

The euro was stronger for most of the day on Friday, but as I left the office at the end of the day, it was beginning to look a little worn around the edges, and as I turn the currency screens on this morning, I see that the single unit has given back some ground.

I got a kick out a story that a reader sent me over the weekend… It was a story that appeared on the Bloomie regarding rate cuts… I told him, “yes, this is the stuff I keep harping on about how it’s not the cost of the credit that keeps banks from making loans, so why keep cutting interest rates?” So… Here’s a snippet of the report so you can see what it is that I’m talking about…

“European Central Bank Executive Board member Juergen Stark said cutting interest rates won’t remedy the financial crisis and pushing them too low may backfire. The financial crisis can’t be solved with rate cuts, Stark said in an interview to be published in Luxembourg’s Tageblatt newspaper on March 9. Too low a rate level can even be counter-productive.”

Hmmm… Finaly a Central Banker with the intestinal fortitude to stand up and say the right thing! Of course, that didn’t stop the European Central Bank (ECB) from cutting 50 BPS last week! UGH!

Recall last week I was talking about how fundamentally speaking, Australia was looking healthier than other countries, but then they posted a contraction in their GDP the next day… Some egg on my face with that one, but Hey! I still think they are poised to pull out of this global financil meltdown on the fast track. Apparently, I’m not the only person that thinks that… Derivatives show that the worst is over for the Aussie dollar… And the Royal Bank of Canada (RBC) is telling their customers to buy the Aussie dollar VS Canadian dollars / loonies… I read that this morning, you don’t think I make this stuff up do you? It was there in on the screen…

I mentioned to Chris Gaffney last week, that I had been seeing more yen selling coming across the trading desk than I had seen in a long time. I said that these people, if they had held it long enough, were probably taking profits. And why not? In this day an age with deflationary pricing pushing most assets downward, when you see a profit, you take it!

The guy known as “Mr. Yen”, Sakakibara, told the press last night that he believed yen may rise to a record 70 VS the dollar… WOW! He also said that it would range trade between 100 and 70… He believes that the yen will be afforded the same kind of love the dollar has received since the financial crisis began in the U.S. With Japan posting a large economic contraction last week, Mr. Yen, is of the opinion that it will help the currency gain to 70.

Hmmm… I just don’t know about all that… For one, I’m not convinced the flight to safety that has underpinned the dollar with buying of Treasuries, will be duplicated in Japan… And two… The only thing I saw pushing the yen stronger in 2008 was the unwinding of the Carry Trade, which I said had come to end about a month ago. So… There you have it… I don’t like yen’s chances to go to 70, but do agree that it could hold 100… It’s darn close to 99 as I type…

Recall last week I told you about my neighbor that stopped me in the driveway and was all concerned about what he had heard on the radio that day, regarding the FDIC going broke… I said then, not to worry about it, as the Fed will print more money and keep the FDIC from failing… If they kept AIG from failing, they certainly would do the same with the FDIC… Well, on Friday I saw this… “the FDIC wants a permanent increase in its line of credit with the Treasury Department to $100 billion from the current $30 billion. FDIC Chairwoman, Sheila Bair told key lawmakers in letters Thursday that such an increase “would leave no doubt that the FDIC will have the resources necessary to address future contingencies and seamlessly fulfill the government’s commitment to protect insured depositors against loss.”

OK… I told you on Friday morning about Gold’s rebound to $940, but it failed to add to that figure even after the horrific jobs data. I guess you would have to say that Gold traders had “priced in the jobs data already”, eh? Gold is off by about $4 this morning, as it gets pulled down by a report regarding global inflation… The Economic Cycle Research institute assesses that U.S. inflation pressures are at their lowest since 1958, and likely to decline further…

But for every report attempting to pull Gold down, there’s one attempting to push it higher… What I’m talking about here is the report that our friends, NOT! At OPEC are going to maintain their 13% cuts in production put in place since September 2008. They may consider more cuts. Oil is trading higher this morning at almost $47, and oil traders believe it will be back to $50 within two months…

Quietly making noise for the past 3 months has been the Brazilian real… The real has gained 4% in the past 3 months, as investors around the world look for yield… And Brazil’s interest rates have had the allure of the Sea Hag’s song to Pop-Eye! But… There’s word out of Brazil that the Central Bank will look to cut rates by 100 BPS / 1% when they meet, later this week. That’s too bad, but Shoot Rudy, Brazil’s rates will still remain higher than you can get in most ports of call… And… Their GDP will be positive…. And… If traders and investors reward the real for cutting rates aggressively like they did over currencies, then the real has nothing to worry about, eh?

OK… So, for the past month I’ve given you my ideas for the countries / currencies that could be on the fast track to recovery, given their ability to remain off the rosters of countries with failing banks. Norway leads the pack, with Canada, and Australia close behind… I even told you about how Paul Volcker thought we should shift to the way Canadian Banks operate. Well… It’s always nice to see someone else follow up on my ideas, not that they read the Pfennig and said, “Hey! Let’s write about what Chuck wrote about”… Nah… That wouldn’t happen… HA! But, seriously, BNP Paribas’ research team has issued a report advising their clients to buy… You guessed it… Norway, Canada and Australia…

BNP said, “we remain friendly on commodity currencies like Norway, Canada, and Australia, and view today’s oil price rally as an indication for other commodities to follow. We are bullish on the Canadian dollar, Norwegian krone, and Australian dollar, but unlike last week we like trading these currencies long against the dollar.”

So… There you go! It’s not just me!

There is no scheduled data to print today, but the rest of the week is chock-full-0-data. On Wednesday, when I board a plane to Florida, we’ll see the Monthly Budget Deficit… That should be a doozy! On Thursday, we get the usual Weekly Initial Jobless Claims, and Retail Sales for Feb… I can tell you right now, that the BHI (Butler Household Index) tells me this report for Retail Sales is going to be very disappointing! Friday the 13th, we’ll see the Trade Deficit, Import Prices, and U. of Michigan Confidence. There are other 2nd Tier reports sprinkled in all week…

I really do think that the Retail Sales for Feb, is going to be bad… And that may weigh on the dollar, that is, if the Trading Theme keeps to the back of the room!

OK, as I head to the Big Finish, I see the euro has lost more ground than when I first came in… It just can’t stand prosperity!

Currencies today 3/9/09: A$ .6360, kiwi .4980, C$ .7735, euro 1.2590, sterling 1.3890, Swiss .8595, rand 10.5930, krone 7.1125, SEK 9.2050, forint 247.90, zloty 3.77, koruna 22.02, yen 99.15, sing 1.5515, HKD 7.7550, INR 51.88, China 6.8410, pesos 15.28, BRL 2.3750, dollar index 89.20, Oil $46.74, Silver $13.22, and Gold… $937.90

Source: A Horrific Jobs Report!

Unfortunately, the facts prove otherwise.  Three months before the recession was officially declared, Paulson and Bernanke have embarked on the largest bailout program ever conceived with the blessing of a lame-duck president and a complicit Congress – a program which so far will cost taxpayers $8.5 trillion. This staggering sum encompasses:  loans backed by worthless assets ($2.3T), equity investments in bankrupt companies with negative net worth ($3.0T), and guarantees on crumbling derivatives and other hollow collateral ($3.2T).

Back in September I was stunned that Paulson was able to make his case and win the support of Congress for a $700 billion bailout package (more than the total war spending in Iraq to date).

How could Americans (or more accurately, their representatives) agree to give such a broad mandate with so few checks and balances?  Have we become completely numb?

While I realize that many of our compatriots have been running large credit card balances and interest-only mortgages with little thought as to how they would repay their debt, one would expect a little more restraint when dealing with the financial future of the largest economy in the world.

Operating under the assumption that our largest financial institutions are “too big to fail”, in the span of a few weeks we went from pledging to spend $1 trillion to $3 trillion – a commitment which then grew to $5 trillion before ballooning to a staggering $8.5 trillion.

At the rate we are going, we will be dealing with double digits – in trillions- before the end of the year.
And while all off that money is not yet spent, make no mistake – these are real commitments with serious liabilities attached to them.

I have heard the argument that an equity infusion is not the same as spending money.  While I would agree that in an arms-length transaction this might actually be the case, our government is definitely paying a large premium.  What is the real value of Citicorp or AIG?  Since they are quasi-bankrupt (and would be totally bankrupt without massive injections from the Fed), a reasonable businessperson might pay a token price for their equity and the assumption of their enormous liabilities.  Before doing so however, a buyer would have to see some significant value in buying these entities as a continuing business.  In most cases, a buyer would not want to assume the company’s liabilities but would prefer to buy selective unencumbered assets in a bankruptcy proceeding.  Any money our government pays above what a reasonable person would pay in an arms-length transaction is real spending and should more accurately be called a grant.

While defenders of the too-big-to-fail policies argue that providing guarantees is not the same as granting money, the reality is that these guarantees are necessary to prevent the collapse of financial institutions currently lacking the necessary collateral to meet their loan covenants.  Should their loans be called, we could actually find out the real value of their assets.  The fact is that in-spite of Paulson’s and Bernanke’s efforts, deleveraging is already happening.  Although at a slower pace, one asset class after another is being adjusted down towards its intrinsic value, which is usually not much.  Make no mistake; many of these guarantees will eventually be called in by lenders.  In due time, unless our government is able to inflates its way out of this bottomless pit, it will have to honor most of these guarantees.

So how does $8.5 trillion dollars compare with the cost of some of the major conflicts and programs initiated by the US government since its inception?  To try and grasp the enormity of this figure, let’s look at some other financial commitments undertaken by our government in the past:

As illustrated above, one can see that in today’s dollar, we have already committed to spending levels that surpass the cumulative cost of all of the major wars and government initiatives since the American Revolution.

Recently, the Congressional Research Service estimated the cost of all of the major wars our country has fought in 2008 dollars.  The chart above shows that the entire cost of WWII over four to five years was less than half the current pledges made by Paulson and Bernanke in the last three months!

In spite of years of conflict, the Vietnam and the Iraq wars have each cost less than the bailout package that was approved by Congress in two weeks.   The Civil War that devastated our country had a total price tag (for both the Union and Confederacy) of $60.4 billion, while the Revolutionary War was fought for a mere $1.8 billion.

In its fifty or so years of existence, NASA has only managed to spend $885 billion – a figure which got us to the moon and beyond.

The New Deal had a price tag of only $500 billion.  The Marshall Plan that enabled the reconstruction of Europe following WWII for $13 billion, comes out to approximately $125 billion in 2008 dollars.  The cost of fixing the S&L crisis was $235 billion.

The best deal ever for a government program was the Louisiana Purchase, a deal with the French that gave us 23% of the surface of today’s US for only $15 million ($284 million in today’s dollars).  Why couldn’t Paulson and Bernanke display the financial acumen of a Thomas Jefferson?

How will our country repay its debts?   The current bailout represents 62% of our GDP.  Our current deficit of almost $11 trillion may exceed our GDP next year.

Recently the Treasury has been able to place new debt; investors have liquidated equities and bonds and sought refuge in the relative safety of the dollar and government bonds.

As we move forward however, our government will need to attract trillions of dollars annually to fund its programs and commitments.  The foreigners who have financed our irresponsible spending for many years will no longer be able to afford it, let alone finance more of our reckless behavior.

As a matter of fact, several countries have already announced their own bailout packages to prop up their domestic economy.  And, unlike during WWII, when Americans invested their savings to support the war effort and fund our government’s deficit, our citizens are in debt themselves with no savings left to invest.

In the near future, the Fed will have no choice but to turn on the printing presses and start operating them around the clock to create the money that can’t be raised in the capital market.

These actions will lead to a significant debasement of the dollar and a major appreciation of gold and all commodities (real assets).

Once this inflationary cycle starts, foreigners will realize that their investments in T-bills are depreciating rapidly.  There will be a massive exodus that will put more pressure on the dollar and on interest rates.  Our weakened US economy will be faced with the rising cost of capital and a painful period of stagflation.  Trillions of dollars will have been wasted.  Our government will have mortgaged America and the ensuing debt will have to be paid by future generations.

Not a very bright picture, to be sure, but the Casey Research team strongly believes that there are opportunities in every crisis. Preserving your assets and even profiting in times of crisis by making the trend your friend is the focus of Casey’s flagship publication, The Casey Report. We have helped subscribers get positioned in commodities in the late ‘90s, buy grains in 2006, and short financial stocks 18 months ago… resulting in double- and often triple-digit returns.

To learn more about the trends we predicted and, more importantly, the emerging trends we now foresee, click here now.

Source: The Real Cost of the Recession

And Japanese yen is “getting bought!” Yen is trading in the 93 range this morning… Strong, very strong!

When this all began, I truly believed that it would last through the elections and on to the end of the year… Then the magnitude of the problems were revealed, and I changed that to lasting probably through to spring. The longer it takes the “boys” Paulson and Bernanke, to get this credit market crisis unlocked, the longer it will take before we return to the fundamentals that continue to get worse by the day.

On Friday, Chris printed some thoughts I had left him regarding the data that printed on Wednesday, wasn’t that just downright scary? I know that a ton of you all had the day off on Friday, and didn’t see the Pfennig that day, so for those of you that missed class on Friday, here’s what I had to say about the data prints from Wednesday…

New-Home Sales Sink 5.3% to Lowest Level in 17 Years U. Mich. Confidence – new low since ‘80
Chicago PMI collapses Consumer Spending Fell to 7-Year Low in October (manufacturing for that region)
Americans’ Food Stamp Use Nears All-Time High

And can’t imagine what in the world the people that make the official call on a recession the NBER (National Bureau of Economic Research) are thinking… I called this a recession back in January, and they have yet to make the call… Amazing!

Of all that bad data, the only one that will have a good outcome in the end, is the Consumer Spending falling to a 7-year low. We’ve gone on with this spending more than we make, for far too long! Now, if we could just get the Gov’t to do the same!

Now onto this week… So, as I said above, the risk aversion theme is back… There will be a ton o’ data print this week with it all culminating on Friday with the Jobs Jamboree… Just peeking ahead at Friday, the “experts” believe the job losses for November will be 320K, with the unemployment rate moving to 6.8% from 6.5%. That’s downright ugly folks.

Speaking of ugly… Today, we’ll see the color of the Nov. ISM (manufacturing) Index, which collapsed to 37 last month, and is expected to have fallen to 32 in Nov. All this “bad data” does is put the Trading Theme front and center even more…

OK, The Chinese renminbi has fallen .73% overnight, which is the largest drop for the currency since dropping the peg to the dollar in July 2005. I find it interesting that the banking officials allowed the renminbi to drop by that large of an amount right before, U.S. Treasury Sec. Paulson is about to visit… Can’t you just hear the Chinese saying something like this to Paulson… “See, Mr. Treasury Sec. we can play games with our currency too, and so now if you’ll just get yourself back on that plane, and leave us alone, we’ll see where the currency goes next.”

The Chinese have their own problems right now, and making sure their currency continues to strengthen isn’t one of them! China has shifted from “inflation fighting” which requires a strong currency, to “promoting growth” which doesn’t! And with exports set to collapse next year, given the U.S. recession, a currency strengthening just isn’t on their agenda any longer.

There will be a truck load of Central Bank rate meetings this week, beginning with the Reserve Bank of Australia (RBA) tonight. The Reserve Bank of New Zealand (RBNZ), Bank of England (BOE) and European Central Bank (ECB) are all expected to cut rates this week, and then next week, we’ll see rate cuts from the Bank of Canada (BOC) and the Fed Reserve…

Global rates are going lower and lower folks, we had all better be prepared for this, as it is going to happen, no doubts. For instance, I fully expect the RBA to announce a 75 BPS rate cut tonight or tomorrow, whenever they do it…

Now… Enough rate talk… How about we visit the goings on with the bailouts? Oh, goodness gracious, no! I don’t want to go there! My blood pressure is doing just fine today! Oh? I have to? The little guy on my right shoulder is telling me to not go there, and the little guy on my left shoulder is telling me to do it, NOW! Hmmm… Ok, I won’t do it, but what I will do is give you a thought from a reader, who is an investment advisor regarding all of this and the Gov’t taking ownership of banks… Let’s listen in…

“Does anybody out there have any memory of the reason given for the establishment of the DEPARTMENT OF ENERGY during the Carter Administration? Anybody? Anything? No? Didn’t think so. Bottom line .. . we’ve spent several hundred billion dollars in support of an agency the reason for which not one person who reads this can remember. Ready? It was very simple, and at the time everybody thought it very appropriate. The Department of Energy was instituted 8-04-1977 TO LESSEN OUR DEPENDENCE ON FOREIGN OIL. HEY, PRETTY EFFICIENT, HUH? AND NOW IT’S 2008, 31 YEARS LATER, AND THE BUDGET FOR THIS NECESSARY DEPARTMENT IS AT $24.2 BILLION A YEAR, THEY HAVE 16,000 FEDERAL EMPLOYEES, AND APPROXIMATELY 100,000 CONTRACT EMPLOYEES AND LOOK AT THE JOB THEY HAVE DONE! THIS IS WHERE YOU SLAP YOUR FOREHEAD AND SAY ‘WHAT WAS I THINKING?’ Ah yes, good ole bureaucracy. And now we are going to turn the Banking system over to them?”

Now, that’s one of those things you say, Whoa There Partner! I’ve warned about this Gov’t sticking their hands into banks and acting like owners before… But that’s exactly what’s happening folks…

OK, enough… Let’s talk Gold a bit… Mark O’Byrne, executive director at Gold & Silver Investments, has his attention on the open interest numbers.

Comex gold futures open interest—the number of outstanding contracts—declined sharply this month, falling to 289,700 contracts in the week ended November 18, according to the Commodity Futures Trading Commission. That’s down 9.3% from a month ago.

What the low open interest means is “that nearly all the speculative froth has been liquidated and remaining longs are ‘strong hands’,” O’Byrne says. “This will encourage more long interest to enter the market and should contribute to markedly higher prices in the coming weeks.”

OK… But… We need to see the markets return their focus on the fundamentals to weaken the dollar before we get any “real traction” in Gold… At least that’s my opinion, although Gold did have its best month in 9 years in November, gaining 11%…

Well, the good news from the weekend was that the Black Friday retail Sales were stronger than expected… But what’s going to happen when, as I said above, job losses post a 320K figure at the end of the week? I think it takes the wind out of those sails in a heartbeat!

I’ve gone on a bit this morning, but there’s lot to talk about, and that means an Iceland update! Reuters reported on Friday that… REYKJAVIK, Nov 28 (Reuters) – Iceland’s parliament passed legislation on Friday to curb currency outflows and the central bank vowed to restrict credit as authorities moved to restart trade in the collapsed Icelandic crown.

“The bank will maintain tight control over the access of banks to central bank credit until exchange market stability has been achieved,” Sedlabanki said on its Web site.

It said temporary currency restrictions, which had been necessary for Iceland to function at a basic level, would be lifted in stages.

“A considerable proportion of crown-denominated securities are owned by foreign investors. Lifting restrictions by stages will make it possible to unwind their crown-denominated positions in a systematic way, as the external balance permits, without undue impact on the exchange rate.”

There have been quite a few individuals that have ripped us for our handling of the Iceland meltdown, but as you can read above, there WERE CURRENCY CONTROLS in place…

One industry that’s not experiencing slowing sales… Guns… Barack Obama apparently is the best salesman the gun industry has had in years! With many buyers worrying about higher taxes or limits put on guns and ammo, sales are quite brisk since the election… I sure wish I was talking about home sales being brisk, or computers, or something like that…

Currencies today 12/1/08: A$ .6425, kiwi .5355, C$ .8045, euro 1.2675, sterling 1.5040, Swiss .8285, ISK 230, rand 10.25, krone 7.0280, SEK 8.1825, forint 207.35, zloty 3.0425, koruna 20.2330, yen 93.90, baht 35.75, sing 1.5285, HKD 7.7518, INR 50.29, China 6.8842, pesos 10.25, BRL 2.3735, dollar index 86.71, Oil $52.07, Silver $9.94, and Gold… $794.00

Source: Back to Risk Aversion

Despite the current, volatile environment, though, the expert team at Casey Research maintain their core prediction: that a highly inflationary cycle is not far off. While we, along with several external experts, continuously review our assumptions and conclusions and encourage dissenting opinions and analysis to avoid biased conclusions, so far we keep returning to our views about what’s coming. That said, the hardest thing to predict is not what will happen, but when.

The way I see it, the swift, far-reaching and mostly ill-conceived reactions from most of the world’s governments under the leadership of two apprentice sorcerers (Bernanke and Paulson) have until now resulted in a widespread run for an exit to nowhere, a deep credit freeze, and total and indiscriminate mistrust in the market and all of its players.

The fact remains that in the last year, many principles that have long been rooted in the success of capitalism have been thrown out of the window.

• First, market players discovered that the longest-lasting asset bubble in recent history was made possible by poor regulations (as opposed to lack thereof), greed, and the misunderstood and misrepresented risks of credit derivatives.
• Second, we found out the real meaning of “too big to fail.” If a business is large enough and has enough clout, it doesn’t matter how poorly managed it has been, it will be bailed out at the expense of taxpayers (us) and investors (us again).
• Third, we found that the rating systems the financial markets had been relying on have been misleading investors and failing to identify some of the riskiest asset classes. As a result, investors and all other economic agents are left with no means of evaluating risk as they conduct business, hence the credit freeze and rush to cash.
• Fourth, to add to the confusion, the U.S. Fed and Treasury, followed by many other central banks, have been altering the rules of the game by the minute (buying toxic waste at face value, bailing out certain financial institutions but not others, becoming shareholders of several behemoths in the banking and insurance industry, and trumping all accepted rules of creditors’ and stakeholders’ priority, prohibiting the shorting of certain classes of assets on a moment’s notice).
• Last but not least, the U.S. presidency, weakened by almost eight years of mismanagement, has continued to show total lack of leadership. It has empowered a couple of technocrats to run the country’s finances without leadership until a new administration gets in and, hopefully quickly, figures out what to do. To make matters worse, the EU has shown its ugliest face and demonstrated a fact we all truly knew but didn’t want to recognize until recently — that economic unity and coordination is easy in good times but almost impossible when the going gets tough.

No wonder economic actors are wreaking havoc as they race for shelter.

Add to this the fact that all natural resources have been hammered by the combination of a credit freeze and lower real and anticipated demand from most industrial nations.

Finally, junior exploration stocks – being very thinly traded and rightfully considered to be in a higher risk class — have been hammered twice as hard as the rest of the markets (hence the performance of the TSX-V, which has lost 76% in the last year and 30% in the past 30 days alone). The fact that many hedge funds had to unwind large positions in such a small market certainly did not help values.

What does this mean for investors in this market?

We all have suffered significant losses in our portfolios, and although our choices may have reduced some of the downside, quality companies have been hit almost as hard as fly-by-night juniors with no future.

Several of our companies are trading at or below cash value and get no goodwill for the significant assets and outstanding management teams they have assembled.

Although there is no way to tell when we will hit a bottom in these markets, we believe that once tax-loss selling season is over and reality settles in, we will see the beginning of a slow recovery process for the best of the juniors. Investors who have the ability to stay the course and are invested in the highest-quality juniors will recover from their losses and benefit from what will eventually be another bull market in commodities.

Precious metals and agriculture, followed by certain segments of the energy sector, will lead the way to widespread price increases across the range of commodities. While we can’t predict the exact timing of this run, the fundamentals are in place once the world economies take a turn for the better or at least stabilize somewhat.

Here is why:

• The current crisis is taking tremendous amounts of needed capacity off the supply pipeline. Whether it be energy, base metals, or agricultural goods, projects to bring online expensive oilfields and alternative fuel sources are being shelved and will take years to get back on track. Mines are closing and projects are being canceled, thereby removing much of the supply; the credit squeeze is cutting down on agricultural investment, and working capital constraints will dramatically limit supply.
• The world’s demographics are not changing, nor are the aspirations of a hard-working, fast-growing middle class in emerging economies. The changes that drove commodity markets up for the last few years are long lasting and real.
• Peak Oil and peak-everything. There is limited supply for many commodities, and although there are alternatives (curbing consumption and finding alternative sources of energy), it takes large investments to do so. In current markets, many of these investments are going to be put aside until the next crisis/shortage hits – at which point we will have years of a commodities bull run before an equilibrium is reached.
• We anticipate that China, Russia, and India will take advantage of low commodity prices to secure very large, long-term supply commitments while the Western world licks its wounds and tries to recover. By the time we do, an even larger portion of the world’s available resources may no longer be available on the markets, for example oil and gas.In the last edition of Casey Energy Opportunities, Marin Katusa pondered how the U.S. is going to replace the supply of uranium when the HEU program with Russia is set to expire in 2013. The answer is that the U.S. will struggle to replace 40% of its needs, and this will benefit a handful of U.S. suppliers with proven reserves. Currently shares of these companies, which have the cash to develop resources or are already producing with positive cash flows, are incredibly cheap – a win-win situation. Eventually similar opportunities will come from copper and strategic metals.
• We can expect the world to continue to be a very unstable place, where regional conflicts can quickly spread and spin out of control, with obvious impact on the smooth supply of key commodities (Gulf region, Nigeria, former Soviet republics, to name a few). In fact, a widespread financial crisis could precipitate those events as conflicts are often linked to economic hardship.
• The unprecedented deficits, a wave of bailouts, and growth in the money creation by central banks in the Western world will eventually lead to massive inflation. In the U.S. alone, the monetary supply has increased by 50% since early September. This will unequivocally reverse the current short-term deflationary pressures and lead to a steep devaluation of the dollar and other major currencies. At that point, precious metals and all tangible assets are poised for a strong recovery.

So, if you ask me if I am still bullish on the resource sector, my answer yes, now more than ever. Juniors are juniors, and when things go wrong, they get beaten down. The strong ones with great teams and lots of cash will survive and prosper, the others will disappear. When commodities come back with a vengeance, there will be fewer companies, almost all with good projects… and those who are invested in these few companies will see a very sizeable appreciation of their capital as the broader public returns.

It’s very hard to be a contrarian investor, especially when all forces seem to be against you, but one thing the markets have taught me is that memory on the Street is unbelievably short, and they will come back.

Not only is the economy presently going haywire, there’s also still the boogeyman of Peak Oil looming on the horizon. While oil prices are at a low not seen for a while, it is all but certain that this sweet relief for motorists won’t last very long.

When oil prices come roaring back, the energy market will virtually explode… and,  if you are safely positioned in the right stocks by then, your bank account will too. Learn more about how being a contrarian investor can earn you a fortune – click here.

Source: Lost Principles

With the consumer price index (CPI) safely in the books for another month, economists can now turn their focus to wholesale inflation with the release of the May producer price index (PPI). Economists, mistakenly, often disregard the energy component of this data each month and focus mainly on the so-called “core” releases – which excludes “volatile food and energy prices.”

While food and energy prices often suffer from month-to-month volatility based on seasonal factors, they cannot be overlooked these days as they continue to have significant impact on the global economy.

Also, Lehman Brothers Holdings Inc. (LEH) can’t seem to avoid the limelight, as the eyes and ears of the investment community will be sharply focused on its earnings announcement today (Monday), which also is expected to detail plans for its much needed capital infusion.

U.S. Treasury Secretary Henry Paulson welcomes his friends from China for Strategic Economic Dialogue IV, as both countries are sure to bicker over unfair trade practices, protectionism, and currency valuations. (And, “bickering” has become a very popular sport in Washington as of late… too late for the Beijing Olympics?).

Market Matters

So let the partisan bickering and political pandering begin. With the executive branch up for grabs in November, the Democratic-led U.S. Congress introduced legislation that has virtually no chance of passing, merely to be used as ammunition as the campaign season heats up. So-called “Big Oil” became the latest villain with politicos proposing windfall profit taxes on record company earnings. Our friends within the Organization of the Petroleum Exporting Countries (OPEC) did not escape the wrath of the Dems, who want to file suits over perceived price-fixing.

In typical partisan fashion, Republican Presidential candidate John McCain has touted his opponent, U.S. Sen. Barack Obama, as a traditional “tax-and-spend” liberal, the wrong choice during this period of economic challenges. Sen. Obama pegged his opponent as a continuation of the previous eight years of failed policies that have led the country into recession/inflation/deflation.

Lehman Brothers has remained front and center in the “who will be the next Bear Stearns Cos. (BSC) watch“ as the financial giant attempted to raise $6 billion in new capital to compensate for its disastrous second quarter. The company also bid a (not-so) fond farewell to two high-ranking executives as it goes to great measures to regain some lost public trust. Over a four-day time frame, its stock gave up more than $4 billion in shareholder value.

Always a day late, Moody’s Investors Service jumped in to protect investors by downgrading the firm from “Stable” to “Negative.” In other business news, transactions headlined the week as Staples Inc. (SPLS) will be acquiring the Dutch office supply company, Corporate Express NV (ADR: CXP), for $2.7 billion. Anheuser-Busch Cos. Inc. (BUD) turned to Mexican brewer Grupo Modelo SA de CV (OTC: GPMCF) to help fend off an unsolicited offer by rival InBevNV.

Meanwhile, Yahoo Inc. (YHOO) finally said good riddance (presumably, for the last time) to Microsoft Corp. (MSFT) in any merger, partnership, or other relationship (and jumped into bed with Google Inc. (GOOG) with a search ad agreement). Apparently, McDonald’s Corp. (MCD) remains recession/inflation proof as the fast food chain reported strong domestic and global sales in May.

Crude traded within a $10 range throughout the week to settle around the $135-a-barrel level as traders over-analyzed news of declining demand, OPEC made comments about “unjustifiable rise on oil prices,” and polls blaming industry insiders for “unethical behavior.” In the “misery-loves-company” category, the United States is not the only nation to struggle with energy-related inflation.

China’s Shanghai Composite Index fell to its lowest level of the year as the country attempted to fight off related price pressures. Likewise, India reported that its inflation rate climbed above 8% in May, while Vietnam devalued its currency because of soaring prices. Closer to home, Broadway ticket sales are down more than 10% from last year’s levels – meaning that even the “rich-and-famous” group of consumers are suffering the ill-effect of soaring oil and gas prices.

After an extraordinary day in the markets that saw the Dow plunge close to 400 points and oil surge to almost $140 per barrel on June 6, any recent volatility seemed tame by comparison. While investors searched for bargains in equities, the fixed-income markets struggled mightily last week as prospects for future Fed rate hikes grew more likely. The yield on the benchmark 10-year Treasury surged past 4% (and beyond), reaching its highest level of the year. Anyone inside the Beltway you’d care to blame, senators McCain and Obama?

The immediate reaction was for the dollar to rally and for gold and other commodities to sell off.

But think about it for a second.

Have things really changed? Have we suddenly now turned a corner and are about to get Paulson’s oft-talked-about, but never-delivered ’strong-dollar policy’? Has anything actually been done?

In a word, no.

“We are attentive to the implications of changes in the value of the dollar for inflation and inflation expectations,” said Ben Bernanke yesterday. “And will continue to formulate policy to guard against risks to both parts of our dual mandate, including the risk of an erosion in longer-term inflation expectations.”

Let’s have that again in English. “Yes, we have noticed that the dollar is going through the floor, and we are aware that we’re meant to care about inflation, and not just about the level of the Dow Jones.”

Could Bernanke have changed his inflationary philosophy overnight?

Strong words indeed. But the first thing to remember is that these were just words. They were not actions. Almost without exception, every action the Fed has taken in recent years, from lowering rates to injections of liquidity, has been to create inflation, not to fight it.

A man does not change his philosophy overnight. Let’s remind ourselves of Bernanke’s. In 2002 he said, “people know that inflation erodes the real value of the government’s debt and, therefore, that it is in the interest of the government to create some inflation.” It is also worth reminding ourselves of the unprecedented and dangerous levels of debt America holds, both individually and nationally. Inflating away the value of the currency has been and remains America’s easiest short-term solution to its problems.

If the Fed meant what they said about a strong dollar policy and fighting inflation, we would see Paul Volker-style interest rate rises (Volker was the Fed governor in the late 1970s and early 1980s, and had to take interest rates well into double-digit levels to combat inflation). But we are not seeing any such thing. Nor is any such thing possible in today’s debt-ridden environment. They would be crippling. What’s more they would be deflationary and deflation is something Bernanke will not tolerate. At Milton Friedman’s funeral he said regarding the deflationary 1930s, ‘You’re right. We did it. We’re very sorry. But thanks to you, we won’t do it again.’

How the Fed are putting the ‘con’ into confidence

The Fed seems to be trying to create a situation whereby they are seen to be fighting inflation, simply by not lowering rates any further. This is because, while the Fed may have no interest in fighting inflation, they have a big interest in fighting what they call ‘inflationary expectations’. In other words, they are more interested in fighting people’s perception of the problem, rather than the problem itself.

They seem to think if people do not see a problem, then there is no problem. As Ian McAvity puts it, they are putting the ‘con’ into confidence. It is the old politician’s trick of saying one thing and doing another. ‘Look over there,’ shouts the magician, the Wizard of Oz. ‘A strong dollar policy’. And everyone looks over there to see a strong dollar policy. Meanwhile, over here, a bucket load of money is emptied onto the audience.

The problem is that when inflation spread into homes and stocks, everything was just fine – unless you were a saver who rented of course. Now that inflation has moved from asset prices into energy and food, then there is a real problem for those who were unprepared, such as our very own Gordon Brown.

We saw the inflationary reaction of the Fed and the Bank Of England to the subprime crisis and the subsequent credit crunch. The notion that the worst is behind us is tosh. All that is behind us is the first wave of an ongoing financial crisis – perhaps a couple of cavalry charges. We still have the infantry, the artillery and the rest of the cavalry to get through before this is over.

The next wave will be in the form of a derivatives crisis: the oft-mentioned collateral debt obligations and credit default swaps. It is apparent that few people really understand what they are and how deep they go. That is bad news. Because it means when the crisis hits, people are more likely to panic. Panics tend to be disproportionate to the problem, particularly when trust in institutions has disappeared, as is the case with banks today.

Source: The Truth Behind Bernanke’s Fears for the Dollar

Good day… And a Happy Friday to one and all! No 3-day weekend this week, Shoot Rudy! Today is a “food day” in the office as we celebrate our cake maker, Cheryl’s birthday. I brought Krispy Kremes for the crew, as they truly eat them up whenever I bring them in.

Well… It wasn’t a Tub Thumpin’ Day for the currencies on Thursday, as the dollar was in the driver’s seat doing the Tub Thumpin’! There was a bias to buy dollars all day long and that carried over into the Asian and European markets. The euro is now looking up at 1.55…

The dollar bulls were all dancing in the streets when the 2nd revision to 1st QTR GDP was revised up to .09%, which was bang on expectations. Now, I would have one question for the dollar bulls, if I could just get them to stop with the dancing in the streets, and that is… What’s so good about GDP at .09%? Let’s say, for instance that we didn’t get a preliminary of .06%, and this was the first print… Most observers would gasp for air and turn into Chicken Littles, all screaming that the sky was falling!

Another thing giving the dollar some love these days is the falling Oil prices… Oil dropped to $125.75 yesterday…

But that’s the story Larry… Oh, and the dollar is hogging all of the spotlight these days that dollar bulls failed to see the problems with an interview that took place that doesn’t shed any sunlight on the financial problems in the U.S. Let’s listen in…

“MARGARET POPPER, BLOOMBERG NEWS: It could be huge. You’re talking about the securitization issue and how that market drying up drives up the ability of consumers to shift their debt around. So they’re in essence, facing a liquidity crisis just like Wall Street did in the capital markets is that -

WHITNEY: No doubt. Margaret, there are two things that are going on here, number one, there’s been an over reliance on consumer liquidity coming from the securitization market. So, for example for ever $1 of mortgages that was put on bank balance sheets since 2007, $7 of mortgages, or seven times that rate has been securitized in the broader market.

So, most people think when the securitization market shuts down, oh lets look at the revenue decrease, revenue declines in investment banks. The bigger deal is it constrains consumer liquidity.

Now, the second issue is that regulators that have clearly gaffed on the housing bubble are now going to make up for lost time and are going to make it so prohibitive for credit card lenders to make profits, maybe that’s a good thing long term, but what’s it’s going to do is extract, I think, over $2 trillion of liquidity from the consumer balance sheet. So the consumer is going to get it from all sides, consumer spending is going to decline and I think consumer defaults are really going to pick up.”

OK… Back to me… And… So it’s not just me that thinks we are far from being out of the woods with this whole mortgage mess… Sometimes I feel like I’m all alone on this island shouting to the wind all these thoughts, but obviously no one can hear me… But then I wake up and realize that I have tons of readers that know what’s going on… Too bad the markets aren’t waking up to smell the coffee!

You know, within the past 10 days I’ve mentioned the fact that Treasury yields seem to be on the rise… The fact is they are rising… The 10 year yield moved over 4% to 4.08%… This increase in Treasury yields began in April, albeit slowly… I just don’t see how this helps the mortgage mess… Or the consumer…

Nor would a rate increase from the Fed help the economy / consumer… It might take a small chunk at inflation’s armor, but to stomp our inflation the Fed would have to aggressively go after rates to move them much higher… And… Turn off the Money Supply spigot! But, they can’t do that… It’s like a drug for the Fed Heads… And getting them off the drug will be a tough row to hoe!

OK… So Fed Head Kohn, was speaking yesterday and thought it was important to give the audience a wink and nod that the Fed window would remain open for business… Again, this is one of the things that has the markets all revved up and ready to roll. The removal of “risk”… If a financial institution gets in trouble with the junk they have on their books, no worries, just take it down to the Fed Window, the Fed will take it as collateral and lend money to keep the financial institution going…

My friends over at the 5-Minute Forecast, Addison and Ian, talked about this “collateral” in their newsletter the other day… Addison and Ian do a GREAT job with the 5-Minute Forecast, it’s a must read each day! Anyway, here’s what they printed the other day…

“Illiquid collateralized debt obligations — including mortgage-backed securities,” says our government stats watchdog John Williams, “now total in excess of 20% of the collateral backing the Federal Reserve Notes.”

Yikes. One-fifth of the U.S. currency is backed by fetid CDOs. Think about that.

“According to the Fed,” John explains, “U.S. dollar currency in circulation is estimated at $818 billion, the better portion of which circulates outside the geographic confines of the United States. While the U.S. currency has been a fiat currency for decades, the Federal Reserve Notes presently in circulation are collateralized by securities held by the Fed.

“Those securities traditionally are U.S. Treasury securities.

“Since the onset of the banking solvency crisis and the establishment of various new lending facilities by the U.S. central bank, however, an increasing portion of the U.S. Treasury securities held as collateral has been lent to troubled financial institutions in exchange for largely illiquid collateralized debt obligations.”

OK… Enough of that… But really these are the storm clouds that are brewing, and the markets are ignoring them… I sure hope they get to the storm cellar before the twister touches down… They don’t want to get caught outside the cellar like Dorothy!

One currency bucking the trend to weaken VS the dollar is the Brazilian real… Brazil received some more good news yesterday, when the rating agency Fitch, announced that they were upgrading Brazil to “investment grade”…

This is a huge deal folks… You see, there are pension funds, etc. that DO have investment criteria (unlike our Federal Reserve Bank) of which, buying bonds with investment grade is a standard… So, all these “buyers” that have been shut out of the Brazilian market, are now able to join the rest of the world that has seen Brazil as an investment choice…

So, obviously, the news helped push the real stronger VS the dollar… The real’s performance year-to-date is +8.63%… Not too shabby, eh?

OK… As I’ve been writing, the euro has turned around, and is back above the 1.55 level, so maybe, just maybe, you-never-know (Joaquin Andujar’s favorite word) (a St. Louis joke), someone has said “enough”!

Today, we’ll see Personal Income and Spending data from April… We’ve been spending more than we make for so long now, I just can’t see this changing. We’ll also see the color of the last reading to the U. of Michigan Consumer Confidence for May… I would expect this to remain near the 59.50 index level it hit at the last print, which is its weakest level since 1980.

We’ll pay the devil his due with inflation data in the form of the PCE Deflator, which measures U.S. Personal Consumption Expenditures. This data is expected to fall, which means U.S. Consumer spending slowed… Of course one would think that with higher food and energy prices, they would easily make up any slow down in spending… So, we’ll have to see, eh?

I just think that the U.S. Consumer has been backed into a corner (OK, the Consumer did some backing of its own!) and there are only a few paths out of that corner… One path leads to run-away inflation, one path leads to deflation, one path leads to recession, and another leads to bankruptcy and foreclosures… That’s dire straights right there folks… Whenever I say “dire straights” I think of Mark Knopfler (dire straits), and the song… Money for nothing…. That cracked me up!

Currencies today 5/30/08: A$ .9570, kiwi .7825, C$ 1.0110, euro 1.5520, sterling 1.9745, Swiss .9540, ISK 74.55, rand 7.59, krone 5.1025, SEK 6.0175, forint 155.50, zloty 2.1750, koruna 16.20, yen 105.50, baht 32.50, sing 1.3650, HKD 7.8050, INR 42.50, China 6.9410, pesos 10.33, BRL 1.6370, dollar index 73, Oil $125.85, Silver $16.85, and Gold… $883.15

That’s it for today… So, a Happy Birthday to Cheryl, who has been with us almost since the beginning of EverBank World Markets. My little buddy, Alex, broke out of his slump and got the game winning RBI hit last night… I was holding my breath as he strolled to the plate. His swing had gotten all messed up and I tried to help him (as best I can given my immobility)… But a nice soft liner over the 3rd baseman’s head brought home the winner! Another game tonight and one on Sunday! I just heard on the radio that Harvey Korman died… He was great in Blazing Saddles and High Anxiety!

Cards take two of three from the rival Astros… Now that’s a good thing! Any time you can beat that team! My long time neighbors, Kevin and Lisa, moved out of the “hood” yesterday… I must be running the neighbors away, that’s the second good neighbor that has moved in the past year! UGH! OK… I could go on, but it’s time to go! I hope you have a fabulous Friday!

Chuck Butler

Source: An Upgrade For Brazil!