Credit Woes Sink the Dollar!

Good day… And a Tip Top Tuesday to you! I thought I would change it up there today. Well… Overnight, we’ve seen the euro (EUR) reach a new record high versus the dollar, only to give some of that ground gained back on some weak German data. There was more news yesterday regarding the Freddie and Fannie saga, but I’ve grown tired of that talk; we dance now! Seriously, though, I have grown so tired of all that Freddie and Fannie talk, that I’m going to go through an exercise explaining what GSE’s are and then go on with life.

So… The euro reached a new record high overnight of 1.6038! WOW! This was reached based on the fears that credit problems in the United States are going to put the kyboshes on what little economic growth we now have. But the shine on the euro was rubbed out by a very weak ZEW. German Investor Confidence as measured by the think tank, ZEW, fell to a record low this month on the surging inflation problems, and rising interest rates. So for now, the euro is back below 1.60, but hear me now and listen to me later… This ZEW report will soon be in the rear view mirror, and the euro won’t have that albatross around its neck as it revisits its overnight high.

And don’t look now, but the Aussie dollar (AUD) is up to 98-cents! WOW! I’ve said for about eight months that I wouldn’t be surprised to see the Aussie dollar at parity to the green/peachback. It certainly has that parity look about it, does it not? The last time the Aussie dollar was 98-cents was 1983… 25-years ago… A quarter of a century, and all that!

The U.K. pound sterling (GBP) is back to $2, which seems totally unlikely… But it has happened, so, go on and crow if you thought I was wrong to say the pound was going to have problems once the Bank of England (BOE) started its rate cut cycle.

And the Canadian dollar/loonie (CAD) has crept back to parity! It’s been a long, time coming… It’s going to be a long, time gone… (A little CSNY)…

And, the poor, downtrodden, Japanese yen (JPY), is at the bottom of the 105 handle, and looking like it wants to trade with a 104 next to it! I had to laugh at a story I saw flash across the screen. The title was… “Yen may gain as Bank of Japan (BOJ) is more likely to raise rates than the Fed”. HAHAHAHAHAHA! Now that’s funny! OK, stay with me on this… A month ago, the dollar was getting bought like Pet Rocks because Fed Chairman, Big Ben Bernanke hinted that he was going to be an inflation fighter, thus interest rates would go higher. But here we are a month later, there’s been on sign of Big Ben the inflation fighter, and now it’s deemed that the BOJ could raise rates before the Fed! And the dollar bulls wonder why their currency is getting sold like funnel cakes at a state fair? Why don’t the dollar bulls give Big Ben a call on the telly, and see if he can’t help them out? Oh… That’s right, Big Ben doesn’t take calls from just anyone. According to our friend, Jim Rogers, on his Bloomberg TV interview yesterday morning… “Ben Bernanke and Paulson only take calls from their Wall Street Buddies”. HA!

Speaking of Jim Rogers… He was full of you know what and vinegar yesterday morning. He didn’t pull any punches and said what was on his mind. You should have seen me here at the trading desk… Jim Rogers would say something, and I would clap and hoot and holler! At one point, Rogers said that the government’s plan to rescue Freddie and Fannie was “an unmitigated disaster”.

So… Remember early in the year when I kept telling you that there would be another “risk event” this year, and then we had the Bear Stearns meltdown, but that wasn’t it for the “risk events”, and I kept harping that there would be more? Well… It’s not like I was wishing, and hoping and thinkin’ and praying for these things to happen… I was simply pointing out that the world today has too many “risk events” all over, and with the credit woes in the United States and the housing and mortgage meltdowns, I just figure it would touch here a few times.

Anyway… What I’m trying to get at here is simply that these are the things I kept telling people to protect themselves against by diversifying into currencies and precious metals. I also recall the wink, wink, I gave you when gold was trading below $900 about a month ago… Today, gold is $983!

OK, enough with all the “I told you so” talk! Let’s talk about today… Well, today has “risk” written all over it! Big Ben goes to the “hill” to talk to lawmakers about the economy and Fed direction. You have to think that before the Meltdown last week of Freddie and Fannie (see…more talk about them; I just can’t leave them on the side of the road!), that Big Ben would have gone to the “hill” and talked the “inflation fighter” talk. But now… Not now… Not with the financial sector in meltdown mode. So this is a double-edged sword. If he doesn’t go and sound hawkish, then the markets will take that to mean that no rate hike is coming and take the dollar to the woodshed again… (You would think by now that the dollar would have gotten used to these beatings!)

Besides Big Ben, we get a ton-o-data today… PPI for June… Retail sales for June… And business inventories for May. Retail sales is the Big Kahuna of data today, and I would think that given the tax rebate checks that were still being mailed in June, retail sales would remain somewhat robust. Wait till July’s number; I saw all the shopping bags from my beautiful bride’s trip to Chicago this morning! But that’s for next month! For now, PPI poses a threat to future consumer inflation, so this one plays big, too.

If any of this stuff comes in worse than expected, we could see the dollar not only get taken to the woodshed, but told to go pick the switch that it will get beaten with! (OK, that takes me back to the farm as a kid… If we were bad, we were told to go pick the tree limb (switch) that we would get smacked with. Talk about adding insult to injury! But hey! Look at me! I grew up, didn’t kill anyone, didn’t rob my neighbors, didn’t develop a drug addiction, and didn’t hate my parents. Wow! Now-a-days “they” would tell you that couldn’t happen, not with getting spanked as a child! HA! What dolts!)

Oh… And rode my bike all day long from sunup till sundown without a helmet! OH NO! Of course some of you might say, see what happens! HA! Living dangerously, that was me! HA!

OK, enough of that! Today has “risk” written all over it, and I should stick to the facts here and not go off on tangents!

I said at the top that I was going to do a little ‘splainin’ Lucy style, regarding these GSE’s that keep getting talked about with regard to Fannie and Freddie… So here goes… Now, if you already know about GSE’s, then go ahead and skip to the Big Finish.

First off… A GSE is a Government Sponsored Enterprise… Here’s the skinny on them…

The two largest housing GSEs – Fannie Mae (FNMA) and Freddie Mac (FHLMC) – own and/or securitize upwards of 70% of the residential mortgage loans in the United States. Ginnie Mae (GNMA) is a government corporation that performs a similar function to Fannie and Freddie, and has the explicit backing of the full faith and credit of the United States government, although there is a perception (and a political reality) that Fannie and Freddie are “too large to fail” and, therefore, will be bailed out by the government should they get into financial trouble. This perception is reinforced by their line of credit with the U.S. Treasury and other benefits of GSE status, such as exemption from state and local taxes and use of the Federal Reserve as a transfer agent.

A GSE bond is perceived to have the same risk as a government bond, which is essentially near zero risk. While GSEs clearly state their securities are not backed by the U.S. government, the market largely perceives them to have an implicit government guarantee.

There you have it… All this and education too! And for free! WOW, where do I sign up for this letter? No wait, you dolt, I write it!

It looks like the selling from the German ZEW for the euro has already been put in the rear view mirror and the euro is back to above 1.60! That was quick!

Currencies today 7/15/08: A$ .9840, kiwi .7730, C$ 1.0020, euro 1.6020, sterling 2.0110, Swiss .9975, ISK 77.70, rand 7.6450, krone 5.0210, SEK 5.9250, forint 145.42, zloty 2.0370, koruna 14.56, yen 104.60, baht 33.48, sing 1.3460, HKD 7.7990, INR 43.20, China 6.8211, pesos 10.31, BRL 1.5970, dollar index 71.46, Oil $146.25, Silver $19.35, and Gold… $984

That’s it for today… Tough day for yours truly yesterday, as the fourth week of treatment really kicked my tail… But I got through it, and today is starting out better, so I’ve got that going for me! The activity on the desk has really picked up in the last week, and rightly so; too bad these people are just now realizing that they need to diversify! Better late than never, I say! Next week, when I’m in Vancouver, the Pfennig will be at least 2 hours (if not more) later in the morning, due to the time zone difference. I didn’t know that Chris was going to be on vacation during the Vancouver show, so I’ll do it on the road, two hours later! What a show that Josh Hamilton put on at the Home Run Derby last night… WOW! He almost hit the ball out of Yankee Stadium! All-Star Game tonight, St. Louis Cardinal, Albert Pujols will bat cleanup for the National League! So… Watch out for all the risk today, and make it a TIP TOP Tuesday!

Chuck Butler
July 15, 2008