Hello! Everyone! How nice it is to be with you again today! We’ll start out with a recap of yesterday… When I signed off the airwaves yesterday morning, the dollar was having its way with the currencies, and the euro was about to give up the 1.39 handle… Apparently, 1.39 proved to be a strong line of resistance, and the euro actually moved higher on the day.

Yes, the bias to sell dollars was there, just not very strong or committed to selling dollars… And in the overnight markets, the bias to sell dollars has remained, but again, not a very strong bias… But a bias nonetheless! Which is a good sign to me, because U.S. stock futures are down this morning, which would normally mean, risk assets, like currencies, are going to have a tough row to hoe today… But, not so, at least while I’m writing the Pfennig!

Could the nascent bias to sell dollars be a result of the fact that the U.S. will once again depend on the ignorance of strangers (foreigners) and issue $35 Billion in 3-year notes today… But then, with the “new” way the Treasury allocates “who buys” the Treasuries, the Fed could step in, buy up a HUGE Chunk, and make it look like “outsiders” bought them, which would make the “deficits don’t matter” flag wavers run into the streets shouting to the tune of Jimmy Crack Corn… We issue Debt, and the foreigners don’t care, we issue lots of debt, and the foreigners don’t care…

I told you yesterday about the sizes of the Treasury issuances that had happened, and are scheduled to take place… If that doesn’t scare the bejeebers out of dollar bulls, then I don’t know what will!

Oh! Maybe this will! Yesterday, I told you my opinion on the Chinese moves recently… 1. Calling for a replacement reserve currency… 2. Calling for the use of SDR’s… 3. signing currency swap agreements with countries… I said that the use of SDR’s was a stalking horse for China’s plan to gain wider acceptance for the renminbi… Which in turn, would set the renminbi up for an alternative world reserve currency…

Now, China won’t admit to this… As the Big Boss Frank Trotter mentioned yesterday in our brief conversation, “China thinks in centuries”…

Well, in this case, I believe China will move faster than that, and faster than most observers think they will… I think this will all take place within the next 3-years… And why do I say that? Do you remember when I told you a couple of months ago, that China has “shortened” their Treasury maturities? Yes, China had, under the dark of night, quietly shifted out of long-dated Treasuries, to ones with an avg. maturity of 3-years!

At the time, we thought, that China just didn’t want 30-year paper, for in 30-years, the U.S. fiscal situation will be very dire, unless something changes drastically, given the baby boomers and their draw on entitlement programs. But now… Maybe the Chinese shortened their maturities to line up with their big plan to gain wider acceptance for the renminbi!

And don’t forget those currency swap agreements they’ve signed with countries in Southeast Asia, and Argentina… (it’s rumored that Brazil is close to signing one too!) As they spread those currency swap agreements around the world, they remove the dollar from the settlement, and replace it with renminbi, folks… I read a story that was talking about trade, and never put these things together, but that’s OK, because the data on trade was good… The story reported that these currency swap agreements could total 1/2 of China’s total exports, which is equal to about $2 Trillion in annual trade flows! If they do that each year, within 3-years they would have one of the top 3 currencies in global trade!

And… Don’t forget the fact that they have effectively removed the dollar from those trade settlements!

So… Folks… I do believe the writing is on the wall here… And Yes, the dollar will have its fun from time to time, enjoying rallies… But they will be short-lived, as the die is cast on this folks… I do believe so…

So, what does this mean for us? OK, first of all, this is just my opinion on what’s going on, there are no “guarantees” this will happen this way! So, let’s not run out into the streets shouting doing out best Chicken Little! Let’s just calmly move to the exits, in an orderly fashion… If you get my drift there…

OK, let’s talk about something else, eh? Oh! How about the Reserve Bank of Australia’s (RBA) meeting last night? Yeah, that’ll work! The RBA left rates unchanged (as I suspected they would), and the accompanying statement was a strong endorsement for maintaining the RBA’s easing bias (as I suspected they would do!). It’s like a young couple that know they are in love, but are too scared to admit it… The RBA knows they are finished cutting rates, they are just too scared to admit it! For all this talk of China’s trade, with support their export side, and once again drive the Chinese economy… As long as China is in good shape, the Aussie exports will be in good shape, and if the Aussie exports are in good shape, the RBA won’t cut rates, and all this should lead to a stronger A$! Notice I said “should”!

I get emails from time to time telling me how wrong I was about something, and that’s fine, when I’m wrong I’m wrong, there’s no two ways about it! But, I always say… I was only speaking from a fundamentals standpoint, and the fundamentals said something “should” happen… Or, like I said the other day… “The markets always do what their supposed to do, just not “when”!

Oh, and how about this to brighten your day! Moody’s announced last night that they are placing Brazil’s rating on review for a possible upgrade! Now when was the last time we heard the word upgrade used? (and not the Beyonce’ commercial for direct TV!) I’m talking About a country here! Brazil! Part of the BRIC’s that are putting so much pressure on the dollar these days!

And then there was this… Recall how I told you that the President had given me the feeling that there was more stimulus on the way for the U.S. economy? Well… Now we have a Presidential advisor making that feeling even stronger! Laura D’Andrea Tyson, a Presidential economic advisor said yesterday, “We should be planning, on a contingency basis, for a second round of stimulus.”

Oh Great, just great! NOT! For you and I know all too well, that when the Government starts planning something, they do not do so with the thought of “scrapping” the whole idea! More stimulus will mean more deficit spending, which means more Treasury issuance… I can hear the foreigners saying… No Mas! No Mas!

I read a story yesterday, (thanks Ann!) about Big Ben Bernanke, and his upcoming reappointment… Most observers believe that Big Ben will get reappointed for another term as Fed Chairman, but not without a fight, for Big Ben has many detractors these days, that have too many questions about how the Bank of America / Merrill Lynch thing came about, and his money supply. While there are others, that somehow think that he is a “hero” for saving the economy. Of course, all they would have to do is check with Ms Tyson as she would tell them that the economy is probably in need of more stimulus!

I’ll head to the Big Finish on that note, I don’t want to end the Pfennig with a tirade on Big Ben! All I’ll say is let’s see him remove the $1 Trillion in stimulus / money supply without pushing the economy back into a recession… Yeah, that’s the ticket! Let’s see him do that, before you give him accolades!

And looky here! While I was writing, the euro steadily climbed back above the 1.40 handle! I guess that bias to sell dollars is growing, eh?

Currencies today 7/7/09: A$ .8015, kiwi .6390, C$ .8660, euro 1.4025, sterling 1.6250, Swiss .9255, rand 7.9550, krone 6.4590, SEK 7.80, forint 194.20, zloty 3.1150, koruna 18.4375, yen 95.30, sing 1.4550, HKD 7.75, INR 48.43, China 6.8328, pesos 13.20, BRL 1.9525, dollar index 80.25, Oil $64.81, 10-year 3.54%, Silver $13.31, and Gold… $927

That’s it for today… Starting today, and going through next Monday, I have a ton of doctor’s appointments, scans, blood tests, you name it… It must be a new quarter on the Calendar! OH BOY! It’s not THAT bad… And as long as they show I’m still clean, and in good health, then I’m all for them! I had a reader send me a note, and tell me that I should change the “my little buddy, Alex” to something else, as Alex is now 14! HA! When he’s bigger than me, I’ll stop calling him that! HA! No… I guess I should change… Just not ready! OK… Writing from home today, I have a doctor’s appt. first thing this morning, and then off to work! It looks like another beautiful day outside, so tell yourself… This is going to be a Terrific Tuesday!

Source: $35 Billion More Treasuries To Auction

Friday’s thinned out markets were not what the currencies wanted to see, as the bias to Risk Aversion was magnified in the thinned out markets, only making the selling of the currencies even worse… Some “levels” were hit in the thinned out markets, and that caused even more selling in the overnight markets as Japan and Asia came on board.

I’m really kind of shocked at the Asian selling… You may recall that last week we had the wild swing Thursday, after there were reports that China had obtained approval to attend the G-8 meeting this week in Italy, and discuss replacing the dollar as the world’s reserve currency. The dollar was sold like funnel cakes at a state fair, after that report hit the news wires… But it was quickly turned around when the Chinese denied they knew anything about the contents of the report…

But… This weekend, while the charcoal was burning everywhere, the splashing in the swimming pools, and the display of fireworks had everyone’s attention, the Chinese admitted that they were going to G-8! Where’s the selling now? Isn’t this confirmed now? Has something changed?

The answer to the Has Something Changed question, is yes… Currency strategists have come to the conclusion that China won’t get anywhere with their desires to replace the dollar with SDR’s (special drawing rights). Even with France throwing their two-cents into the discussion, and having their Finance Minister (Lagarde), and Bank of France Gov. (Noyer) calling for an increased discussion of currency coordination, the Currency strategists just aren’t budging… They believe there’s no way China, even with the backing of Brazil, Russia, and India, will get any traction…

Hmmm… So… It’s over? Not hardly folks! I think that the comments coming from the French officials says…”We need to give the emerging markets more say in how the world’s economy is run”… A foot in the door, if you will… And… When you have the war chests like Brazil, Russia, India and China have, a foot in the door, is like having a wide enough space that you could drive a Mack Truck through!

Of course that’s just my opinion… I could be wrong… But then, somewhere in the back of your mind, you’re thinking… Hey, this Chuck guy may just be, because you never know… He might be right!

OK… Playing games with your mind isn’t what I was trying to do there… I was simply crossing the T’s for the legal beagles…

So… We begin the week with the currencies weaker than they were last week, and the euro about ready to lose the 1.39 handle. The High Yielders are taking it on the chin too, with the exception of Brazil, but once that market opens we could very well see the real play catch-up.

The data cupboard is relatively empty this week, with the Initial Jobless Claims on Thursday, and the Trade Deficit data on Friday, the only “real” data this week… So, the G-8 meeting on Wednesday will have center stage, and any comments from the “outsiders” (China, etc.) creating pressure points for the dollar this week.

One of the worst performing currencies in the past couple of weeks is the Canadian dollar / loonie. No wonder, with the price of Oil dropping and Gold stuck in a rut… Nothing to give the loonie a boost… And overnight, the price of Oil has “gapped” down to $64, putting even more pressure on the loonie.

Let me explain what I think we’re seeing in the price of Oil… I think a large part of the run-up in the price of Oil was caused by investors taking positions to hedge VS inflation… And in recent days, those fears of inflation have been put on hold… And these investors have no patience… So, those positions are getting sold, and… That’s what’s pushed Oil down so much in the past week.

Tonight, the Reserve Bank of Australia (RBA) meets to discuss rates… I fully expect the RBA to keep rates unchanged at an internal level of 3%. But, I also expect them to muddy the euphoria of unchanged rates, by leaving their easing bias intact. Put yourself in the shoes of the RBA… You may want to say the end of rate cuts has been seen and the next move, whenever that is, will be higher… But! You don’t want to open Pandora’s Box of currency rallies… The RBA would be the only Central Bank in the world that had removed their easing bias, with an eye on higher rates… The flood gates of investors seeking a currency that will be raising interest rates, would be thrown open, and an unwanted at this time, run-up in the A$ would take place.

So… The RBA will be cautious with their words, and keep their rate hike cards in their back pockets for now… Waiting for the right time to pull them out and throw them on the table!

Did you hear about China and Hong Kong agreeing to settle cross-border trades in renminbi? I know, you’re scratching your head and saying, but Chuck, isn’t Hong Kong a part of China? I could swear I saw the U.K. hand it over to China years ago! Ahhh grasshopper, you are correct… But, Hong Kong retains their own currency, the Hong Kong dollar, or “honkers” as currency traders call them. And… Renminbi has never been allowed outside of the mainland China… But now Hong Kong Banks will be able to borrow or buy renminbi!

I know this sounds like small potatoes… But, these are baby steps for China and what I believe their goal is… And that is, to gain wider acceptance for their currency… It’s how they will be able to spring the coup someday to replace the dollar as the reserve currency… I truly believe their call to use SDR’s is just a smokescreen… These currency agreements that China has signed with Argentina, and the Southeast Asia countries, and have on the table with Brazil, is the real thing to watch… I see the SDR’s as a sort of stalking horse for China’s wish for wider acceptance for the renminbi…

And to round out our discussion today… Our old friend, Jim Rogers, was back in the news last night. Let’s listen in to Jim Rogers, author of a few best selling books, and long considered an excellent investment mind…

“The government is printing lots of money and borrowing even more; that’s not the basis for a sound currency. The idea that anybody would lend money to the U.S. government for 30 years at 3 or 4 or 5 or 6 percent interest is mind-boggling to me.” Jim also said that he olds fewer dollar than a year ago, and plans to short U.S. government bonds someday.”

Of course this is a reoccurring theme with yours truly… I have harped and harped about this since the beginning of this year. In fact, in February, the title of my Currency Capitalist letter was: U.S. Treasuries the next great bubble…

The number of bonds being issued… And the question of who’s buying them? For instance, the U.S. had more than doubled bond issuance to $963 Billion in the first half of this year, with another $1.1 Trillion scheduled to be sold by then end of the year. U.S. debt issues have lost 4.46% in the first 6 months of this year, and I just don’t see how that trend can be turned around, when $1.1 Trillion in new issuance will be forced down the throats of investors before we sing Auld Lang Syne for 2009!

The Bank of Japan believes that they are seeing signs of an end to their recession, saying that they are more optimistic about the economy since 2006… I wonder how many times since 1990 that Bank of Japan officials have said those words? Probably enough times to make you wealthy if you had a Gold coin for every time they said it!

Speaking of Gold… Another $10 off the price this morning, down to $922… Silver is in danger of losing the $13 handle! Did I hear someone say… Bargains? Well, only if they go up from here, eh?

Currencies today 7/6/09: A$ .79, kiwi .6265, C$ .8585, euro 1.39, sterling 1.6125, Swiss .9145, rand 8.0230, krone 6.5215, SEK 7.8560, forint 197.25, zloty 3.16, koruna 18.6750, yen 95.20, sing 1.4575, HKD 7.75, INR 48.47, China 6.8340, pesos 13.36, BRL 1.9530, dollar index 80.86, Oil $63.76, 10-year 3.51%, Silver $13.09, and Gold… $922.70

That’s it for today… I hope you all had a grand 4th of July holiday! It was pretty low key at the Butler House, as my little buddy, Alex, was suffering from a case of swimmer’s ear, and the weather did not cooperate, as it rained, and rained hard, all weekend. I did get to spend some time with good friends on Friday night before the rain came. The rain didn’t stop me from putting my Weber grill to use all weekend! The Agora Financial Investment Symposium in Vancouver is only two weeks away. Last year, I go food poisoning while in Vancouver, and believe me… being on the road, is no place, to get sick like that! I have better memories of Vancouver though… I’ve actually written my presentation for the general session in Vancouver… WOW! That’s a first for me! Now, that workshop thing… You should check out Vancouver, and the Agora Financial Investment Symposium. OK! Time to go, Mike’s here! I hope your Monday is Marvelous! Tell yourself that today will be a Marvelous Monday!

Source: China Is Back On The G-9 Docket

OK… Well, yesterday we saw the currencies stop the bleeding from the overnight sell off, and although they range traded on the day, the bias was to sell dollars once again. That bias has played through on our Turn Around Tuesday theme, and the currencies are higher today than yesterday, but lower than they were 3-weeks ago week ago. Yes, the month of June has not been kind to the currencies, as some of the euphoria that was going on from March thru May, regarding the global economic recovery is being thought about again, and this time, not with the same rose colored glasses…

Yesterday, I told you about the story in the Australian Morning Herald that shook the A$’s confidence, when the Economics Editor said the markets were wrong to believe the Reserve Bank of Australia (RBA) were finished with their rate cuts. Well, that story was followed up by one that shook the confidence of the Commodity Currencies… This one was about China, and how analysts had gotten the stimulus all wrong in China, and that the Chinese had NOT put the money toward infrastructure and Capital improvements but instead into investments, thus making the Chinese disguising the stimulus in China as a recovery… Hmmm… I don’t live in China, so I can’t really pass judgment here, but I will say that most people that comment on China in the past 6 years have been mostly wrong…. And more wrong than right for sure!

But… As they say on the farm, it’s too late, the cow’s out of the barn! That Chinese stimulus story, hit a nerve with the Commodity Currencies, and before you knew it, the high flying currencies of Aussie, kiwi, Brazil, and South Africa were all looking at figures that thought for sure were in their rear view mirror! The sell off was damaging for sure…

This looks like a classic case of “getting cold feet”… Traders were all lathered up to take these currencies higher last week, but read a story and “got cold feet”… They would say they are being prudent… I would say that they are being wimps! Because in the end, folks… This has nothing to do with whether or not the RBA cuts rates again or not! In the end, this is all about what the U.S. is going to do about all their debt! I’ve harped on this for years, and the thing that really gets me is that IT HAS GOTTEN WORSE! The National Debt, is now over $11 Trillion, and will probably reach $14 Trillion this year, after all the deficit spending by the administration… This is just awful folks, just awful… Because… And here I go again getting up on my soapbox, but come on, this is important! And Yes, I know, you’ve heard this at least 100 times if not more before!

But, the only way the U.S. is going to be able to pay down their debts, and the $11 Trillion is just the tip of the iceberg with the baby boomers starting to retire, is to pay it back with cheaper dollars… But… Hey! Don’t take my word alone for this… Let’s listen in to the IMF’s Chief Economist, Olivier Blanchflower, who was speaking at a conference in Paris yesterday…

“A U.S. economic recovery will only be sustainable if there is a “large increase” in net exports, which may require a dollar adjustment. It may not be very easy, It may require “an adjustment in the dollar, but it is needed.”

Did you hear that? The IMF Chief Economist is saying out loud, and not under his breath, like most economists that see this but don’t want to go out on a limb, that the U.S. needs to devalue the dollar!

Now… That might be a shock to you, folks… But it’s not to me! And if you’ve read the Pfennig for a long time, and heard me harp and harp about the deficits and not being able to pay them back unless we do so with a cheaper dollar, then now it might just all come back to you… Like what the blind man said when he spit into the wind, Ahhhh, it’s all coming back to me now!

But again… It’s not just me that thinks these things, although I will say that sometimes it sure feels like I’m the only one saying them out loud every day of the work week!

Today, I have a special treat… And once again, I’m as proud as a peacock this morning, because, I have a quote to share with you, from the one and only Richard Russell… This comment plays well with what I’ve just been talking about… Check this out!

Richard Russell – “It’s clear (at least to me) that Obama is following the path Roosevelt took during the Great Depression.

In 1933, the government devalued the dollar by 41% by raising the official price of gold from $20.67 to $35 an ounce. Devaluation makes debt easier to handle. In a devaluation, the dollar value of debt remains the same, but all other assets would be worth more (in nominal terms) whether it was a house, a stock, a car or an ounce of gold.

How our creditors who own trillions of dollar in their reserves will react to a dollar devaluation I really don’t know, but a devalued dollar is a lot better than nothing. The Bernanke Fed is trying desperately to bring back inflation, and devaluing the dollar is the surest and quickest way to inflate.”

WOW! It’s not every day that I get to use a quote by Richard Russell! But now… Think about this stuff that’s in the Pfennig this morning… And then think about what I told you last week, about how all this going back and forth in the currencies and precious metals, is just “noise”… Ahhh, now I want to hear you say… “I get it, I get it!”

Oh… And to follow up the Blanchflower, Butler, and Russell comments… Ty sent me a quote my Mark Twain that sums it all up… Mark Twain – “History doesn’t repeat itself, but it does rhyme.”

U.S. stocks sold off 200 points yesterday, making it a tough row to hoe for the Commodities, and Commodity Currencies… The Brazilian real posted the worst performance on the day, with the real moving back above the “2″ level for the first time in about a month… Recall, that the Central Bank Gov. said in the middle of May that he would everything he could to keep the currency above “2″, only to watch it move below and then well below “2″ in the next weeks. The Central Bank Gov. did try, by cutting interest rates about 10 days ago, but in reality, he has little at his control if the markets / traders / investors decide to buy the currency… He does not have a treasure chest of reserves like the Bank of Japan and Bank of China… No, in reality, the only way the real was going to move back above “2″, was to have the sentiment toward Commodity Currencies change…

And again, I can’t believe that the one story in the Australian newspaper, has caused a sea-change of sentiment like this! Maybe, the story’s writer will be proven to have been bang on… That’s not what I’m saying… I’m saying, his opinion, caused a sea-change of sentiment, and that surprises me!

I had someone write me yesterday and say, I might add, once again, that Europe is in worse shape than the U.S. that they didn’t even have stress tests there because they fear what they might show… Hmmm… I wonder what they’ll think when they read this… ECB member, and President of the Bank of France, wrote in his annual letter to French President Sarkozy, that the “worst has passed for the economy and that he was favorable to releasing the results of the banks’ stress tests.” Hmmm… Guess we’re back to the “ugly car” comparison, eh?

Recall last week when I told you about the Chinese announcing a “buy China” protectionist program? I said then that these things usually spread and other countries announce their own versions of protectionism measures… Of course, we all know who started this round of protectionist talking… The current administration and their “buy American” plan… The Chinese measures were placed to offset the U.S. measures… But now, Germany is feeling pinched… Germany’s economy minister, Guttenberg, is voicing concerns about the Chinese announcement last week, and that he would bring this up at the next G-8 meeting in July…

Well… The problem with that is that China isn’t a member of G-8, so this could just be a “you-know-what session” of finance ministers, getting them all wound up to write protectionist measures of their own! Watch for these protectionist policies to spread like Bermuda grass! And, if that happens, the global recession will get even worse, folks! Thanks to the “buy American” move… Geez Louise, when will they ever learn? When, will, they, ever… Learn?

Looks like more and more people are jumping on my bandwagon, that the stimulus would not work… Two months ago, 59% of Americans thought the $787 billion stimulus would restore the economy, but since then, the number has slid to 52%. And… As unemployment heads to 10%, even with the adjustments and ghost jobs the BLS adds each month, that number of those that thought the stimulus would restore the economy, will continue to slide…

And finally a not so serious story… Say it ain’t so Paul Simon! Kodak will retire Kodachrome! Eastman Kodak has announced it will discontinue the legendary 74-year-old film that revolutionized color photography because of slow sales and dwindling demand in the film, due to digital cameras…

Kodachrome
You give us those nice bright colors
You give us the greens of summers
Makes you think all the world’s a sunny day, oh yeah!
I got a Nikon camera
I love to take a photograph
So Mama, don’t take my Kodachrome away

On a sidebar… I saw Paul Simon in concert this past spring… A great concert!

Currencies today 6/23/09: A$ .7870, kiwi .6330, C$ .8670, euro 1.3960, sterling 1.63, Swiss .9295, rand 8.24, krone 6.5375, SEK 7.9650, forint 202, zloty 3.2535, koruna 18.71, yen 95.50, sing 1.4565, HKD 7.75, INR 48.54, China 6.8345, pesos 13.33, BRL 2.0325, dollar index 80.44, Oil $67.08, 10-year 3.68%, Silver $13.81, and Gold… $922.73

That’s it for today… OK… Are you as fearful of what could happen in this on-going N. Korean ship following by the U.S.? That kind of stuff is scary… Somebody gets a nervous trigger finger, and… Oh well, I had better think of more peaceful things this morning, eh? For those that send me notes asking me about my left eye… I don’t have anything new to report. My lack of vision with the eye is the same, the good news is that it hasn’t gotten any worse! I told a good friend of mine the other day, when he expressed his concern that I’ve taken more than one hit with this cancer… “So far, the Good Lord has only allowed me to be attacked by cancer in places where I have two of”… Kidney, hip, leg, and eye! And… That’s the way I see it! I love those east coast starting times, I can actually watch the whole game! Of course I didn’t like it last night when the Metropolitans took it out on my Cardinals… Time to go… I hope you have a Terrific Tuesday!

Source: So Far… It’s A Turn Around Tuesday!

Front and center this morning, I’m as proud as a peacock this morning. I just read an email from good friend, and excellent market analyst, Mary Anne Aden… Mary Anne sent me a note letting me know that the one and only Richard Russell had quoted me in his letter June 10th… She said it went something like…”this is from Chuck Butler’s always terrific column…” WOW! Being quoted in Richard Russell’s letter is like the top of the list for me!

OK, Chuck, you have to come down from cloud 9… Hey You, get off of my cloud! Even the fact that the currencies and commodities have sold off in the overnight markets can’t stop me from this seashells and balloons feeling…

Yes… The currencies and commodities have sold off in the overnight markets… Even a good print by Germany’s think tank IFO on Business Confidence, hasn’t wrapped a tourniquet around this sell off… This wasn’t a “one and done” for Business Confidence in Germany either! This happens to be the third consecutive month of positive gains for this data. Now… One would think that this should signal something, right? I mean, if I walked up to you on the street and said, “Germany’s Business Confidence has posted positive gains for 3 consecutive months”… You would probably, no wait, definitely think (because I know you are very astute, and pay attention in class each day), that Germany’s economy must be coming out of their recession… Hmmm… Yes, that’s what I would think too! But… The euro isn’t showing any thoughts by traders like that!

I think that in the next print of GDP in Germany (the Eurozone’s largest economy), we’ll see a nice improvement from the previous quarter’s negative -6.7% decline! I’m not thinking that GDP will go to a positive print… But if it knocks out half of that decline, that would show that things are improving… And if things are improving in Germany, the rest of the Eurozone will grad on to the coat tails!

The U.S. Fed meets this week, in an otherwise quiet week data, and talks, and we’ll have to see what’s up Big Ben’s sleeve now… I would suspect that this week will be a non-event… But in August, the Fed will most likely be setting off some late fireworks, with an increase in their bond buying program… Quantitative Easing… UGH! And that thought leads me talk about the amount of supply hitting the markets in the near future… But I wont’ bore you with my description of the supply… Here are my friends, Addison Wiggin and Ian Mathias…

My friends, Ian Mathias and Addison Wiggin over at the 5-Minute Forecast, never cease to amaze me the way they describe things! Here’s a piece of their letter from Friday, June 19th…

“The U.S. government announced yesterday it will auction a record $104 billion in debt next week. Despite obvious warning signs that the world has had its fill of American paper, the Treasury will forge ahead: $40 billion in 2-years Tuesday, $37 billion in 5-year notes Wednesday and $27 billion in 7-year garbage on Thursday.

They must “get it.” Last week’s sharp rise in 10-year yields was as sure a sign as any that investors everywhere are getting cold feet. A prudent government would take a break… let things cool off. But there’s no rest for Uncle Sam, or his Treasury. They’ve got the mother of all Ponzi schemes to run:”

I’ll get to meet up with Ian and Addison next month in Vancouver… I’m looking forward to that!

So… Like I said, the data is pretty weak this week… So, we’ll be scratching and clawing for the markets to throw us bone.

Down Under… The Aussie dollar (A$) has taken on some water overnight after a story printed and quoted the Morning Herald’s economic editor… The quote went something like this… “the market was wrong in discounting little to no chance of another RBA cut this year, and a high chance of a hike in the first few months of next year” …

You might recall last week I told you that the market in Australia had basically decided that the Reserve Bank of Australia (RBA) had come to an end of their rate cut cycle… I then threw in my own 2-cents and said that the first rate hike would come in the 1st QTR next year… Well, the Economics Editor at the Morning Herald doesn’t agree… And the A$ has sold off big time since the paper hit the news stands! Come on! That’s just one person’s opinion, isn’t it? Last week, the market players were all about the end of rate cuts… And they are now going to be swayed by one opinion? Where’s the intestinal fortitude?

And then there was this… Not happy with having their heavy hand in just about everything these days… The Fed is reviewing the Repo market… Apparently, the poor old Repo market is getting blamed for exacerbating the financial turmoil that followed the collapse of Lehman Brothers last fall. For those of you not familiar with this market… It’s a utility for overnight funding… (some go longer than overnight, but the overnight repo and rev repo market is what is being reviewed) So… Look for more Gov’t. reforms in a market that has existed for many years just fine and dandy…

I’m going to stop there this morning, as I forgot to print a “Corporate feel good story” on Friday, I will do so today… So, look for that after the “that’s it for today” segment…

But… First, speaking of feel good stories… I saw this flash across the screens this morning… New York Times reporter David Rohde, who disappeared in Afghanistan in November 2008, has escaped from his Taliban kidnappers and is under U.S. military protection…. Cool, eh?

Currencies today 6/22/09: A$ .7960, kiwi .6350, C$ .8745, euro 1.3845, sterling 1.6440, Swiss .9190, rand 8.1575, krone 6.4950, SEK 8.00, forint 201.65, zloty 3.2575, koruna 18.80, yen 96, sing 1.4580, HKD 7.7503, INR 48.59, China 6.8355, pesos 13.42, BRL 1.9750, dollar index 80.75, Oil $68.30 (this has really backed off the past couple of days!), 10-year 3.73, Silver $13.88, and Gold… $925.35

That’s it for today… My little buddy, Alex, and I were on our own for part of the weekend, and we did just fine! Last week, I bought a used Bass Guitar, and now I can add some bass to Alex’s guitar playing… It’s fun! The two of us, “jamming” in the basement! All we need is drummer, so people can feel a beat, yeah….. HA! It’s alive! It’s alive! My beloved Cardinals actually had their offense come alive this past week… A nice weekend sweep of the cross state Royals, was sweet! I just heard on the radio that the “heat index” could hit 110 today here in St. Louis! My mind immediately flashes back to when I was a kid, and we didn’t have air conditioning! Then we got one that cooled one room… I had 6 siblings so the 9 of us would all sleep in that one room! We were NOT allowed to go in that room during the day! And look! We survived! HA! OK, thanks for going with me on the trip down memory lane… Time to go to the Corporate Feel Good Story… I hope you have a Marvelous Monday!

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I have my own business, working out of my home, representing a small agency called Markle & Associates here in the Pacific Northwest. We represent six wool carpeting mills and a bamboo and hardwood importer. And because our products are “green”, environmentally friendly, we do have an edge over the synthetic products and anything tied to petroleum. But nevertheless, we have still been affected by the economic downturn. What I’ve found to keep the business coming is a simple tool we all know about: networking. Years ago I heard a statement about the success of networking that said it was the single most powerful way to increase business. Faster results than advertising, and cheaper than any other marketing attempt.

So, I’ve made that my thrust over the years and make sure I stay involved in my industry organizations, participate in meetings on the chapter and national levels and volunteer for positions to help these organizations grow. In my industry, it meant remaining connected over the years with design organizations like NKBA (National Kitchen & Bath Association), NWSID, (Northwest Society of Interior Designers), American Society of Interior Designers (ASID) and International Interior Design Association (IIDA). The reason networking works is because people buy from people, rather than simply from businesses. Learning that key has helped my business to keep going in diverse economic climates, including this one.
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Source: Currencies and Commodities Sell Off

Good day… And a Tub Thumpin’ Thursday to you! It was 95 here yesterday, and forecast to be even warmer, or should I say hotter, today! WOW! Like overnight, it turned to summer, after the coldest, most wet, spring I can ever recall… I know, I’ll get 100 emails reminding me that summer doesn’t officially start until next week… I’m just talking about the summer-like weather!

The currencies remained in that range I talked about yesterday, with a slight bias to sell dollars, but not much of one. Crude Oil prices moved higher on the day and overnight, which doesn’t play well with a dollar rally, and therefore, has pushed the dollar down a bit… But again, we’re talking minor moves. It’s as if someone (traders) are waiting for something BIG to happen with data, the Fed, the Treasury, before taking one direction.

Did you hear about the Gold vending machine in Germany? I saw this yesterday morning, and thought it to be a hoax… Then someone in the office brought me a print out of a story in the U.K. Telegraph… OK, so maybe it’s not a hoax… Any way… Here’s the skinny… In Germany, they’ve come up with a vending machine that can update prices of Gold every few minutes, and… Dispense 1 gram Gold wafers, 10 gram Gold bars, or coins… There’s about a 30% increase in the market price! WOW! Imagine that, you need some Gold in your pocket just for GP, and you simply walk up to a vending machine and buy some, as simple as getting that Zero bar, or Snickers!

OK… What gives a guy this kind of idea to make a vending machine that disperses Gold? It’s all about taking advantage of the times, folks… I may have told you this in the Pfennig before, I don’t recall, but I use it in my presentation for Gold… Investment in Gold increased 427% last year… To put it into Tonnes of Gold, retail investment purchases of Gold reached approximately 108 Tonnes of Gold in 2008, up from 36 Tonnes in 2007, and 28 Tonnes in 2006!

I was talking with the Big Boss, Frank Trotter, who, by the way scored a goal from about 30 yards out in his soccer match the other day… Ty Keough, our one-time national team player, and long time pro, was quite impressed, and that says a lot, because Ty has seen some soccer in his years… You may know Ty or heard of him… But do you know his dad? His dad is a soccer legend, playing on the U.S. national team that beat Great Briton in the World Cup in the 50’s, and then went on to be the winningest college coach, with multiple national championships at St. Louis University…

Oh, I digress, there, I’m so sorry… But once I got talking about soccer, of which I played a ton of in my youth, I just started typing… UGH! Any way, I was talking to the Big Boss, Frank Trotter, the other day, and Frank mentioned that he was concerned that Gold could be the next bubble… I assured him that I didn’t see it that way, not until my neighbors are asking if they can buy Gold at $1,200 oz! (I tried to get them to buy it at $800 oz, to no avail!)

Remember when we were kids? No wait, we wouldn’t all have been kids at the same time you dufus Chuck! OK, when I was a kid… We used to have these bomb shelters in our schools, and we would practice going into them… It was a different time, the cold war was strong, and the fear was put in all of us toward Russia… I had a teacher, many moons ago, that told the class that it was a good thing that Russia and China didn’t see eye-to-eye… Well… I wonder what he thinks about the news that China and Russia have agreed to use each other’s currencies and eliminate the use of dollars in their trade?

It kind of feels like Russia and China are ganging up on the dollar!

The other “new kid on the block” Brazil, is joining in with Russia and China… But that news didn’t help the Brazilian real yesterday, as it saw one of its worst days in weeks! But that’s the real… I watch it trade some days, and your eyes grow very wide open in amazement of the wild swings in this currency. It will move 2-3% in a day, either way, in a heartbeat! Which tells you that the “number of players” in real, is smallish when compared to the second most liquid currency in the world… The euro! So… If you’re going to own reals, you need to be aware that it has these wild swings!

Speaking of the euro… It’s getting a boost this morning from an improved outlook for risk today, as U.S. stock futures are stronger. The “Big Dog” looks a little tired of chasing the dollar, and then being pulled back on to the porch over and over again recently… But, as always, always I tell you tutor turtle, be yourself… No wait! I always tell you that all this is “noise”… Investment portfolio diversification into currencies and precious metals is a long-term relationship… The dollar didn’t lose over 90% of its value overnight! The euro didn’t gain over 50% VS the dollar overnight! These things are long sweeping moves, and you have to drown out the “noise”… Otherwise, you’ll become a currency and metals “trader”, and chasing these assets all over the board!

Pound sterling is getting hit on the chin this morning, as retail sales fell in May, which was the first drop in 3 months… Retail Sales fell .6% in May, and pretty much squashes those so-called “green shoots” that have been talked about for the U.K. economy… I think you can expect to see stuff like this for the next year… Up and down, in and out, green and brown shoots… And… Like I’ve said before, if it’s happening in the U.K. it won’t be long before we experience the same, as the U.K. just seems to be ahead of the U.S., time-wise…

The Swiss franc is stronger this morning than recent trading sessions as the Swiss National Bank (SNB) met, left rates unchanged, and made a statement that has given a green light to franc traders to buy… The SNB announced that they were not targeting a specific exchange rate for the currency. You may recall that the SNB had previously stated that they were not happy with franc strength, and had intervened on occasion to keep the currency from strengthening… I would be careful here, as this could be a “trap” Oh, you don’t think Central Banks set traps for traders? OK, well, maybe they don’t really set a “trap”, but they do send mixed messages that cause losses!

Big Al Greenspan was famous for these “mixed messages” that were called “Greenspeak”… After reading two books on Big Al, I can tell you that I personally think that “Greenspeak” was gobble-de-gook! Confuse everyone so they think you are some sort of messiah! Right Big Al? When… In reality, he was just “a guy”, who really screwed things up!

Today, we will see the Weekly Initial Jobless Claims, which for me has turned into watching the “Continuing Claims”… This part of the data tells me if unemployed people are being re-hired… I haven’t see that happening, as Continuing Claims have continued to grow larger in numbers… We’ll also see the Philly Fed Index, (manufacturing)…

The real meat (where’s the beef?) will come from a testimony before the Senate Banking Committee by U.S. Treasury Sec. Geithner, on the President’s plan to overhaul the U.S. Financial regulatory system… I doubt these Senators will understand what Geithner is talking about, and will “rubber stamp” the plan… Which means, folks… That the Gov’t gets its foot in the door further…

I know, I know, I get quite a few emails from people that take exception to me getting upset with the Gov’t getting more involved in the markets, etc. as they say, “Yeah, Chuck, and you think the “markets” have done a better job?” Well… The markets are the markets, folks… If left alone, they will act as markets should… What? You didn’t like the fact that the Mr. Market, as my friend, Bill Bonner, calls it, turned the whole credit, and deficit spending on its ear? Mr. Market was just trying to correct what was wrong… Getting the Gov’t involved is just plain, wrong! One foot in the door… Then next it’s the next thing, and the next, and pretty soon, the Gov’t is completely in the door, and hanging out on your couch!

Please… These are just my opinions… If you don’t like them, you have that right! It is still a free country for speech! Just delete it and go on with your life! OR… You didn’t pay anything for all this, that I’ve been giving to people since 1992…

In Norway yesterday, the Norwegian Central Bank, The Norges Bank, surprised me and the markets by cutting rates 1/4% of 25 BPS… I did say the other day that the Norges Bank was the only Central Bank that was meeting this week, that had some room to cut rates… The Norges Bank did say in their press conference after the rate announcement that rates were at the “bottom” and that they were looking toward the first quarter 2010 as the timing on the first rate hike!

Well, with traders so forward looking, this was good news for the krone, as the rate cuts was quickly put in the rear view mirror, and now everyone is looking forward to higher rates!

And under the heading of “dirty float”… The Reserve Bank of Australia (RBA) is reported to have sold the most A$’s in the month of May, since February 2004! Now, go back to May and recall the move in A$’s… The currency gained almost 10% in the month… So, the A$ would have gained even more if the RBA had not sold A$1.4 Billion A$’s in the month! I personally think the RBA was just trying to smooth out the trading the A$, which given this information would have been moving up the charts with a bullet in May!

I don’t think the RBA would get involved if the move was a slow, general appreciation of the currency… So, I don’t look for future intervention to keep the A$ from gaining the ground I believe it will gain rest of this year, as inflation fears grow stronger and stronger…

And on that positive note… I think I’ll head to the Big Finish!

Currencies today 6/18/09: A$ .7945, kiwi .6355, C$ .8835, euro 1.3935, sterling 1.6260, Swiss .9280, rand 8.1380, krone 6.37, SEK 7.8725, forint 204, zloty 3.26, koruna 19.16, yen 95.80, sing 1.4570, HKD 7.7503, INR 48.25, China 6.8350, pesos 13.46, BRL 1.97, dollar index 80.42, Oil $71.30, 10-year 3.69, Silver $14.25, and Gold… $938.20

That’s it for today… That’s a pretty interesting story about the Gold vending machine, eh? Here in the office we have one of those “honor snack trays”, where people pay for what they take… Can you imagine one of those that had Gold coins in it? HAHAHAHAHA! Another good win for the Cardinals VS the Tigers last night… Of course I can only watch 5 innings or so, before it’s bed time. I get up the next morning, and watch the highlights! This weekend is Father’s Day… Don’t forget your dad! More on that tomorrow… I just love this time of year when the daylight lasts until 9 pm… The daylight lifts spirits, I believe, and now spirits get lifted longer each day! HA! OK… How about making this a Tub Thumpin’ Thursday, eh?

Source: Gold Vending Machines!

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

This will be the end of another of the things that’s keeping the fundamentals in the back of the classroom. All we’ll have left is the credit squeeze… Unfortunately though I feel like we’re going to have to live with that one for some time to come! There are signs that things are loosening up, but it’s a far cry from what should be considered as “normal” in the lending arena! As long as the credit squeeze remains in place and on the minds of traders & investors everywhere, we’re stuck with the Trading Theme of 2008… Well, let’s see, it didn’t come into play until late July, so it should be called the Trading Theme of late 2008 and 2009.

That’s right folks… When I first saw this all unfolding in July and August, I told you in this letter that this dollar strength could very well last through the elections and through to year-end… That was before the rot on the vine was exposed in September and October… Now, I fear that this will be the Trading Theme for most of 2009 too… As the Credit squeeze continues to hang over the markets like the Sword of Damocles. And… Someone told me that in 6 out of the last 7 elections, regardless of whether the Democrats or Republicans won, the dollar rallied in the 6 months following the election. So…. That takes us into 2009, with the Trading Theme and credit market squeeze… It all adds up…

And as long as I’m going down this road of bad news… I have come to a conclusion that the deflation wolf has won… For months I wrote about how inflation was winning but the deflation wolf was always at the door… Well… After viewing the landscape of falling stock prices, falling commodity prices, and falling home prices, I have to think that inflation is no longer the king of the hill… Deflation is all around us folks… The only things you don’t see falling are Consumer prices and bond prices… But those bond prices are sure to fall given the glut of Treasury issuance coming down the pipeline… And Consumer prices? Well, if Consumer Spending keeps falling off the cliff, then you can expect Consumer Prices to fall too…

But inflation isn’t going away… And in my opinion, it will hide out on the other side of this deflationary period… And at first it will look much like 1976 all over… 1976 was a great year, right Christine? But it wasn’t a great year for stagflation…

So… What does this mean for the currencies and precious metals? I don’t think it spells a Happy Days while the deflation is going on… But… On the other side of the deflation, it could very well spell rallies in currencies and metals that will be huge! You see, the Trading Theme remains in place for most of 2009, as we work through the deflation… And then as the Trading Theme is removed slowly, inch by inch, step by step, there will be an unwinding of “Safe Haven” trades (read U.S. Treasuries) and the race to the bottom for the dollar will be on…

That’s how I see it from my seat here on the Trading Desk in St. Louis Mo. Home of the 10-time World Champion St. Louis Cardinals! It’s not a pretty picture, near term, that I’m painting this morning, but even an artist paints some ugly pictures now and then… I know of one, no never mind, no need to go into that.

OK… You’ve been very patient, waiting for the update in currencies… So, here we go!

The currencies played the Trading Theme to a “T” once again yesterday… When I left you yesterday morning, the euro was trading 1.2845… But then, more deep, dark, dangerous data printed for the U.S. and the dollar slapped down the single unit and every other currency that got in its path. The data came in the form of the latest reading of Manufacturing in the U.S. The ISM Index fell from 43.5 to 38.9, a low since September 1982! OMG! For the new kids to class, the ISM Index draws a line in the sand at a 50 level… Any number above 50 equals expansion… Any number below 50 equals contraction… We haven’t seen manufacturing contract at this level since September 1982… And the NBER still hasn’t put the “recession sign” on the economy’s door? Geez Louise, what do these guys need to prove to them that we’re so deep in recession right now?

So… With that bad data in the books… The dollar rallied and pushed the single unit to below 1.27 for most of the day… We’re seeing some recovery this morning, and the euro has popped back up above 1.27… This morning, they are reporting from Europe that borrowing costs (LIBOR) have fallen a bit, thus loosening the purse strings… Recall, this was another of the things knocking the stuffing out of the euro and other currencies, as Financial Institutions in Europe stopped borrowing in LIBOR because the rate had gotten totally out of control on the high side. Instead, the Financial Institutions used the currency swaps market, selling their reserve currency (read euro) to raise the capital needed as reserves against the toxic waste they had on their books…

It was my assumption when hearing about this change to currency swaps to generate cash, that this would come crumbling down once LIBOR got back to what would be considered a “fair rate” for borrowing, and the swaps would get unwound, meaning the currency sold in the swap would be re-purchased. It will be interesting to see if this plays out, even with the Trading Theme in place.

The Reserve Bank of Australia (RBA) cut interest rates last night by a larger margin than I expected… I had thought the RBA would cut 50 BPS… Instead, the RBA followed up last month’s 100 BPS cut, with a 75 BPS cut! WOW! They aren’t messing around, eh? Before you skip down to the Currency roundup to see what the A$ is doing after a 75-BPS rate cut, no need… The A$ has rallied since the rate cut news! Talk about perverse! Currencies these days are just strange… Well, I guess it’s not the “currency” but the Currency Trader! But, who am I to look a gift horse in the mouth? The A$ is rallied…

The Canadian dollar / loonie rallied last night too… Hmmm… I’m sitting here thinking about these rallies and started humming the great song by the Who… Won’t Get Fooled Again! For I know that the Trading Theme is in play… Yes, it’s the Same Old Song… Ahhh the Four Tops too!

So, one down, two more to go… That is Central Bank rate cuts this week… Still to come… The Bank of England (BOE) and the European Central Bank (ECB)… The performance of the A$ after the rate cut is promising for these two currencies; pound sterling and euros respectively… But remember the Who!

Recall last week, when I was talking about having the fear that the Bank of Japan’s (BOJ) Ministry of Finance would intervene to stem the yen’s rise… Well, unless they’re lying… And we have no reason to believe they are… The BOJ announced last night that there was no currency intervention last week… Hmmm… Just wondering why then, did yen fall from 92 to 99? I doubt the rate cut on Friday had anything to do with it… Must have been all the jawboning…

Well, that, and… The fact that as things in the credit markets loosen up a bit, those cocky Carry Traders get back on their feet… And we all know that Carry Trades to yen are like kryptonite to Superman!

The data cupboard is pretty bare today, with only September Factory Orders on the docket, which are expected to drop -.8%… And Fed Head Fisher, will be speaking in Texas on economic challenges in Texas… Fed Head Fisher is always good for a quote… But this is election day, and most likely he will be a forgotten man today.

I’ll finish up today and head to the Big Finish right after I tell you about this little ditty that the Wall Street Journal reported this morning… “The Treasury Department is considering using more of its $700 billion rescue fund to buy stakes in a broad range of financial companies, not just banks and insurers. In focus are companies that provide financing to the broad economy, including bond insurers and specialty finance firms such as General Electric’s GE Capital unit, CIT Group and others.”

Hmmm… Is it not bad enough that now these finance companies are going to get bail out money too? But… What’s with the “others”? I sure hope they mean “other” finance companies, and not just “others” that need a bail out… Like, say, Joe’s Bar and Grill! YIKES! The Treasury Dept is out of control folks, and there’s no reining them in now… We’ve given them too much rope! UGH!

Currencies today 11/4/08: A$ .6875, kiwi .60, C$ .8525, euro 1.2785, sterling 1.5865, Swiss .8565, ISK (no live quote), rand 9.8910, krone 6.6950, SEK 7.73, forint 202.90, zloty 2.77, koruna 18.915, yen 99.50, baht 34.90, sing 1.4740, HKD 7.75, INR 47.72, China 6.8360, pesos 12.70, BRL 2.1410, dollar index 85.77, Oil $63.85, Silver $10, and Gold… $737.40

Source: Election Day!

Investors will be utterly confused today about what to fear most. First, you had the nightmare open in New York on Friday. The futures markets were limit down and closed briefly. By the time order was restored to electronic markets, the Dow opened down 6%.

The Dow rallied-if you can call it that-to close down “just” 3.6% on the day. A that point, you could safely say the market was ‘pricing in’ the fear of a global recession, and just what that would mean for corporate earnings. Not even an oil price of US$65-meaning lower prices at the pump-could cheer investors.

And then, this weekend, European and Asian leaders met and, “pledged to undertake effective and comprehensive reform of the international monetary and financial systems,” according to Bloomberg. China’s Premier summed up the argument for the 40 heads of state present by saying, “we need even more financial regulation to ensure financial safety.”

And thus a great debate unfolds in the weeks ahead of the November 15th G20 summit in Washington. Was the crisis a result of unregulated “cowboy capitalism”? Or did it have its roots in phony, government-regulated interest rates, which skewed corporate and personal incentives in favour of debt-based speculation? More that in a moment.

Did you see news reports that the RBA intervened in the currency markets? The Bank is trying to prevent the Aussie dollar from going “splat!” Truly, there are few currencies in the world that have fallen so much, so quickly. But why?

Chatting with Swarm Trader Gabriel Andre this morning, he said the seven-year up-trend in the Aussie-Yen currency pair has been completely reversed in the last three months. Kris Sayce will be running Gabriel’s comments in today’s Money Morning. What does it mean?

The currency pair is as good a symbol as any for what fuelled the global rise in speculation. You could borrow virtually for free in yen and invest in high-yielding currencies and assets. Those assets included Aussie stocks and the Aussie currency itself. The collapse of the yen and dollar carry trades is what’s behind the plummeting Aussie dollar.

Meanwhile, the government still hasn’t fixed the problem that’s mushrooming in the cash and mortgage fund market. Over $11 billion is still frozen in those accounts as the firms that run them try to work out a deal with the government. But what deal could there really be?

Investments in mortgage funds are not deposits in banks. By guaranteeing bank deposits, the government drew attention to the fact that investments always have risks, and that some risks cannot be insured against. You either take them and accept the risk (in exchange for the return), or you keep your cash in a safer, but lower-yielding security (or in cash, subject to inflation).

It would be nice if you could get a guarantee in life that you’d never lose money no matter what kind of decision you made. But no such guarantee exists. It just happens that we live in an age where no one expects to lose at anything, ever. This goes for kid’s soccer games as well as financial markets. But if there aren’t real winners and losers, you don’t have a real market.

Congratulations to our friends at www.businessspectator.com.au. The financial news and analysis site is turning one year old this week. It’s a precocious one-year old, though. And there is a lot of collected wisdom there.

For instance, Robert Gottliebsen recently made this chilling observation about the hedge fund meltdown, “The mortgage fund freeze has escalated the number of superannuation investors who are demanding to exit the managed fund equity system. At the moment it is containable but if the move to quit shares balloons we will see big forced selling of Australian stocks.”

Hopefully the mortgage freeze will end soon. Perpetual says this morning that it would like to end its freeze on redemptions as soon as possible. Exactly when that is is anybody’s guess.

As if the credit crunch and a global recession weren’t bad enough, investor now have to deal with calls by the Europeans and Asians for Bretton Woods two. Everyone wants a new global financial system. But it’s not like buying a new shower head or toilet seat, is it? You can’t just run down to the shops and get one, along with some beef jerky.

It’s obvious the current system is breaking down. Globalisation-made possible by cheap money and cheap energy-is contracting. You know for certain that governments, being blame artists, will blame markets. But it’s not the market’s fault. As with every bubble, from Tulips to the South Seas to the Mississippi Scheme, it’s people who pervert markets.

Sure, CEOs and corporations turned normal businesses into vehicles for private speculation. But that is a failure of management, not the market. More oversight by corporate boards and shareholders might have made for better discipline in risk taking. But discipline is exactly what people lose in a bubble.

The credit bubble was remarkable because it leveraged the interconnectedness of global markets, allowing investors to borrow in weak currencies and invest in high-risk, high-yield assets. It wasn’t a regional or even national bubble. It was the whole planet.

But in its other essential features, it is indistinguishable from previous bubbles, manias, panics, and crashes. One of those features in fact, is how governments and bad regulations actually enlarge, prolong, and generally abet the bubble. And in this one, because everyone had a stake in its expansion, everyone has tried to keep it going. The best example of this is the determined allegiance to the dollar-pegged world financial system.

The price of money is fixed by central banks via interest rates. For years, everyone followed the Fed’s lead in the U.S. and set the price of money below rate of consumer price inflation. Australian mined. China produced. Europe traded. OPEC pumped. The U.S. spent.

Global bubbles in all asset classes ensued. That is a failure of the highest order by the regulators of global interest rates. Now politicians see massive wealth destruction and blame free markets for screwing things up when it was the non-market price of money that touched off the crisis to begin with.

In any event, we’re going to get some sort of hogwash in the next month from the confab in DC. There will be more supervision of banks. It will probably lead to less bank lending and tighter credit. Hedge funds will be regulated. Many investors will anticipate this by taking their money out ahead of time. Redemptions will force more asset sales. Stocks will fall.

The International Monetary Fund will probably enjoy some enhanced status. The IMF is already bailing out a bankrupt Iceland. It will loan US$16.5 billion to Ukraine. Before it’s all over, we reckon Japan and China might even consent to loaning some of their huge dollar reserves to the IMF in exchange…for something.

We’re not sure what it would be yet. The IMF may become a super-bank with access to funding from central banks, a kind of supra-sovereign wealth fund in the service of a world government and regulation. That sounds…not encouraging.

Also, keep in mind that the entire strain of the crisis in the U.S. was generated by a politically desirable outcome in residential housing. The original mis-allocation of investment dollars came about because politicians insisted that banks make loans to people who couldn’t repay them. Market discipline was actively subverted by political opportunism.

The U.S. set up Fannie Mae (FNM) and Freddie Mac (FRE) with preferential borrowing terms so those two could buy up mortgages originated by the banks. The banks could sell the mortgages quickly, which put them in the position to fund even more mortgages and expand “home ownership” in America.

We all know how that’s working out. Median U.S. house prices continue to fall. The loans made to finance those homes are going bad. The securities made up of bundles of those mortgages are rotting, taking bank capital with them. And insurance sold against default in them is putting the sellers of that insurance into great difficulty.

Europe, for its part, has a brewing problem in emerging market debt. Austrian banks are exposed to sovereign emerging market debt to the tune of 85% of GDP. Swiss banks have emerging market debt equivalent to 50% of GDP. It’s 25% in Sweden, 25% in the U.K., and 23% in Spain. If more emerging markets go the way of Iceland and default on debt or go bankrupt, Europe’s banking system faces major trouble. Just what we needed. More trouble.

Dan Denning
for The Daily Reckoning Australia

Source: Europe Faces Day of Reckoning in Emerging Market Debt

Take oil. As Gabriel and Al mentioned in Money Morning earlier this week, the correction is on. Oil was down another two dollars in U.S. trading around US$122. And it wasn’t even the thundering of George Soros in front of Congress that scared speculators out of their positions, either.

High prices, as the saying goes, are the cure for high prices. “Cure” may not be the best word, though, especially if you’re an airline company or a car maker. Here in the States, United Airlines announced it would cut its domestic service Ted (the equivalent of Jetstar), cut 1,100 jobs, and retire about 70 planes, including the lumbering, old, creaky 747s that fly the Sydney to LA and Sydney to San Francisco route.

Why the drastic measures? Jet fuel prices are up 89% in the last year. High prices. The auto industry is finally reacting to high prices as well. General Motors announced it would close four truck and SUV plants in the U.S. and shed 10,000 jobs. GM’s capacity to build gas-guzzling trucks will decline by 35%.

It’s been a long time coming. And while GM makes fewer bigger cars, the company plans to make a new smaller, more fuel-efficient car. It also plans to get into the plug in hybrid market with the Chevy Volt.

Jets and cars and oil prices. Demand is finally destroyed by high prices. Of course the demand destruction in the transportation and travel market means a contraction of an economic activity. It also means, as GM’s CEO Rick Wagoner suggested, a permanent shift to a world where cheap energy is no longer the assumption. Maybe we’re moving toward a different living arrangement after all. Hmmn.

Much too late in the game, Fed chairmen Ben Bernanke is talking up the dollar, as if kind words were any replacement for a real yield. Bernanke is trying to talk people out of being worried about the very inflation his monetary policy has caused worldwide. He told listeners to a commencement speech at Harvard that heightened inflation expectations by the public are a “significant concern.”

But don’t worry, he continued. This ain’t nothing like the 70s. It’s all good. Nothing to see here. Move along. Go away. Shut up. Goodbye.

“We see little indication today of the beginnings of a 1970s-style wage- price spiral,” is what Bernanke actually said. “The overall inflation rate has averaged about 3.5 percent over the past four quarters, significantly higher than we would like but much less than the double-digit rates that inflation reached in the mid-1970s.”

Well it all depends on how you measure inflation, doesn’t it? The Fed probably under reports actual inflation. But it’s also probably true that inflation hasn’t yet reached the wild levels of the 70s. For that to happen, expectations have to begin driving consumer behaviour (trading cash for tangible goods while the cash retains purchasing power) and monetary policy must become even looser to respond to tight credit markets or over-indebted consumers.

Do you really think the Fed will be raising rates this year? Not likely, with credit markets still tied up in knots and house prices in the U.S. still falling. This is one reason why we think the Aussie dollar is still a good bit to hit parity this year with the greenback.

Speaking of Australian interest rates, just when you thought it was safe to begin thinking of lower rates, more mixed signals for the RBA. The Australian Bureau of Statistics reported yesterday that Aussie GDP grew at 0.6% in the first quarter. That comes out to an annual rate of 3.6%.

That growth rate is 0.6% higher than what economists surveyed by Bloomberg expected, although it’s lower than last year’s rate of 3.9%. This is exactly the kind of economic growth that’s led the RBA to the conclusion that inflation will grow at 4.25% until some time in 2010.

Not so, says the OECD! The OECD assures us that inflation will slow to 3% by the end of next year, a full year earlier than Australia’s own central bank expects. Why? Because, “economic activity is likely to slow to below 3% in 2008 and 2009 because of tighter financial conditions and the worsening external environment. This should ease pressures on the labour market and bring inflation down to under 3% by the end of 2009.”

Well there you go. Despite all evidence to the contrary, the OECD says it will be so.

We know the DR has been a little thin on analysis of the Aussie market and the economy this week. We promise to resume our full coverage upon our return next week. Until tomorrow…

Dan Denning
The Daily Reckoning Australia

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Source: Inflation Hasn’t Yet Reached the Wild Levels of the 70’s