When I signed off on Friday morning, the currencies were enjoying a very nice rally, which remained in place the rest of the day. The Consumer Income and Spending data was very much as I describe it would be, and so there was no surprise for the markets to deal with. You may recall, that I told you that Spending would be greater than Income, as the “Cars for Clunkers” probably had something to do with the Spending be so much stronger than the Income piece…

The currencies ran into a speed bump in the overnight markets though… When I checked the Japanese market last night, stocks were rallying on the news of the election results. The ruling party was voted out, and a pro-consumer driven growth party was put in… But, I guess what turned this around overnight was the fact that while the opposition party in Japan ran on a platform that promised change, when the dust settled, there are many questions… And when there are questions about leadership, risk assets don’t fare too well… And thus, the reversal of the currency rally.

So, as we all know, the trading pattern of the last 9 months… When risk assets don’t fare well, the dollar and Japanese yen do… And vice-versa. Yes, even though Japanese stocks sold off overnight, the yen was in play. It’s just some strange phenomenon that has a grip over the markets for 9 months…

It will be interesting to see if the opposition party in Japan will actually change the way the Gov’t does business… And if it does, what kind of “change” will take place. One would hope for the Japanese economy that it lifts the economy from the doldrums that have hung over the Japanese like the Sword of Damocles for a very long time now… That’s right! We’re not talking 2-3 years, not 5-6 years, not even 9-10 years… Japan’s problems go back to the early 90’s… YIKES!

Every time, the economy would attempt to pull itself up by the bootstraps the Japanese Gov’t would introduce some sort of stimulus, and burden its Gov’t with more debt… I know it sounds familiar… And I long ago told you all that the U.S. was following Japan’s steps, but hoped that the U.S. would not take 15 years or more to reverse their steps… Unfortunately, those hopes and dreams are taking a beating!

Which is why I questioned the reappointment of Big Ben Bernanke last week. The leader of the Fed Heads, has really, in my opinion, stepped in the doggie dookie and followed the Japanese even though he said he wouldn’t! My friend Bill Bonner had an interesting thought about Bernanke’s reappointment… “Obama picked him to continue as head of America’s central bank, the Federal Reserve…even though his predecessor, a Republican, appointed him.”

I know, I know, the media is making Big Ben out to be the “savior of the world” right now… I suggest we all wait-n-see if all that he’s done really does “save the world” or if it just masks the problems, and they come back even worse in the near future… If I were a betting man, I would put money on the latter of those things.

I noticed a story on the Bloomie this morning that says “The Federal Reserve will be unable to prevent the Trillions of dollars in Government stimulus pumped in the U.S. economy from stoking inflation later this decade, according to a survey of business economists.”

They didn’t ask me… But I would have been all about that idea!

In fact, I think the cartel, I mean the Fed Reserve will have to accept the fact that inflation is growing at first, because they 1. won’t recognize its beginnings, and 2. won’t have the guts to raise interest rates, and remove quantitative easing at the first signs of inflation, because the economy’s recovery will be nascent at best. So, a higher level of inflation will have to be accepted by the Fed… And unfortunately, you and me!

OK… Let’s stop talking about the Fed, they make my stomach turn any way!

When I got home last night, I was reading a story that really got me thinking… The story was about how China has gone from Exporter to Importer. The story explains that the stimulus that the Chinese Gov’t put into the economy this year, has really spurred consumer demand, and exports from South Korea jumped 26.6%, Taiwan 41%, Japan 30.2%, and the European Union 23.5%…

The idea here was that the Chinese Gov’t wanted to reduce their dependence on the U.S. consumer… You see, from my vantage point, the Chinese Gov’t has done their part in curbing the global imbalances that used to exist, and I used to rant about almost every day! Now the trick is to see if the domestic demand can really take off from here now that the stimulus has, well, stimulated the economy! And did you see where China announced that they are going to begin to build light trucks? Putting people to work making things… Wow! What a concept! It’s what made the U.S. economy powerhouse that it once was…

The South China Morning Post had a very interesting story in it this morning regarding the Chinese renminbi becoming an international currency. Let’s go to the tape! “Vice-Premier Wang Qishan has been put in charge of a task force to make the renminbi (yuan) a currency for international trade. The recession has encouraged Chinese officials to speed up the currency programme. As the downturn erodes U.S. influence, China is losing faith in the dollar and sees the time coming for the renminbi to become a major world currency.

The renminbi is not convertible for purely financial purposes, ruling it out as a reserve currency for now, but China has started to carve out a bigger international role for it, beginning with the currency swap agreements China has put in place.”

SEE! I TOLD YOU! I TOLD YOU that was what China was doing when it signed those currency swap agreements with 6 different countries, and is currently working on ones with Brazil and Thailand! China was gaining a wider acceptance for their currency… Slowly but surely (who’s Shirley?) China was begin to provide convertibility to the renminbi, and then and only then will it be picked up by currency dealers all around the world! It’s all happening right before our eyes folks… Don’t close your eyes, this won’t go away by closing your eyes!

Staying in Asia… The Indian GDP surprised on the upside when it printed last night… A 2nd QTR 6.1% rise in economic growth VS last year, is a very good performance for India. The rupee has been hanging around a corner for the past couple of months, so maybe this kind of news will attract foreign investment once again, and drive that currency higher VS the dollar…

You know… The data that printed in the U.S. last week, wasn’t half bad! In fact, as long as you don’t want to turn it over to expose the rot on the underside, you might begin to feel as though the economy is recovering… Unfortunately, there is that rot on the underside to deal with… Therefore, I’m pinning my colors to the mast of a “W” shaped economic future… I know Chris talked about this while I was in San Francisco, and gave all his reasons for his thoughts… So I won’t go over them again… But just to say that the rot on the underside of the economy is what leads me to think this…

The data cupboards all over the globe will get a workout this week… There are 2nd QTR GDP’s to print, Manufacturing Indexes to print, Jobs Jamborees, and Central Bank meetings… So, the currencies won’t have to take their only direction from stocks! The currencies will bet taken in so many directions this week, which is why I’m saying right here, right now, that this will be a very volatile week… This Friday will be interesting in that, a lot of the “big boys” on currency trading desks will be gone to add a day to the Labor Day Holiday weekend, and volume will be thin, but Friday is also a Jobs Jamboree Friday…

The sell off that I saw going on in the currencies when I first began writing this morning, has picked up steam… But still, not a strong sell off just yet…

And on that note, I’ll head to the Big Finish! But for one more thought… The U.S. 10-year Treasury Note yield has fallen in the past week, which means there had to be some buying of the note to drive up the price (remember, with bonds, when the price goes up, the yield goes down, and vice-versa). You don’t think it could be more Fed buying do you? I have my suspicions for sure!

Currencies today 8/31/09: A$ .8380, kiwi .6815, C$ .9060, euro 1.4280, sterling 1.62, Swiss .9415, rand 7.7875, krone 6.0250, SEK 7.1550, forint 190.30, zloty 2.8750, koruna 17.77, RUB 31.8350, yen 93.25, sing 1.4435, HKD 7.7505, INR 48.82, China 6.8305, pesos 13.29, BRL 1.8810, dollar index 78.49, Oil $71.15, 10-year 3.41%, Silver $14.72, and Gold… $955.37

That’s it for today… It’s going to be a hectic week here, so I had better get my rest when I go home! Mike Meyer just walked in, and he had Lasik done on his eyes Friday, and he’s smiling from ear to ear! So… I guess it all went OK! A great weekend for the Cardinals, who are really on a roll, and probably hate to see August end! We were all sitting around a campfire on Friday night, listening to the ballgame, when Albert Pujols hit his “walk off” home run… High fives all around! This coming weekend will be a 3-day Labor Day Holiday weekend. College football begins this weekend, which means my beloved Missouri Tigers play Illinois at the Dome downtown. Go Tigers! It’s a rebuilding year for the Tigers, but I still expect them to be good! And congrats to the U.S. kids from California who won the Little League Championship yesterday… OK… Time to go… I hope your week starts off with a Marvelous Monday!

Source: Renminbi To Become An International Currency?

Cool Beans, eh? OK… Well… If yesterday was Turn Around Tuesday as the writer said, I sure didn’t see it! We had a “stop the dollar at the 1.38 border” Tuesday… But a complete turn around from Monday’s sell off, after Russian Finance Minister, Kudrin, threw a cat among the pigeons? Not that I saw!

We do seem to be stuck in a trading range of 1.37 to 1.40… With probes below 1.37 and above 1.40 short-lived. That’s OK with me, at this point, but it had better not last too long, or traders will grow tired of the boring range… And, I will be yelling at the walls for some price action!

Well… The BRIC (Brazil, Russia, India and China) meeting didn’t really bring about the Thunder and lightening as I thought it would… The leaders of these countries did discuss the need for a “more diversified monetary system to reduce dependency on the world’s reserve currency.” (read the dollar!) They also discussed selling bonds and swapping currency among the group. Now if we rewind back to Monday, I said that I thought this could be what they would do… The crystal ball was bang on that day! HA!

I can’t believe the markets have allowed this to be swept under the rug… This could be colossal if it’s carried through… And this way, all of them can smile and say they believe in the dollar and U.S. Treasuries while not dealing with them! Personally, I think the reason the markets aren’t paying attention to these goings on, is that the media isn’t covering it… The grip that the administration has on the media is really beginning to show just how tight it is…

One other thing from the meeting… The BRIC nations announced that they wanted to take a more active role in the world’s financing system… And with $2.8 Trillion in currency reserves among the 4 of them… That would be more than a “kind gesture”…

Speaking of the media… I have to wonder what the media is thinking on this one… Here’s the skinny… First of all, this story came to me a week ago… But at first, I thought, I had better make certain this is not a hoax before talking about it… What am I talking about? I’m talking about the report that two Japanese men were caught at the Swiss-Italian border with $130 Billion in U.S. Treasuries!!!!!!! Now, Chris and I were talking about this yesterday, and Chris said, “But I thought all Treasuries were book entry for some time now”… Yes, since 1982 (a great year, with the Cardinals winning the World Series!) Treasuries have been book entry only… So… The question I had from the beginning is “are they real or fake?” Because I didn’t want to waste your time and mine if they were fake bonds… But apparently the someone believes them to be real…

Hmmm… $130 Billion in bearer bonds… Does this intrigue anyone? It sure does for yours truly. Does this mean that the U.S. Treasury has been printing bearer bonds and selling them under the cover of a dark night? That’s the only explanation I can come up, IF THEY ARE FOR SURE REAL!

I don’t know what to make of this except it has my attention, and I can’t believe I don’t see one story on cable news… But it’s all over the news in Europe and Asia… More later, as additional news comes to light on this…

OK… Yesterday, I talked about the Current Account Deficit, which is expected to be $85 Billion for the 1st QTR… What I didn’t talk about is that this would be the lowest level for the Current Account in a decade! And would represent just 1.5% of GDP. Now… I used to go out and talk about how the dollar entered the weak dollar trend in Feb. of 2002, after the Current Account Deficit reached 4% of GDP, which historically had been the line in the sand for currency issues…

But let’s put this in perspective, eh? Back in 2001 and 2002, our GDP was running at 4-5%… It’s now negative… So, maybe this won’t be the harbinger to reversing the weak dollar trend, that it looks like on the outside… Besides, as I’ve said over and over again lately, the whole deficit talk used to center on the Trade Deficit (which account for the majority of the Current Account), and with the global recession going on, the Trade Deficit, while still having issues, is no longer the focal point… Instead, the Budget Deficit (the 2nd of the Twin Deficits) has taken the reins of the focal point… If it’s not one thing it’s another, my mother used to tell me! (the you-know-what disturber in me just has to make this comment… “no wonder the Current Account is lower, we don’t report debts or the bonds that represent the debts!”… That’s in reaction to the $130 Billion in bearer bonds!)

I came across a news story yesterday morning that caught my attention… It seems that the Gov’t of Australia, has decided to put Government backing on state issued bonds like the QTC’s (Queensland Treasury). This is HUGE for these issues, especially since the states in Australia were seeing downgrades in ratings! Now, the country of Australia has a higher rating, and these bonds will carry that rating, since they are now backed by the Gov.! The one thing it will do though, is tighten up the yield on these bonds… Probably by about 10-15 Basis points…

Why am I talking about this? Because… If the QTC bonds now have a higher rating, more institutions will be able to buy them, and the more investment in Australia, the more flows into Aussie dollars! The news brought the A$ back to 80-cents yesterday briefly… But this is going to take some time to work through. The thing here is that in the long run, this is good for the A$!

In China overnight, we had an announcement that could really become a problem with protectionism… China has introduced an explicit “Buy Chinese” policy as part of its economic stimulus program in a move that will amplify tensions with trade partners and increase the likelihood of protectionism around the world.

Now, long time readers know that I’ve always banged on 1. the Bush administration when they placed tariffs on Japanese Steel about 8 years ago, 2. Schumer and Graham for introducing a bill to place tariffs on Chinese exports to the U.S. Because… Both represent protectionism… And a currency will normally get taken to the woodshed for being associated with a country that takes protectionism measures…

So… Will this hurt the Chinese renminbi? Ahhh grasshopper, remember, the Chinese renminbi is a “manipulated currency”. The Chinese Gov. decides what value the renminbi will be… So… In a regular floating currency scenario, yes, this would hurt the currency… But in China’s situation, it’s all different.

However, the reason I make a big deal out of this is that this announcement could lead to other countries placing their own protectionism measures to offset China… One protectionism measure, begets another, and another, and another… Oh boy! NOT!

Talk about smashing a bug! This would be just like doing that to the promises of a global recovery… Somebody stop them for they know not what they are doing! Or maybe the Chinese do…

Yesterday, Housing Starts in the U.S. surprised on the upside, and so did Building Permits… I don’t like this for the simple reason that we already have an “inventory” issue with houses that have been built and not bought or occupied. But, the media was all over this new, because… It’s the opposite from what I told you the day before that economists, Shiller, Roubini and Whitney had to say about housing! And the Housing Starts and Building Permits data flies opposite of the report this morning that mortgage applications fell 15.8% this month!

We also saw that Industrial Production fell -1.1% in May… So output was off sharply at factories, utilities and mines, in May, which is completely opposite of those that are saying the recession is over…

Today, in addition to the Current Account data, we’ll also see the stupid CPI data for May… You never know what that data has in store for us, because the Gov’t doesn’t know what they want it to show for us yet! HAHAHAHAHAHAHA! Of course that’s my feeling toward CPI, and I’ve explained it all many times over the years… But, in a nutshell, CPI is kept artificially low by the Gov’t by re-weighting things that get too expensive, or substituting things that get too expensive… We all know why CPI is kept artificially low too, don’t we? Yes… We do…

Now… I spent more time on CPI this month than I care to! It’s just a dumb report that the media will be all over like a cheap suit!

I heard a great old song on the radio this morning that pretty much puts my feelings toward the direction of the country into words… “but you tell me over and over and over again my friend, ah, you don’t believe we’re on the eve of destruction.” – Barry McGuire

And then, I see where the President is going to announce his sweeping regulatory changes today… Hmmm… Do you see what I see? This is a shift from markets driven regulation to Political regulation… Markets to politics… Somebody stop the madness! Serenity now!

Currencies today 6/17/09: A$ .7925, kiwi .6295, C$ .8805, euro 1.3865, sterling 1.6260, Swiss .9190, rand 8.0530, krone 6.4115, SEK 7.8350, forint 204, zloty 3.2580, koruna 19.2570, yen 96.40, sing 1.4580, HKD 7.7505, INR 48.08, China 6.8370, pesos 13.45, BRL 1.9735, dollar index 80.72, Oil $69.69, 10-year 3.67%, Silver $14.10, and Gold… $932

That’s it for today… A pretty busy day for yours truly yesterday, with the monthly Review & Focus due, and the regular daily stuff all rolled into one day… Thank goodness, Chris and Mike help me with the Review & Focus these days! Speaking of the Review & Focus, I did a story on whether inflation or deflation is worse for an economy… You’ll want to check that out, when it shows up in your mailbox! Hey! My beloved Cardinals scored more than 2 runs in a game last night… YAHOO! It’s been a tough month for the redbirds, a June Swoon, if you will. Last night’s game VS the Tigers reminded me of the 2006 World Series match-up, and we all know the outcome of that series! 10th World Championship for the Cardinals! OK, enough of that, time is a wastin’! I hope your Wednesday is Wonderful!

Source: Stuck In A Range

Good day… And a Happy Friday to one and all! Another seemingly long week for yours truly… Where’s a 3-day Holiday weekend when you need one? Have you been following the goings on with the investigation into the Bank of America (NYSE:BAC) purchase of Merrill Lynch? Whoa, there partner! I thought for sure this would get all swept under the rug, but it’s all coming out, every dirty deed! Dirty deeds done dirt cheap!

Before we get into the goings on there… Let’s talk about the currencies and their huge jump yesterday, only to see chicken traders come out of the woodwork overnight to support the dollar going into the G-8 meeting.

Yesterday, the currencies had it all going on VS the dollar… The euro at one point in the afternoon hit a high of 1.4170! You can imagine the long, stale trades that finally could take a profit there, eh? Well… It happened, and by the time I left for the day, the euro had backed off that lofty figure. But not like it backed off overnight… The reason I call these guys chicken traders, is that they are afraid to be short the dollar going into the G-8 meeting… Now… I have to ask this question… Did they NOT KNOW there was an upcoming G-8 meeting this weekend yesterday when they took the euro to 1.4170? I did, in fact, I told you 3 days ago that there was going to be a G-8 meeting!

Here’s the skinny… The chicken traders are scared to death of having short dollar positions ahead of the G-8, where they fear U.S. Treasury Sec. Geithner will say that the U.S. favors a strong dollar! Geez Louise! Here we go again! How many times can a U.S. Treasury Sec. go to the well with that saying and get positive traction? For each time they do say that, they follow it up with an attack on the Chinese renminbi, saying it must appreciate. Well, how can that happen if they “truly” believe in a strong dollar? Add to that, the goings on now… How can anyone in the Gov’t say they believe in a strong dollar when they are implementing Quantitative Easing?

The other thing boosting the dollar this morning is a report that Big Ben Bernanke is calling for reduced bond buying, thus reducing the pressure on the dollar. Now… That would be great news, if it were really going to play out… But these guys are like junkies now, this Quantitative Easing is like cocaine to the Fed, and the bond markets… And soon enough, the bond guys will be clamoring for more cocaine/ bond buying / Quantitative Easing! And the Fed is the pusher…
You know the dealer,
the dealer is a man
With the love grass in his hand
Oh but the pusher is a monster
Good God, he’s not a natural man

OK… A blast from the past there! My good friend, Rick, likes to guess at the band’s name when I put lyrics in the Pfennig… This one is waaaaaayyyy before your time Rick!

So… The dollar will end the week getting some love from the chicken traders… Bawk, Bawk… (I do that really loud, when pitchers pitch around Albert Pujols!)

The news that the Fed “might reduce bond buying” hit the high yielders in the mid-section, knocking the air out of them! But, these currencies are resilient, and after the wind is restored in their mid-sections, they climb back on the rally tracks! You have to love currencies that show resilience!

The dollar received an additional boost overnight… You’ll want to sit down for this one… and put the coffee down, to not risk spilling it and burning yourself! Here’s the skinny… Japanese Finance Minister Yosano who stated that “we have complete trust in the fact that the U.S. views its strong-dollar policy as fundamental,” and “so our trust in US Treasuries is absolutely unshakable.”

What else did you expect from a country that is the second largest holder of U.S. Treasuries? But… The dollar basks in the sun from those comments…

Did you hear that U.S. Treasury Sec. Geithner is clamoring for more power for the Federal Reserve. In Geithner’s mind the Fed should be the Big Dog regulator in the markets… Hmmm… Let’s see now… Could he want to see that because of the Fed’s “wonderful” track record of allowing the dollar to lose over 90% of its value since they took over the stewardship of the currency? Yeah, that’s the ticket! I shake my head in disgust that this is even being talked about… The Federal Reserve Bank is not even a Gov’t Agency! The Fed is a Farce! Come on people, get your rakes, and pitchforks, and let Geithner and the administration know this is not in the best interest of this country!

OK… Right after I hit “send” yesterday, the Central Bank of Brazil announced a rate cut… This was a huge rate cut, VS the forecasts… The Central Bank cut 100 BPS or 1%. Let me tell you what’s going on here… First of all, Brazil see’s an opening… They can promote growth, and get a foot in the door of countries that have been struggling to show any growth… But first, there’s the real… The real has really seen some strong winds in its sails lately… It has gained nearly 20% VS the dollar in the past 3 months… And what did the Central Bank Gov. say about 3 weeks ago?

Well… Let’s draw this out… The real was trading around 2.03, and the Central Bank Gov. said he “would keep the real above 2″… You may recall at the time I said that in the old days, traders would take that statement as a challenge, and go after the real Big Time to make it stronger and to put egg on the face of the Central Bank… Well… While there may have been some of that… The currency pushed higher on the back of the High Yielders, and Commodity Prices rise… And the real soon was trading below “2″! (real is a European Style currency so the lower the price the more value it returns in dollars!) In fact, the real traded to 1.93!

Yesterday, after the announcement, the real lost some ground, as a currency should lose when a Central Bank debases the currency with an interest rate cut! But soon, the real was rallying once again, having put the rate cut in its rear view mirror. Now… That was a good sign for the real… But, I truly believe that the Central Bank here will look to lower interest rates on a couple occasions in the future… To me… That kind of information is like manna from heaven! For if the currency is going to weaken briefly after rate cuts, but rebound quickly, that would make for some good trading info… Of course, just because it’s happened in the past, doesn’t mean it will continue!

OK… Now… Let’s talk about the Bank of America (BOA) and Merrill deal… First, you might recall me telling you about a month ago that BOA Chairman, Ken Lewis, testified that the Fed and Treasury pressured him into buying Merrill Lynch, and not disclosing the losses on Merrill’s books… The Gov’t even gave BOA the money to make the purchase! And… You may recall that Big Ben Bernanke immediately dismissed these statements, as false… Well, someone with some intestinal fortitude decided to investigate this deal…

The other day I told you the records had been subpoenaed and that I thought it would get all swept under a rug… But NOOOOOOO!!!! Yesterday, it was revealed that Fed officials sharply criticized Bank of America and CEO Kenneth Lewis in emails to each other after the bank tried to pull out of its deal to buy troubled investment bank Merrill Lynch, according to documents unearthed by Congressional investigators. The emails confirm Fed Chairman Bernanke was willing to threaten Mr. Lewis’s removal as CEO if he reneged on the Merrill deal and later sought assistance. OMG!

And now… Ken Lewis is telling lawmakers that government officials pressed him to buy Merrill Lynch even after he became aware of major losses at the investment bank. Uh-Oh! The Fed and Treasury need to pull a Lucy here and do some ‘xplainin’!

The data cupboard was busy yesterday with Retail Sales and Weekly Initial Jobless Claims… First, Retail Sales for May were bang on expectations of a .5% gain… A closer look though revealed that the major move here was in gas prices, which if you take them out, Retail Sales only gained .2%… But you know me, I don’t like taking things out, or adding things in… Let the data speak for itself!

The Weekly Initial Jobless Claims were better than recent reports coming in at 601K VS the previous week’s 625K… The problem here folks is that while the Corporations may be cutting back on the layoffs, people that are out of work are remaining that way… The continuing claims rose to 6816K from 6757K the previous month… I mentioned on the desk yesterday, that the media was reporting the 601K number as “good”, but somehow forgetting to mention that the continuing claims weren’t good! There comes a time when you just can’t fire anyone else!

Today, we see some minor data, with the U. of Michigan Confidence Index the only recognizable data print today. It’s a Big Day in the Big Finish… And… I’m back to sharing a “Feel Good” Corporate story during this recession… So, let’s get to it!

Currencies today 6/12/09: A$ .8140, kiwi .6410, C$ .8950, euro 1.4035, sterling 1.6475, Swiss .93, rand 8.0120, krone 6.35, SEK 7.65, forint 198.35, zloty 3.1920, koruna 19, yen 98.10, sing 1.4520, HKD 7.7507, INR 47.55, China 6.8352, pesos 13.41, BRL 1.9240, dollar index 80.07, Oil $71.52, 10-year 3.80%, Silver $15.09, and Gold… $950

Chuck Butler

Source: Here We Go Again!

Now, if you think like me, no wait, most people don’t want that burden! But… We think in similar circles, you probably chuckled a bit when you heard that G-7 “praised” China for their continued flexibility with the renminbi… Doesn’t that almost sound like an Eddie Haskell? “Why, Mrs. Cleaver, you sure look nice today” Is G-7 “kissing up” to China? It sure sounded that way to me, for China hasn’t allowed the renminbi to move higher VS the dollar with any kind of consistency for some time now!

So, G-7, Schmee 7! I just don’t think they can deal with these things in a macro environment… In other words, each finance minister, Treasury Sec. or other official needs to go home and take care of their own house! There was one thing that came out of the G-7 meeting… Each country “promised” to not resort to protectionism to help their economy… I’m sure that while they promised they had their fingers crossed behind their respective backs!

The shot across the euro’s bow this time is coming from the rot on the vine of the Eastern European countries… These Eastern European countries are taking on water from bad loans, or loans gone bad, and you know who the lender of last resort is on these loans don’t you? Yes, Eurozone banks… This opens a whole new can of worms folks… The euro has taken hits from Spain, Italy, and Italy in this round, and previously took a major hit from France in 2005, and survived all of them. And it will survive this round… But not until it sees more weakness VS the dollar. I would look for the euro to revisit its previous low of a few months ago in the 1.23 handle… This could get ugly, as this Eastern European bad loans scenario has just popped up, and we’ve got to work through all the rubble to get to a base, before the euro can come back even stronger.

This will obviously represent some cheaper levels to buy, and diversify… Or average cost in… Or anything other reason you might have for taking advantage of this soon to be cheaper opportunity.

So, with the Big Dog, euro getting taken to the woodshed for its indiscretions with Eastern European loans… BUT REMEMBER I TOLD YOU THIS… The European bank losses are NOTHING compared to those in the U.S. My friend, John Mauldin, said that they “Dwarf those in the U.S.” And… Remember, The Eurozone began this meltdown in a position of strength! The U.S. was on its knees begging for foreign investment to finance their IOU’s… The rest of the dog pound is getting taken to the woodshed too! Shoot Rudy, even Japanese yen, which didn’t get mentioned by G-7 for its strength, is losing ground to the dollar this morning. There’s not a currency anywhere on the scorecard that’s not going 0-for 4 against the dollar today… UGH!

OK… I take that back! Not a fiat currency that is! But the currency that a lot of people don’t consider a currency, but I do, Gold… Is kicking some dollar rear this morning and taking names later! Gold is up $24 this morning to $965! And why do you think Gold is on the rally tracks this morning? Well… Things are uncertain these days aren’t they? Then if you answered yes, then you know that the “uncertainty Hedge” is here to save the day! Gold is the “uncertainty Hedge” … Oh, and Silver is like the Super hero’s sidekick… Like Robin to Batman, Silver to Gold… Silver is trading within spittin’ distance of $14…

When will traders and risk takers stop and look at all the debt the U.S. is taking on? That’s the question I keep asking myself… The massive amount of debt that just keeps going on the books, is crazy stuff folks… It’s gotten to be so massive, that I believe it has pushed everyone to become “comfortably numb” That’s got to be the answer, because if it isn’t, then I think we would see people screaming bloody murder at the Gov’t! They are amassing these massive debts and we’re paying for it! Don’t believe me? Well… Let’s listen to former U.S. Treasury Sec. Paul O’Neil, who quit because he didn’t believe in the tax cuts without cuts in Government spending… “The federal government doesn’t have any money that it doesn’t first take away from the people.”

But, as long as no one complains to their Senators, and Representatives, then they believe they have Carte Blanche to spend your money, your kids’ money, and your grandchildren’s money… Sometime in the future, someone will find a year’s worth of these Pfennig’s, and they’ll say… “Hey! Why didn’t we listen to this guy?” OK, I’ve gone too far there… That’s crazy imaginary stuff there, and has no place in this “professional letter” HAHAHAHAHA!

Well, we get a look at the how well the foreigners are keeping up with the financing of these debts this morning, as the December TIC Flows will print. Keep in mind that this is a fancy name for simply stating that this is the “net security purchases by foreigners”… Also, keep in mind that we need about $40 Billion per month (yes, it has fallen, but that’s long before we calculate the budget deficits that will be mounting this year)… In November the net was a negative of $21 Billion… Whoa! December’s total is forecast to be a positive $20 Billion… Which is better than a negative $21 Billion, but still doesn’t meet the required amount to finance the deficit… So, we just keep pushing that forward, and forward, and forward, until someone “calls” us on it, much like De Gaul called the U.S. on the debt, back in 1971, and demanded to be paid in Gold for the IOU’s he held… So… Now, we wait for the time when foreigners say “no mas”… And you now see why this is not a good idea for a country to be at the mercy of outsiders…

That’s when Nixon closed the Gold window… August 1971… And the world that we knew with a Gold standard was to be no more… Sort of like Puff the Magic Dragon when Jackie Paper came no more, and Puff that mighty dragon, he ceased his fearless roar!

Ok… Enough of that! The Japanese Finance Minister Nakagawa, is going to resign after Japan posted an economic report that showed Japan’s economy contracted at the its fastest pace in almost 35 years during the 4th QTR of 2008. Of course it didn’t help that he was reported to have been under the influence of alcohol during the G-7 meeting… He denied that his behavior was due to “being drunk”, and instead blamed a combination of alcohol and cold medicine…

So… Not only did Nagakawa have to deal with the bad economic report upon returning home, he had the press all over him about his behavior… So, he announced that he will resign… In Japan, this is called, falling on a sword…

The economic report has caused some slippage in the Japanese yen. This is the first real slippage we’ve seen in yen in some time… There are no reports of intervention by the Bank of Japan and the finance ministry, so one has to believe that this is simply profit taking after seeing the rot on the economic performance’s vine…

But, as long as the Bank of Japan and finance ministry keeps their finger off the intervention trigger, Yen should not succumb to heavy selling, and losses VS the dollar… Not yet…

The “new and improved” $787 Billion Stimulus Bill is on the President’s desk for his signature today… The markets will get all tingly, especially stocks… So, let’s hope for at least a day or two, the connection between stocks and currencies remains… But it can drop soon after, and go back to the way things have always been!

I see the time, and realize that I’ve been typing for far too long this morning, I have a ton of stuff to do, since yesterday was a holiday, so off to the Big Finish we go!

Currencies today 2/17/09: A$ .6405, kiwi .51, C$ .7920, euro 1.2640, sterling 1.4260, Swiss .8550, rand 10.20, krone 6.99, SEK 8.70, forint 242.30, zloty 3.86, koruna 23.38, yen 91.75, sing 1.5260, HKD 7.7540, INR 49.66, China 6.8414, pesos 14.61, BRL 2.3050, dollar index 87.38, Oil $37.06, Silver $13.96, and Gold… $963.80

Source: When Will Foreigners say “No Mas”?

Good day… And a Wonderful Wednesday to you! The first full day of the new regime… I will say this, it makes one proud to be an American when you can watch a peaceful, even extravaganza, handing over of leadership… It really rips me up when I read that the Wall Street Boys really contributed cash to the inauguration proceedings… Making certain the new President knows who contributed cash to his party… Probably cash they received from the Gov’t in bailout payments! Nah… That couldn’t happen… Could it?

Well… The currencies didn’t really trade outside of a very tight range yesterday, except for the pound sterling, which continues to fall VS the dollar, euro, yen, and probably even the Zimbabwe currency! OK, that’s harsh! But I wanted to paint the picture, so that everyone understood the grave situation the pound sterling is in… The Bank of England has decided to take 70% control of the Royal Bank of Scotland, and nationalization isn’t far behind for that bank, and a few others…

Yesterday, the Bank of Canada (BOC) lowered their official interest rate by 100 BPS or 1%… I told you long ago that the BOC would follow in the Fed’s footsteps, and they have… Canada had it all going for them last year, with gold rising, Commodities like Oil, natural gas, and metals all rising, but that curtain came down hard on Canada and their dollar / loonie. It will be some time before the loonie can recover… but… if my scenario of soaring inflation for the U.S. and rising Commodities again comes to fruition, then it won’t be that long, not in the scheme of things…

There was word yesterday that the Monetary Authority of Singapore (MAS) stepped in to support the Sing dollar after it had fallen to a 6-week low. This kind of intervention works in this case, as the Sing dollar is relatively small in circulation, and the intervention doesn’t have to be of size to stabilize a market… But, they (the MAS) need to know when to get out, and let the markets be… They gotta know when to hold ‘em, know when to fold ‘em….

Gold put in another strong performance yesterday adding $21 as I left for the day. Jennifer asked me during the day if this was a first, with Gold and the dollar rising… I said that I had seen it before, but it certainly doesn’t normally go that way… For Gold is another offset currency to the dollar… Which leads me to believe that it wasn’t so much dollar buying as it was euro selling yesterday…

The Boys and Girls at Morgan Stanley issued a report on Gold recently that called for Gold to reach a new record within the next 3 years. They call for the Gold to “average” higher each of the next three years through 2012, with the average this year to be $900, next year $1,000, the following year $1,050, and $1,075 in 2012… Personally, I believe their call to be quite conservative, something that we’re going to see a lot of in the next few years, as these research teams, back off the “hyper-calls” for assets, as they walk gently over eggshells in an attempt to not garner the spotlight…

At least they’re calling for higher Gold prices… You normally don’t see Wall Street firms going out of their way to talk up Gold… For that thought, you normally don’t see Bankers talking about Gold either… That’s where I’m different! I talk to one radio station quite often and they call me the “un-banker”! That’s right, baby! I’m not even your last choice as a “banker”… I’m a markets guy…

OK, enough of that self-promotion! HAHAHAHAHAHA!

Back to the markets… Well, the Obama bounce didn’t come in the first day of his Presidency, as the Dow sold off by 332 points! UGH! OUCH! That’s going to leave a mark! So far, one piece of the Obama bounce, the dollar, has rallied… But the other, stocks, have fallen on their face…. We’ll have to see what stocks think about the $850 Billion stimulus package that the Obama team is working on…

Here’s the skinny on the package, that could still grow… It certainly isn’t going to narrow! The stimulus plan covers 5 areas of spending and tax breaks… Health, education, infrastructure, energy, and support for the unemployed and the poor. All worthy areas… Unfortunately, we (the U.S.) don’t have the funds to pay for this… Now… If we weren’t already in a huge deficit hole, then a stimulus package to get the economy going might be the answer… But, that’s not the case! I told a radio station a week ago that the Roosevelt plan worked back in 1933, but it could have just as well failed, it was that touch and go, and if it weren’t for the war it might not have… This time, we’re starting in a deep, dark deficit hole… I sure hope it works… I just can’t get my arms around how adding $2 Trillion to our national debt this year helps…

How did I get to the $2 Trillion? Well… The Congressional Budget Office (CBO) has already told us the deficit in 2009 would be $1.2 Trillion. Recall I had a cow over that announcement! Well, the CBO’s budget forecast does NOT include the new stimulus plan of $850 Billion… I’ll tell you what it also doesn’t include… Any new military expenses… And the remaining TARP money that the Obama team just came into…

I just heard, and sang along with, out loud, good thing no one else is here!, one of my all-time face Chicago songs… Hard Habit To Break… Yes, the habit of deficit spending is a Hard Habit to Break apparently… So, where’s the change?

OK, Whew! I really went off on a tangent there, eh? Oh, some of that was from my radio interview, and some of it was from my good friend, David Galland, who recently put out a piece on the spending… David used to take my Review & Focus draft, and make music with it… What a writer!

I see where Christopher Cox, resigned from his leadership role at the SEC… I think back to the election process when John McCain was asked what he would do about the financial mess, and his first response was to say that he would fire Cox… McCain got all kinds of flak for that… But in hindsight, given the failure of the SEC to spot Madoff’s alleged ponzi scheme, that call doesn’t look so bad now, eh? So… According to Harvey Goldschmid, a former Democratic SEC Commissioner, the SEC was “passive” under Cox… Well, you can expect that pendulum to swing swiftly to the other side… As with all things in life… They go too far one way, and when somebody notices, they swing too far the other way… Never finding a “happy medium”…

Someone sent me a note yesterday and said I hadn’t mentioned the Swiss franc and why it had fallen on hard times, after posting a great 3-month return… I pointed back to a previous Pfennig that pointed out that UBS was involved in a bond scandal in Italy, and it reverberated all the way to the franc… Of course since then the euro has fallen from 1.34 to 1.29, and that has even more to do with the recent movement in francs… Remember… The euro is the Big Dog of currencies…

I’m currently reading a research report on China, in my “spare” time I might add! The research plays well with what I’ve been harping about for some time… And that is rising inflation in China, and how the Chinese officials should use a stronger renminbi to combat that inflation… There are a lot of people, researchers, pundits, out there calling for China to slow down their renminbi appreciation VS the dollar… I’m on the other side of that fence, as usual, right? I think the Chinese WILL use the renminbi as an inflation fighting tool… More later, when I have some “spare” time!

For readers of our monthly client newsletter, Review & Focus, you’re in for a special treat in February… The Big Boss, Frank Trotter, submitted a special report called “The March of the Presidents” which goes back to Nixon, and gives grades based on raw data, not sentimental, of “soft stuff” … Strictly numbers… Inflation, unemployment, etc. Look for it at a news stand near you!

Currencies today 1/21/09: A$ .6510, kiwi .5210, C$ .7925, euro 1.2925, sterling 1.3770, Swiss .8750, rand 10.2725, krone 7.04, SEK 8.3250, forint 220, zloty 3.3660, koruna 21.42, yen 89.80, sing 1.5025, HKD 7.7580, INR 49.11, China 6.8375, pesos 13.95, BRL 2.36, dollar index 86.20, Oil $41.29, Silver $11.40, and Gold… $860.70

Source: Gold Moves Higher With The Dollar

I have searched the news wires this morning and can’t find any good reasons for the dollar’s turn around other than it had simply gone too far too fast. Mike Meyer and I were talking about this yesterday morning, as we were looking at the trading screens in amazement. The dollar’s move down over the past two weeks was even faster than the move up earlier this year. Chuck had warned readers all during the dollar rally that the strength was only temporary, but the reversal was just too quick. This move back up is healthy for the markets, and will allow investors another opportunity to move back in.

The US jobless numbers were better than expected as they dropped to 554k from an adjusted 575k last week. The continuing claims also fell to 4,384,000 out of work. Leading indicators fell .4% during November, and Octobers number was revised to -.9%. So while all of these numbers could be spun as positive (not quite as bad as the last ones), they still reflect an economy which is continuing to falter.

Treasury Secretary Paulson will probably be heading back to Congress to claim the second half of his $700 billion bank rescue plan. I think he is probably hoping Congress is in a giving mood with the upcoming holidays and will go ahead and let loose of the additional funds. But Paulson may have some trouble securing the additional funds as lawmakers have warned the Bush administration it must come up with a new effort to aid homeowners and get aid directly to their constituents.

Paulson is also probably worried that congress may pull back some of the promised funds and earmark them for the new administration’s stimulus package. So now we have the present and future administrations fighting over who is going to get to spend the taxpayers money, with Paulson doing his best to get it all spent before heading off into the sunset. Chuck spent a tough day as the eye doctor yesterday, but still sent me the following note:

“As reported by the Wall Street Journal…

“Obama’s economic team is crafting a stimulus package to send to Congress of $675 billion to $775 billion over two years, according to transition officials. The transition team has conveyed the figures to Capitol Hill, where the package is likely to grow as it works its way through the House and Senate. Obama aides hope to keep the package below the trillion-dollar mark, as they fear being accused of adding too much to the country’s long-term budget deficit.”

I laugh! As if! As if $775 Billion “won’t add too much to the country’s long-term budget deficit”! I give up… I really do… The Gov’t thinks we are all BUFFOONS! They really do, folks… They are taking us as village idiots, thinking that if they keep it below $1 Trillion, we “won’t notice”! ”

Not to be outdone by the US, the Bank of Japan cut its benchmark interest rate to .01 from .3%. The move puts Japanese target rates back below the new target for US fed funds. The Japanese central bank also said it will continue using ‘quantitative measures’ to inject capital into the financial markets. The yen is unchanged on the day, but we saw a pretty large amount of selling by our investors yesterday.

The Chinese Renminbi headed for a second weekly gain as Chinese officials signaled they won’t pursue a weaker currency to help exporters. Many thought the slow and steady appreciation of the Renminbi had come to an end as Chinese officials let the Renminbi move lower during the first part of this month. China’s trade surplus which widened to a record $40.1 billion in November, continues to support a stronger Renminbi. Consumer prices in China rose just 2.4% in November from a year earlier, the smallest increase in almost two years. The easing of inflation pressures will allow China to lower interest rates to make sure growth stays above their 8% target. All indications support a further slow and steady appreciation of Renminbi.

Currencies today 12/19/08: A$ .6819, kiwi .5745, C$ .8155, euro 1.3982, sterling 1.5036, Swiss .9049, ISK 176.5, rand 9.7813, krone 7.0467, SEK 7.7980, forint 189.78, zloty 2.9152, koruna 18.8295, yen 89.24, baht 34.49, sing 1.466, HKD 7.75, INR 46.255, China 6.8457, pesos 13.17, BRL 2.3927, dollar index 80.869, Oil $34.39, Silver $10.67, and Gold… $835.34

Source: Dollar Bounces Back Up

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

HA! Had you there for a minute! The dollar rallied once again, when the deep, dark, dangerous clouds returned, and the risk takers that had come out of the woodwork on Friday, disappeared, which left the currencies hung out on the line. Gold rallied $10, which is really counter-intuitive to the risk takers disappearing and the dollar rallying… But it did, and I’m not here to argue about that!

As I said yesterday, the data cupboard was bare with no data to report Monday… With today being a holiday, we won’t get our next glimpse of the awful fundamentals data until Wednesday. In the overseas version of a data cupboard, the German Investor Confidence, as measured by the think tank, ZEW, surprised on the good side, with the index rising in October… This index had been on the slippery slope for the past few months. The news is that the index rose because the European Central Bank (ECB) stepped to the plate a couple of weekends ago, and made good contact with the financial meltdown in Europe.

Again… Let me say this loud and clear, folks… There’s a HUGE difference in Central Banks that provide liquidity… One does so from a position of strength like the ECB and China… and the other does so from a position of weakness (the Fed)…

But the good report isn’t doing anything to help the euro this morning, as the overnight stock markets didn’t fare too well, which has led to U.S. index futures being off… And all that means a rotten trading day, thus keeping the risk takers on the sidelines, and the dollar being the king of the hill…

And… All this means the Japanese yen is back on the rally tracks! I see this morning where BNP Paribas says that their Elliott Wave chartists believe yen will trade to 96.85 in the next week… Of course you know me folks… Trends are what move currencies… Charts merely tell you or give you an excuse as to why a currency moved in that trend. In this case… We all know that while the deleveraging is going on during the credit market squeeze, that dollars and yen are the only two currencies to gain (Chinese renminbi goes back and forth)…

Back here in the Good Old U.S.A…. The accountants over at Fannie Mae announced that the $100 Billion pledge to them “may not be enough”… This announcement came after Fannie posted a record $29 Billion loss and confronting more difficulty in issuing and refinancing debt. I guess the folks at Fannie thought, Shoot Rudy, if AIG can go back for second helpings of bailout funds, then we can too! I think we should all get used to this, as I said when all the original plans to bail out these firms were announced… These bailout funds are going to be like cocaine to these needing bailouts, and they are going to need more and more…

And the Wall Street Journal reported this last night that… “The Federal Reserve said Monday it will allow American Express to become a bank-holding company, saying “unusual and exigent circumstances affecting financial markets” justified a fast approval of the company’s application. The surprise move would give American Express access to new low-cost financing from the Federal Reserve.”

Before it’s all said and done, we’ll all be one big happy family, no make that dysfunctional family of “bankers”… Shoot, they may as well bring the automakers into the fold too, they need some of the low-cost financing from the Fed too! I could really go off on a tangent here… But, I’ll keep it on a even keel, as it’s not like there’s anything I can do about all this, so why get to upset with all these dolts!

So… The bad fundamentals, no make that awful fundamentals, continue to mount for the U.S. to deal with… But before we can deal with the awful fundamentals, we have to deal with the credit markets squeeze… No ifs, ands or buts… If we can get the lending going again, and I’m not talking about to individuals, I’m talking about between banks, and with Corporations, then the focus will return to the fundamentals… That’s my story and I’m sticking to it!

You know… One thing that I talked about last summer, and was even quoted in the Wall Street Journal talking about, was the fact that with the low interest rates in the U.S. the dollar had replaced the Swiss franc as a funding currency in the carry trade… And since then, the borrowing rates in the U.S. have gone even lower… But Carry Trades are not too popular at the moment, with risk taking on the sidelines… So the affect on the dollar at this point is mute. But, this explanation helps with the “reason the dollar is rallying”… I’ve explained more times than I care to that with Carry Trades unwinding, the “funding currency” which was sold short, gets bought to cover the short position, and so, just like Japanese yen, the dollar rallies…

And while I’m on the weird things going on in the U.S. I thought I would give you a snippet of a letter that Ted Butler (no relation, that I’m aware of) sent out regarding what he feels is manipulation of Silver. Here’s the other “Mr. Butler”…

“This week, I received a copy of a letter, dated October 8, sent from the CFTC to a California Congressman, Gary G. Miller. It discussed allegations of a silver market manipulation because of the data in the monthly Bank Participation Report. The data in that report for August showed that one or two U.S. banks held a massive short position in COMEX silver futures of 33,805 contracts, or more than 169 million ounces. This is equal to 25% of annual world mine production, and was up more than five-fold from the prior month’s report. After this position was established, silver prices fell more than 50%, in spite of a widespread shortage in retail forms of investment silver.”

So, there you go! Ted Butler believes he has the proof of manipulation in Silver, but what’s the Gov’t going to do about it… Ahhh… As one of my all time faves, Edwin Starr, sings… Nothing, absolutely nothing, say it again!

There was an article posted on CNBC’s website yesterday that listed Companies here in the U.S. that are announcing layoffs… This was not a pretty scene folks… But if you want to check it out, click here… http://www.cnbc.com/id/27645929

Yesterday, I told you the “news of the weird” with the announcement by the Fed that the guy who was responsible for risk management at Bear Stearns, the now defunct Bear Stearns I might add, was hired to head the group that overseas the purchase of the toxic waste bonds by the Fed… This to me is akin to putting the fox in control of the hen house! Any way… A long time reader sent me a note regarding this announcement… “I read somewhere about this appointment in several places last week on the web. One “source” actually suggested perhaps he was hired just to keep his mouth shut as who would better know how really toxic the traded paper is and what really lies out there?”

OK… You know me, I’m not one to put speculation in the Pfennig, especially when it appears on a website… But, this really struck a chord with me (probably cmaj7 my fave chord!)… And it appeals to my conspiracy theory blood… Let’s just hope it’s not even close to the truth!

I hear that the major oil companies that are attempting to get Oil out of the oil-sands in Canada, have decided to halt the spending there. For those of you not familiar with these oil-sands in Canada… These are the world’s biggest energy reserves outside Saudi Arabia. Getting the oil out of the ground here is a real problem and costly, and with the price of Oil dropping since July, the oil companies drilling here, have decided to cut back on the costs… I don’t understand this decision, as this IS the time to drill!

Currencies today 11/11/08: A$ .6685, kiwi .5830, C$ .8385, euro 1.2740, sterling 1.5575, Swiss .85, ISK 182, rand 10.1825, krone 6.90, SEK 7.875, forint 210.50, zloty 2.2050, koruna 19.89, yen 97.75, baht 34.94, sing 1.4980, HKD 7.75, INR 48.10, China 6.8250, pesos 12.88, BRL 2.2050, dollar index 86.02, Oil $60.30, Silver $9.97, and Gold… $739.15

Well, I would just like to say Thank You to anyone that reads this letter that is or was in the service for this country… And Thank You to those that are no longer with us to read the Pfennig. Sure hope your Tuesday is Terrific…

Source: Veteran’s Day

This from Money Morning:

On the surface, it appears as though the Chinese economy is suffering along with the rest of the world. The economic crisis that has ensnared Western economies is expected to dampen Chinese exports and there is already evidence of capital flight.

But the real story is that China’s foreign exchange reserves – at $1.9 trillion – remain at an all-time high, and the outflow of capital, or “hot money,” will actually deflate many of the asset bubbles that speculative investment has created over the past several years.

Ultimately, the so-called “global recession” that many analysts have projected as a virtual certainty will serve as only a temporary correction for China’s economy, which is still projected to expand by at least 8% this year and next – even as its Western counterparts sputter

Is Hot Money Leaving China?

“Hot money” refers to foreign funds that are temporarily transferred to a financial center and can be withdrawn at any time, or to the massive quantities of capital that international speculators can shift from one market to another across the globe – whipping a market into a frenzy when it flows in, and potentially leaving it flat and shattered when it’s whisked away. It’s a boom-and-bust cycle that’s occurred time and again throughout history: In the early 1990s, for example, hot money flowed into such emerging-market economies as Hong Kong, causing some stock markets to double in a year. But all those gains – and then some – were given back a year later when speculators pulled out of the emerging markets in pursuit of the next “hot money” investment opportunity.

The emerging economies have been the target of the hot-money crowd again in recent years, as investors and speculators scoured the planet for the highest-possible returns. But with the onset of the current financial crisis and drum-tight credit markets, much of that hot money is on its way back to where it came from.

The Institute of International Finance estimates that capital inflows to 30 emerging markets will decrease by nearly a third this year, from $900 billion in 2007 to $619 billion this year, before declining to $560 billion in 2009.

Analysts estimate that anywhere between $10 billion and $25 billion fled China in September, as the global financial crisis worsened.

To support this claim, analysts point to China’s massive foreign exchange reserves. Foreign exchange reserves increased $96.8 billion in the third quarter to a record high $1.9 trillion, but even though China’s currency stockpile grew, it expanded at a slower rate than previously seen. China’s broad measure of money supply grew by 15.3% last month, down from 16% in August.

China recorded a $29 billion trade surplus in September, and nearly $10 billion in foreign direct investment, yet the country’s reserves grew by just $21.4 billion – a red flag for many analysts.

“I think it’s pretty certain that we are seeing an outflow of capital at this stage,” Glenn Maguire, Asia economist for Société Générale SA (OTC ADR: SCGLY), told The Wall Street Journal. However, he said, “what we are seeing is an unwinding of the hot-money flows that occurred earlier in the year, rather than outright capital flight.”

Indeed, roughly $120 billion in hot money poured into China throughout all of 2007, and Michael Pettis, a finance professor at Peking University, estimates that more than $200 billion flooded in during just the first half of 2008. But as credit tightened over the past several months, it’s likely that many financial institutions called much of that money back in an effort to shore up their own balance sheets and ensure adequate liquidity.

“This outflow likely reflected foreign financial institutions attempting to repatriate capital and hoard dollar liquidity in the midst of the credit crisis,” Logan Wright of Stone & McCarthy Research Associates in Beijing told The Journal.

The dollar’s appreciation against foreign currencies, including China’s yuan, is another reason for the recent shift in hot money flows The yuan has appreciated 17% against the dollar since the peg between the two currencies was dissolved in 2005. It rose roughly 7% in the first nine months of the year, drawing in speculative investors looking to cash in on the currency’s continued appreciation.

However, Beijing likes to keep the yuan artificially low as a means of boosting exports, and the currency has climbed far too fast in the first half of the year for the government’s liking.

“Worries about the economy have escalated,” Yang Bin, a Beijing-based dealer at Bank of China Ltd., the country’s biggest foreign currency trader, told Bloomberg News. “A return to the fast pace of appreciation in the first half would stifle struggling export industries at this difficult time.”
Indeed, a dealer confirmed to the Economic Times, that “despite the global dollar weakness, the market believes China’s slowdown won’t allow the yuan to strengthen too much in the near future.”

Additionally, the dollar has rallied nearly 20% against the euro since April, and because China’s reserves are reported in dollars, the value of its non-dollar holdings has been shrinking. That, too, has contributed to the apparent slowdown in China’s reserve growth.

“We think the (reserve-growth) slowdown is related to the dollar’s recent strengthening,” Li Heng, a Beijing-based economist with TX Investment Consulting, told the AFP. “We believe [the] forex-reserves growth will stabilize in future. So far, significant growth in capital outflows is not happening.”

So long as there is no dramatic withdraw of cash from China – and there hasn’t been so far – a slight correction or pullback would actually be beneficial for an economy that has been growing too fast for its own good in recent years.

All of the speculative capital flowing into China over the past decade has fueled inflation, driven up stock prices, and helped accelerate a worrisome bubble in the real estate market – similar to the one created in the United States. So, in that respect, the recent outflow of capital is actually restoring fair value to the marketplace.

“The excessive influx of hot money will expand market liquidity, cause excessive money supply, and will eventually push up inflation,” Zhao Qingming of China Construction Bank told the Beijing Review. “The hot money inflow also poses more pressure for yuan appreciation. It can also create bubbles in the property and stock markets.”

Stephen Green, of Standard Chartered PLC, told the Financial Times that, given the exodus of foreign capital in the third quarter, the problem of too much hot money is “beginning to sort itself out.”

“This is certainly reducing some of the pressure, which will be welcome in Beijing,” Green said.

China’s Leaner, Meaner Economy

When China’s foreign-exchange reserves jumped to their world-record high in the third quarter, its currency holdings were up 33% as of the end of September, from a year earlier.

The Chinese market “remains liquid and the financial system is broadly sound,” said central bank Deputy Governor Yi Gang.

Indeed, liquidity is not an issue in China. Instead, the question is how will the economy hold up in the face of a severe global downturn. So far, the signs are encouraging.

Of the world’s large economies, China has fared the best throughout the duration of the current economic crisis. Whether Chinese banks were “wise, lucky, or better regulated,” they avoided exposure to the risky subprime mortgages and derivative products that caused the current financial firestorm, said Liu Erh-fei, managing director and chairman for China at Merrill Lynch & Co. Inc. (MER).

“There is no systemic risk in China’s banks that could spill over into a full blown financial crisis,” Liu said. “China is not affected by this virus that permeates the U.S. and European economies.”

Liu added that China would be able to maintain “reasonable” growth at, or above, 8% so long as it is able to tame inflation and increase domestic demand.

There are already signs that inflation is subsiding, and the outflow of hot money may be, in part, responsible for that. Another factor is the decline in commodity prices that has accompanied weaker global demand and a stronger dollar.  The price of oil, for instance, has plummeted more than 50% from its record high of $147.27, set July 11.

Inflation in China receded to 4.9% in the year to August from 8.7% in February. And Goldman Sachs Group Inc. (NYSE:GS) forecasts that it will fall as low as 1.5% in 2009. That means the biggest task ahead for China will be spurring domestic demand to compensate for a decline in exports.

Exports rose 21% in August from a year earlier, after soaring 27% in July, and that growth rate will likely continue its downtrend as economies in the United States and Europe, China’s two biggest trade partners, continue to weaken if not contract.

Fortunately for China, domestic retail sales are up, having jumped 23.2% in August from a year earlier.

According to Merrill’s Liu, Beijing is well enough equipped to steer its domestic economy towards stable growth by aiding rural development and sponsoring infrastructure projects.

“The government has all this cash and it should use it,” Liu said.

China has a budget surplus of 2% of gross domestic product (GDP), according to Standard Chartered’s Green. And public sector debt is just 16% of GDP.

Beijing already has plans increase the number of rural banks and lending firms to 100 by the end of the year, from 61 at the end of August, Bloomberg reported. This will improve farmers’ access to credit.

The government could also change current land ownership laws to give farmers the ability to transfer (lease or sell) the rights to 30.5 million acres of rural residential land, to market-oriented farm corporations. That would give those farmers looking to sell their property more access to capital and income, as well as aid companies in need of land to develop Bloomberg said.

Additionally, China still has strong growth in its burgeoning cities. Fixed asset investment in urban areas rose 27.4% in the first eight months of the year.

“Despite negative shocks of the financial crisis, China will accelerate transformation of the growth model, promote domestic demand – especially household consumption – and maintain fast and stable growth,” said Deputy Governor Yi.

The Chinese economy accounted for one-third of global GDP in the first half of the year. It could play an even greater role in 2009.

Source: Although “Hot Money” Flees China the Red Dragon Will Emerge From Financial Crisis Unscathed

Well… The dollar continued to push the envelope against a handful of currencies yesterday. Up front and center, the high yielders got beaten about the head and shoulders by the dollar. Aussie, kiwi, real, rand, all took major hits from the dollar. It was one of the worst days I can remember seeing for these currencies. This huge sell off showed two things going against the high yielders… 1. Commodities (other than Gold) are getting whacked, and 2. The Carry Trade is Dead…

To add insult to injury, the Reserve Bank of Australia (RBA) surprised the markets with a shock 100 BPS rate cut last night. A short-lived rally in Aussie after the announcement leads me to believe that interest rate expectations are not driving currencies right now. Instead, we’ve got the same kind of strange thinking in the markets, much like in 2001 and 2002, where the markets rewarded currencies that had Central Banks that cut rates to promote growth… It was the first time I had seen currencies gain after being debased, but it was there right before my eyes, and now, this… It could be happening again…

Yesterday, Japanese yen actually traded for a good part of the day with a 100 handle! That was a 3.5% gain in one day VS the dollar! Talk about the Carry Trade being dead… WOW! I looked up from my attempt to work through trading yesterday and saw yen with a 100 handle, and shouted out… “Hey! Look here everyone, yen is 100, I told you all that yen would get to 100!” Then some smart alec yelled back… Yeah, you said that two years ago, now sit down and trade currencies! HAHAHAHAHA! Funny guys…

On the Very Serious side folks, is the news that we came across yesterday when attempting to deal in Icelandic krona… There was no forward market! Dealers would only quote spot transactions! The banking crisis had reached a point that basically shut the markets down. The currency dropped 33%!!!!! This was Serious Stuff folks, I was scrambling around trying to find a forward market so our CD’s could roll to the next maturity… But there was none… Well, maybe one could be found if the buyer wanted to take HUGE LOSSES… One’s that were 1000% away from the previous week’s bad forward points.

Basically, what happened is that, as I reported yesterday morning, the Icelandic Central Bank was waiting to hear from the Nordic Central Banks regarding a bailout, when they had to take the second largest lender, Landesbanki, into receivership… This news spread quickly, and caused the currency to drop to depths not seen in recent years. Since then Iceland has announced that they had received a 4 Billion euro loan from Russia to provide the banking system help and liquidity.

Now… The Central Bank has announced plans to peg the Icelandic krona to the euro at a value of 131. So… Like I said above, there is no forward market, the Icelandic krona CD’s that remain will have to be closed when they come due. And they can NOT be traded / broken ahead of maturity, as there is NO FORWARD MARKET. A sad ending to what was once an exciting currency to be in… But had faded badly since early this year when the banking crisis arrived on the Icelandic scene.

So… There are a lot of theories as to why the dollar continues to rally in the face of increasing debt burdens, job losses, factories nearly shutting down, etc. In the end it really is just a case of the U.S. and Europe being in a bind, and them coming back to dollars as a safe haven… There’s the CDO’s unwinding, there’s the capital requirements on toxic waste bonds, there’s a ton of things going for the dollar right now, and I won’t deny it… Which is why I said yesterday, that I needed to go sit in a corner with my back to the room, for not seeing this ahead of time… I was so myopic about all the bad stuff causing problems for the dollar, and didn’t see the bad stuff causing dollar strength… Just didn’t make sense to me, the dollar looked like it didn’t have a prayer…

OK the focus today, since the data cupboard is basically in need of a trip to the grocery store, will be on speeches… First, European Central Bank (ECB) President, Trichet, will speak at the World Policy Conference in France. That will be followed by Big Ben Bernanke talking at a Capitol Hill boondoggle. Fed Head, Stern, will speak in Chicago on Financial Shock, which should be quite current, eh? I think the thing to think about here is that Trichet, and the hawkish Fed Heads, including Big Ben, remember he said in June that he was an inflation fighter, are all going to have to back off their hawkish statements… This is not the time to be putting the fear of higher interest rates into the markets…

Things like the Wall Street Journal (WSJ) reporting yesterday that Bank of America (BAC) announced a cut in their dividend by 50% and raise $10 billion through the sale of common stock. Tell me that fundamentally the U.S. economic position is teetering… So, will the dollar’s run be short-lived? Well… As far back as July I was telling anyone that would listen to me that I thought the dollar strength would last through the elections and probably through year-end. So… That’s my story and I’m sticking to it.

We will see the color of the Fed’s FOMC meeting minutes from last month’s meeting… One would think that it would be, if they were honest with themselves, a picture of an economy in shambles… Plus that was the time when all the you know what was hitting the fan with Fannie (FNM) and Freddie (FRE), IndyMac Bank (IDMC), AIG, and a host of other problems… Should be interesting reading… If it isn’t, then they were hiding things…

OK… Let me go through this Gold and Silver stuff again… Some of you missed class the last time I talked about this, so here goes… The metals dealers don’t have ANY supply of coins or bars, PERIOD! Metals dealers haven’t received shipments in some time. The minters had stopped minting because of a backlog in orders. It really is a HUGE mess! And there’s nothing we, the dealers, or minters can do about it.

Now… I know what you’re saying… But Chuck, if there’s a shortage, the price should be going through the roof for the metals… And to that I would say, you are correct sir! (and Ladies!) Can you say, hanky panky? There’s hanky panky going on here folks…

BTW… Gold rallied yesterday… Oil was down… The dollar was up… And Gold rallied? That seems strange to even type much less say! But it’s true , it’s true, I did see a Gold rally! And… It’s rallying again this morning, up $22 right now on the day!

So, the turmoil in the markets continues today… Stocks were off 800 points at one point in the day yesterday before rallying back to close down “only” -370 points… The DOW is now trading below the 10,000 level… YIKES! All I can say is that I’m glad I sold all of my stocks last October! I have no idea what moved me to do that, except that I saw this all coming, as I had chronicled in the Pfennig, and for once in my life I have someone who needs me, no wait, for once in my life I acted on my thoughts for the market!

The euro seems to be in a mini-rally this morning, as I’ve seen it move higher throughout the time I’ve been here writing. There was profit taking in Japanese yen overnight, and the currency is trading back to 102, but 102 is still better than 110! I see where China’s renminbi moved higher VS the dollar, the most it has in one day, in 7 months! Remember, China was on holiday all last week, and therefore left the renminbi unchanged on the week… But that was quickly changed in the first two trading days, and that has to be a good sign for all that talk about a China slowdown!

The Chinese government indicated that the move downward in the renminbi before the holiday was too much, and that they want a “stable currency” to stabilize their markets. Makes sense, eh?

Our little Christine told me last night when we were leaving that she had received a truck load of CD breaks for this morning. UGH! This is not the time to sell into this kind of a market folks… It’s akin to catching a falling knife! But… It’s obvious that they are in panic mode, which I don’t blame them… I don’t know their personal investment situations… According to FDIC, CD holders must have a “financial reason” and a “need for the funds” to break a CD… So, that’s all I have to go on!

Currencies today 10/7/08: A$ .7160, kiwi .63, C$ .9070, euro 1.3585, sterling 1.7450, Swiss .8760, ISK (no quote), rand 8.8130, krone 6.1825, SEK 7.1250, forint 183.90, zloty 2.5350, koruna 18.07, yen 102.10, baht 34.52, sing 1.4640, HKD 7.7660, INR 47.95, China 6.8170, pesos 11.93, BRL 2.1790, dollar index 81.24, Oil $90.40, Silver $11.63, and Gold… $882.25

Source: Iceland Melts Down…