The Return of the Credit/Liquidity Crunch?

Good day… And a Happy Friday to one and all! A Fabulous Friday, and Jobs Jamboree Friday to boot! We finally saw some dollar strength, albeit for only half a day, yesterday. The data that printed wasn’t as unfriendly to the dollar as most data has been recently, and at one point in the day it looked like a mini-dollar rally was on the way.

But that all ended by lunch time… I see that the roster of investment gurus calling for additional rate cuts by the Fed has added another BIG NAME! Dennis Gartman says the Fed may cut rates to “well under 3%”. I have a funny story that relates here… Last week in New Orleans, I couldn’t get the Internet to work in my hotel room, so I went down to the booth to write the Pfennig. I was writing as fast and furious as I could – not paying attention to what was going on around me. It was early, and only exhibitors were supposed to be in the exhibit hall… A voice then said to me, “You are the guys that offer renminbi deposits right?”

Not even looking up, while writing, I said, “Yes, we are,” and continued writing. The voice then asked what the details were… And I said – again not looking up – what the details were. I then stopped and looked up, and it was none other than Dennis Gartman!

I was so embarrassed! Here is one of the most well respected investment analysts around, and I was not paying attention… Only to my Pfennig! Silly me!

OK… So much for that story… I have another one that really asks an important question…

The Big Boss, Frank Trotter, was doing an interview with a guy at the U.S. Treasury Department regarding the Fed’s rate cut. (They had called me to do it, but I was sleeping!) Anyway, as the conversation goes along, the Treasury guy says to Frank… “You know, there are a lot of guys here looking to get out of the dollar.”

When Frank told me this, the hair on the back of my neck stood up… “That scares me,” I said to Frank. “What do the Treasury guys know about the dollar that the rest of us should know?” If this little conversation doesn’t lead you to believe the United States wants a weaker dollar, then nothing will!

Oh… And did you see the story in the Wall Street Journal Online yesterday about the job action in Dubai because of the weak dollar? Seems inflation is eating their dollars alive. I would look for the U.A.E to break the dollar peg some time in 2008.

Yesterday afternoon sure looked like carry trades were unwinding again, as the usual suspects (read high yielders) were all selling off, while Japanese yen (JPY), and Swiss francs (CHF) gained ground. Then I heard later as I drove home that the Dow lost a chunk of ground, and it all came together – risk aversion had entered the marketplace. How long it stays around is the question…

Two high yielders that didn’t really get caught up in the selling were: 1. Pound sterling (GBP), and 2. Icelandic krona (ISK)… I traded pound sterling above 2.08… WOW! Aussie (AUD), kiwi (NZD), and South Africa (ZAR) all lost some major ground, while the Icelandic krona only lost a small amount. Iceland’s fall would have been greater, except for the announcement yesterday that they had raised interest rates 45 BPS.

I’m wondering if the credit crunch and liquidity problems aren’t returning to the markets. The Fed had to inject $41 billion of liquidity into the banking system, a single-day high since 9/11. Credit Suisse had to write-down $2.2 billion from the housing meltdown, and refused to say if they would not suffer more write-downs in the fourth quarter.

Listen to me now and hear me later… This is getting ugly. Check out the lineup of bad stuff that happened, under the media’s nose, but was not reported yesterday…

Reports surfaced that Fortress Investment Group was experiencing SIV problems. Radian Group, the third largest U.S. mortgage insurer, reported its first quarterly loss, and First American Corp., the largest U.S. title insurer, was sued by the NY Attorney General for allegedly inflating home values under pressure by Washington Mutual.

Chrysler announced 12K layoffs… And finally… The ISM Manufacturing Index slid very close to the line in the sand that determines expansion versus contraction… The Index printed at 50.9… As I’ve explained many times in the past Ricky, the 50-level is the line in the sand… Anything below it represents contraction… And vice versa for the above the level.

I find this to be interesting given the amount of exports the government keeps telling us are going on.

The brief dollar rally yesterday morning halted gold’s rise to within a whisker of $800. Can you believe that? $800! WOW! Not to worry… I’m sure we’ll see it there soon enough and then it will be in our rear view mirror! Wouldn’t that be nice? To live together in the kind of world where we belong… And wouldn’t it be nice to, WAIT! Although the Beach Boys are great to hear on a Friday morning, I don’t need to break into song here!

Some mixed data from Australia yesterday left the Aussie open to carry trade selling. First, the bad news… Australia’s trade deficit widened by $1.9 billion in September, as exports were outpaced by imports, which indicates a strong domestic economy still.

The good news was that retail sales jumped 1.9% in the September quarter, putting the annual retail sales figure above 8%. Just another indication that a strong domestic economy exists here, and that the Reserve Bank has more work to do to cool the heels of that strength… And they will do that by raising interest rates. As I’ve already told you, look for a rate hike from the Reserve Bank of Australia in December and then one in the first quarter, and one in the second quarter of 2008.

So… In my mind… Even if carry trades continue to unwind, the effect on the Aussie dollar might be offset with the higher interest rates… A-la Iceland today.

OK… Today’s a Jobs Jamboree Friday… And since this data has been all over the board recently, I think we had better pay attention to it, not that we normally don’t, but this one could be a doozy. Job creation is forecast to have gained only 84K in September… But that’s before the Bureau of Labor Statistics gets their hands on the data to massage it. I would suspect this to be probably around 125K, after the BLS tinkers with the numbers… And while the media will go gaga over creating 125K jobs (not really, but they don’t care to look under the hood), it still is not enough to keep up with the economy.

125K merely tells the markets that the labor market is still “muddle through” as my friend, John Mauldin, likes to say… And “muddle through” is not going to help the dollar in any shape or form.

The price of a barrel of oil backed off of the all-time high of $96.24 yesterday, and has settled in around $94. There had to be a ton of profit taking on oil contracts once it hit $96. I was pretty sure we would see the $100 oil figure before year-end… But as fast as it has moved through the $90 handle, that may be a conservative call now! But what difference does it make? As far as the accountants figure, the price of oil hasn’t entered inflation into our economy. How could it have? Inflation is running 2.4%, and oil has increased to $94 a barrel… I shake my head in disgust over these inflation numbers they expect us to accept, like we’re morons and we just fell of the turnip truck!

Before I go to the Big Finish I wanted to give you something that a reader sent to me yesterday… This is from John Maynard Keynes, the famous British Economist that died 60 years ago! “The best way to destroy the capitalist system is to debauch the currency. By a continuing process of INFLATION governments can confiscate, secretly and unobserved, an important part of the wealth of their citizens.”

As I head to the Big Finish… The currencies have really added to yesterday’s gains in the overnight markets of Asia and Europe… Pretty impressive moves, so with no further delay, I give you… The Big Finish!

Currencies today: A$.9205, kiwi .7650, C$ 1.0580, euro 1.4480, sterling 2.0860, Swiss .8670, ISK 58.95, rand 6.5850, krone 5.4180, SEK 6.3840, forint 174.18, zloty 2.5180, koruna 18.6160, yen 114.70, baht 31.74, sing 1.4490, HKD 7.76, INR 39.34, China 7.4550, pesos 10.68, BRL 1.7480, dollar index 76.49, Oil $93.96, Silver $14.23, and Gold… $793.20

That’s it for today… Sleep, sleep, sleep that’s all I seem to do once I get home… This is supposed to be my “good time” with two weeks away from the cancer medicine! Don’t get me wrong, I love sleep… I’ve just been loving it too much this week! My beloved Missouri Tigers travel to Boulder Colorado on Saturday, which is a tough place to play if you’re the visitors! It sure would be nice to get a victory there! I’ll be glued to the TV Saturday evening for sure! My little buddy’s last football game of the year is tomorrow… I sure have had a great time watching him play this year. He sure loves to play the sport! So… I hope you have a Fabulous Friday, and Wonderful Weekend… I hope to, if I can only stay awake!

Chuck Butler
November 2, 2007