Greenspan Goes to the Hill

St Louis, Missouri- Good day… Another big move up by the dollar and the Japanese yen (JPY) last night. Really just another repeat of what we have been seeing each day of this week – dollar down, gold down, and oil down. And with the stock market falling dramatically yesterday, all of us on the desk were searching for something that was actually up yesterday. Our bond trader, Don Reis let me know that muni bonds rallied dramatically, along with U.S. treasuries. So I guess investors are just continuing to park funds into the U.S. fixed income markets.

Chuck is headed back home this afternoon, after spending the past two weeks traveling the country with FX University. I’m sure he will be happy to get to sleep in his own bed again tonight, and will catch up on his rest tomorrow. He sent me the following note to share with readers:

“Well… Another day and another dollar rally… I’d like to thank Chris for all his work on the Pfennig while I’ve been out. I’ll talk to you all on Monday. But for now… Chris did an excellent job putting together all my different reasons for the dollar being so strong yesterday, didn’t he? Since nothing’s changed in that regard, and nothing probably will for months, I thought I would skip the dollar talk and go somewhere else…

“First of all… Here’s a quote by Thomas Jefferson that really struck a chord with me… (And remember… Thomas Jefferson wrote this over 200 years ago!)

“‘The central bank is an institution of the most deadly hostility existing against the Principles and form of our Constitution… Bankers are more dangerous than standing armies… (and) if the American people allow private banks to control the issuance of their currency, first by inflation and then by deflation, the banks and CORPORATIONS that will grow up around them will deprive the People of all their property until their children will wake up homeless on the continent their Fathers conquered.’

“Now if that doesn’t shake you up, and get you mad at all these dolts who have put our country in this mess (and that’s now spreading into Europe), I don’t know what will… OH! Maybe it’s this…

“Yesterday, I came across a story regarding the audit of the credit ratings agency, Moody’s… You see, the examiners are convinced that ratings Agencies employees were doing no good in rating those mortgage bonds so high. Well, in an examination of various emails, they found this quote by an employee of S&P (according to the story on Bloomberg), ‘Let’s hope we are all wealthy and retired by the time this house of cards falters.’

“And also from Bloomberg… ‘And in an investigation over at Moody’s…the employees at Moody’s Investors Service told executives that issuing dubious creditworthy ratings to mortgage-backed securities made it appear they were incompetent or “sold our soul to the devil for revenue”‘.

“Shame, shame, shame… Shame on all of you! But then, they haven’t been convicted of anything yet, so in this country they are presumed innocent until found guilty…”

Chuck always calls it like it is! And he just sent me another message reminding me that the founding father of all of this mess, Alan Greenspan, will be on Capitol Hill today addressing the House Committee on Oversight and Government Reform. Big Al was very vocal in his aversion to increasing financial supervision as Fed chairman from August 1987 to January 2006. He said in a May 2005 speech that “private regulation generally has proved far better at constraining excessive risk-taking than has government regulation.” During his term at the Fed’s helm, Greenspan repeatedly warned lawmakers against inhibiting markets, such as by tightening oversight of certain types of derivatives.

Greenspan’s office released a copy of the prepared testimony he will give to congress today, and in it, the Former Fed head does a dramatic about face. He is now trying his best to distance himself from the free-market culture that he helped create. But during his testimony today, he will call for tighter regulation of financial companies. “Firms that bundle loans into securities for sale should be required to keep part of those securities,” Greenspan will say in his testimony today. Other rules should address fraud and settlement of trades, he will say. I doubt if any of his buddies on Capitol Hill will really let him have it (they let the rating agency heads skate right on through yesterday). As usual, the individuals who were asleep at the wheel during the creation of this crisis will be let off the hook and left to enjoy their retirement while all of us taxpayers pay for their excesses.

I haven’t written much about the data releases in the U.S. this week, as it has been a very slow data week. Today will be the most interesting piece of data as we will get the weekly jobs numbers along with the U.S. house price index. Initial jobless claims will probably increase again this week, as the U.S. economy continues to stumble along in a recession.

Yesterday we got more bad news on the U.S. housing front, as U.S. foreclosure filings increased 71% in the third quarter from a year earlier. Foreclosures are now at the highest on record, as home prices continue to fall and stricter mortgage standards make it harder for homeowners to sell or refinance. As we have repeatedly warned, the government bailout on Wall Street will not have an impact on the housing market slide. All of the money given to the big Wall Street financial firms is being used to make up for the losses they have on the ‘creative’ investments they sold each other. All of the talk about how this bailout money will help homeowners is just a bunch of Paulson doublespeak.

Now the administration is finally starting to talk about giving homeowners some relief, with both the candidates and congress suggesting we come up with a second bailout package aimed at individuals. I guess the first $1.3 trillion just didn’t do the job, or maybe it was just aimed at the wrong institutions. As we have been saying all along, this financial crisis still has a few surprises to spring on us, and it is far from over for the U.S. taxpayers.

One of the reasons I have heard for the fall of the euro (EUR) is that currency traders expect the ECB to continue to cut rates to stimulate their economy. But ECB President Trichet has held to his commitment to combat inflation, which continues to hold above the ECBs 2% target. But on this side of the Atlantic, officials are more than willing to ignore inflation, as our FOMC is expected to continue to be very aggressive cutting rates over the next few weeks. The FOMC will probably reduce the benchmark federal funds rate by half a point next week to just 1%, the lowest since May of 2004. The official rate has never been lower. So how can currency traders be taking the euro lower on the mere possibility of ECB cuts when the United States has all but guaranteed even more aggressive reductions? It doesn’t make sense to me, but none of the markets haven’t been making much sense lately!

Both the Reserve Bank of New Zealand and the Riksbank in Sweden cut rates last night. New Zealand cut by a record 100 basis points last night in an aggressive move to stimulate their economy. The RBNZ did not express concern over the fall of the New Zealand dollar (NZD) or imported inflation in their accompanying statement. The kiwi initially rallied on the cut, as markets had actually priced in an even more aggressive cut. But the short rally didn’t last and the kiwi is opening up this morning down slightly from where it was trading yesterday.

Sweden cut its key lending rate by a half-point for the second time in two weeks and forecast another similar reduction within six months to cushion the economic slowdown. It also lowered forecasts for growth and inflation. “The interest rate cuts are aimed at alleviating the effects of the financial crisis on the real economy and at the same time attaining the inflation target of 2 percent.” The cut was widely expected so it didn’t have a dramatic impact on the Swedish krona (SEK) which is actually up a bit versus the U.S. dollar.

The yen continued to strengthen overnight, but was joined by some strange bedfellows. We are used to seeing the yen rally as currency trades are reversed, but over this morning the high yielding currencies of South Africa (ZAR), Mexico (MXN), and Brazil (BRL) have joined it. As I mentioned yesterday, expect the unexpected in these markets. Apparently the South African rand is rallying after the central bank assured investors that banks in South Africa are well-capitalized and won’t need a government bailout. South African banks have very little direct holdings in U.S. subprime related assets and do banking in a more traditional manner. The report from the central bank assured investors that the banking system in South Africa is very well regulated and ‘safe and boring’.

The rand rallied in spite of another drop in gold, which is close to breaking below $700 per ounce. And I thought my purchase at $850 was well-timed! We continue to have trouble buying coins or bars in either gold or silver, so the shortage of the physical metal remains. Apparently much of the selling of gold and silver is coming from institutional holders who are having to raise cash, and are using sales of these hard assets. I continue to believe that both gold and silver are cheap at these levels, as global inflation will spike as a result of the tremendous increases in global money supplies.

On to the currencies:

Currencies today 10/23/08: A$ .6603, kiwi .5879, C$ .7873, euro 1.2795, sterling 1.6185, Swiss .8570, ISK (No Quote), rand 11.18, krone 7.1741, SEK 7.8481, forint 222.26, zloty 3.0928, koruna 20.2269, yen 97.35, baht 34.63, sing 1.5029, HKD 7.7529, INR 49.82, China 6.8355, pesos 14.1105, BRL 2.5052, dollar index 85.67, Oil $68.10, Silver $9.3663, and Gold… $706.37

That’s it for today… I will be happy to see Chuck back in the office next week, hopefully he will bring a little currency rally along with him. Blues lost a tough one last night, but are still off to a great start. My wife and I will be heading to the hockey game on Friday night, and Chuck will be going also. I just heard that Sarah Palin will be dropping the puck, so it should be a fun night. The markets continue to be crazy, and the phone volume has picked up again, so I’ll have to jump now. Hope everyone has a Tub-Thumpin Thursday!!

Chris Gaffney
October 23, 2008