The Deed is Done

Good day… And a Marvelous Monday to you! The deed is done… The House, which had previously voted down the bailout package, decided to go ahead and put the country in debt by another $700 billion. Yes, I know the payouts will be in installments, but in my mind it was in one swoop that $700 billion was added to our debt. And guess what? The dollar rallied on the news!

More on the bailout package in a minute… The other thing that happened on Friday was the awful Jobs Jamboree in which 159K jobs were reported lost by the Bureau of Labor Statistics (BLS) during September. The job losses were all over the place, led by those in manufacturing. And guess what? The dollar rallied on that news, too!

OK… I’m raising the white flag, folks. This credit squeeze has the whole world in a tizzy right now, and it appears to me that investors around the world have decided to reward the dollar for all these problems. Seems awful strange to me, since dollar denominated assets are what caused this whole problem, but that doesn’t seem to be on anyone’s mind right now. The dollar has moved to the front of the class against the euro (EUR), and the rest of the currencies that aren’t Japanese yen (JPY) or Chinese renminbi (CNY).

When the dollar can rally in the face of news like it received on Friday, even me, the biggest fundamental trader you’ve ever seen, can see the writing on the wall… This dollar rally goes against everything I’ve ever known or studied regarding fundamentals. I still don’t believe the dollar can maintain this strength going forward, as the funding requirements on the deficit continues to be the Sword of Damocles hanging over the dollar. But for now… I have to go to the corner and sit, for I have been wrong about how the dollar would react to all of this.

Now… I haven’t been wrong about how all of this mess has played out… I’ve warned of “risk events” and we’ve had plenty of them… I was one of the first to bang the drum and warn of a housing bubble… I’ve warned of interest rate cuts, and growing debts… And in the end, I warned that the dollar would take the brunt of all these indiscretions… And it may still… But for now, it’s the belle of the ball… Don’t ask me why… For I don’t know… And don’t remind me of my failures, I’m well aware of them.

So… As I mentioned above… The Japanese yen, and Chinese renminbi are the only currencies posting gains versus the dollar. China, just back from a week of holidays, allowed the renminbi to gain versus the dollar overnight, and that’s a good sign, given the rumors circling around regarding the slowdown in China.

But the big Kahuna moving against the dollar is Japanese yen… Don’t look now, but yen has a 103 handle! Is the carry trade truly dead in the water? Much like the munchkins, we’ll have to see if it is truly dead… As Glenda said… “Let the joyous news be spread, The Wicked Old Witch at last is dead!”… Seriously though… The carry trade does very truly look dead in the water, as the credit squeeze takes its toll on these once favorite tools of investors… They are “risk trades” as I’ve explained 100 times before, and therefore, the credit squeeze wiped them out.

And… So now… Finally, a couple of years after I first said it, the next shoe to drop for the dollar will be against the Asian currencies. It looks like the carry trade is dead, and that the Asian currencies, led by Japanese yen, can finally be left alone to trade straight up versus the dollar.

So… We’re taking on water with the other currencies that have been so profitable for holders for over six years now, but Japanese yen is finally cut free of the carry trade.

The credit crunch/squeeze is spreading folks… I told you about a few of the problems in Europe last week, and how a bank had failed in Iceland… Well… There’s even more problems for Europe… And… Iceland is looking for a bailout now. Iceland is looking for a bailout from the Nordic central banks. I first wrote about a banking crisis in Iceland about five months ago, and every week we send out a notice to Icelandic krona CD holders that they should probably look to do something with their krona CD’s. Well… I’m afraid they will have no choice pretty soon. Recall, last week I told you that offshore investments of krona are getting hammered and that interest rates had gone negative. Well… We won’t be able to offer Iceland going forward, if they remain negative… There won’t be any dealers that will take on the risk of selling us the currency forward… It’s a very sad day in Iceland, folks.

And in Europe… The rot on the vine is spreading. The Euro Summit didn’t produce any real deals or solutions to their problem… And another thing it didn’t produce was a plan that would mirror the U.S’s $700 billion bailout package… I would suspect that the fact that the Euro Summit didn’t produce any answers, has weighed heavily on the euro this morning. The single unit has fallen to a 13-month low versus the dollar. I wonder where those guys from Citigroup who were calling for a euro rally are now? I can’t blame them, I would certainly like to hide under a rock (I know it would have to be a real big rock) right now and let this blow over… But I can’t… I write this daily newsletter!

There is still a lot of talk about coordinated central bank rate cuts happening this week… Even after the European Central Bank (ECB) left rates unchanged last Thursday. I didn’t think the ECB would look at cutting rates as an option, but that was before the rot on the vine was exposed in Europe last week. Now… I’m 50-50 on the ECB participating.

Speaking of the $700 billion bailout package… The stock jockeys sure loved the passing of the bailout package… But what’s there to love about it? Yes, I know… King Henry and Big Ben assure us that this will unlock the seized credit markets, and get this economy rolling again… But didn’t they tell us that back in July too, when they got the president to sign $3.9 billion to help 400,000 home owners that would qualify? They told us then, that the mortgage bill would cure what ailed the housing meltdown… These two have been so wrong about this whole mess going back to last summer when they failed to recognize that we had a housing meltdown.

The overnight markets of Asia and Europe saw stocks sell off big… So it could be that the U.S. stock euphoria over the passing of the package will be short-lived.

Don’t expect this bailout package to cure what ails the economy right now folks… There are going to be more banks closing, corporations closing, and consumer bankruptcies. Banks aren’t going to just open their vaults to the public today and offer loans to anyone that has on a shirt and shoes!

There was a great article in my local Sunday Business Section. I was surprised by that, because there’s normally not much, and I mean NOT MUCH, in my local paper’s Business Section… But that was before yesterday’s print! It’s a great look back at the financial mess we’re in, how we got there, and how our leaders don’t have a clue as to what’s going on based on the myths they keep coming back to… David Nicklaus is the writer, and he dispels the myths and calls them out on how wrong they are, and offers a solution… I don’t have the room or time to do snippets, but if you want to read it, you can find it here.

The Reserve Bank of Australia (RBA) meets tonight, and I fully expect them to cut rates at least 25 BPS and maybe even 50 BPS. It’s not really a rate cut because inflation is in check or anything like that. The Aussie economy has slowed, but not to the degree that would require another rate cut. No, this rate cut, I believe will be of the “let’s reduce borrowing costs, and try to avoid a lending problem like in the U.S. and Europe” kind of rate cut… That won’t help the Aussie dollar any. The Aussie dollar (AUD) is getting whacked on two fronts… The thought of lower yields from the rate cuts, and the Japanese investors repatriating funds (selling Aussie dollars and buying yen).

The Bank of England (BOE) meets this week, and they too will cut interest rates. The BOE will cut 25 BPS and probably follow that up with 25 BPS cuts in November and December.

There isn’t a whole lot of data in the data cupboard this week… All second tier stuff, with the September FOMC meeting minutes being the most important data until we get to Friday, and the August Trade Deficit.

So… The dollar will hold onto its “belle of the ball” title this week as the dust settles on the bailout package.

Next week, I’ll be out all week on the second leg of the Currency Tours. The next leg lasts 10 days, and ends in Jacksonville. That’s the home town of EverBank! We end the following Monday (the 20th), and then I get to travel home on Tuesday, and back in the saddle Wednesday! I don’t know how this one will go, but the last Tour went fine for me… Travel isn’t easy when you have a small handicap like me, but, it is what it is, and you just roll with the punches!

Currencies today 10/6/08: A$ .7460, kiwi .6475, C$ .9215, euro 1.3590, sterling 1.7585, Swiss .8765, ISK 114.52, rand 6.1625, SEK 7.1990, forint 183.70, zloty 2.5410, koruna 18.25, yen 103.05, baht 34.49, sing 1.4630, HKD 7.7670, INR 47.77, China 6.8425, pesos 11.35, BRL 2.0440, dollar index 81.17, Oil $90, Silver $11.39, and Gold… $859.05

That’s it for today… What a huge win for my beloved Missouri Tigers on Saturday night! 30 years of frustration at Lincoln, Nebraska were wiped out with a romp over Nebraska. I’m heading down to Columbia, Missouri this weekend to watch them play Oklahoma St. Saturday night. I’m so excited! Oklahoma St. is a good team too, so this will be a big test for the Tigers! What a great weekend, weather wise here in St. Louis! WOW! I’m feeling so much better these days, the further I distance myself from the cancer drugs… Things are looking up for me health-wise, and that’s more important than what direction the dollar goes! Thanks to all… Time to go. Mike and Mary are here, I must be late! Hope your Monday is Marvelous!

Chuck Butler
October 6, 2008