Trichet “Gets the Memo”

Good day… And a Marvelous Monday to you! What a fabuloso 3-day Holiday weekend! WOW! The weather was great, I relaxed max time, and shot off some fireworks just to keep the tradition going. The weekend was working hard to make me forget the happenings of Thursday.

The Perfect Storm that was possible for the dollar turned out to see the tables turned and it was the euro (EUR) that went into a tailspin on Thursday… Here’s the skinny.

The European Central Bank (ECB) yes indeedly did raise rates 25 BPS and say that it was inflation running high that caused them to raise rates… And about the same time, the Jobs Jamboree posted a job loss for June of 62K, and the storm clouds were forming… But then, the ECB President pulled a rabbit out of his hat and said… “Starting from here, I have no bias”. Folks, that’s just as good as saying, “Here’s your rate hike, don’t expect another one”. No hawkish tone… No pointing out how inflation pressures are causing the ECB problems with their mandate to provide price stability… No nothing – nada, zilch, zero, and the euro was sent to the woodshed… And the whippin’ was awful!

So, what happened here? Ahhh grasshopper, this is the “Beware the Thin Markets” conspiracy stuff I was talking about on Thursday morning. I believe in my heart of hearts that Big Ben Bernanke and Treasury Secretary Paulson, sent ECB President, Trichet, a memo that said… “Please help us out here. You are going to raise rates and talk hawkish on the same day we are going to post a huge negative jobs number, thus telling the markets the Fed is NOT going to raise rates soon… Could you please not sound so hawkish? That would help us greatly… Thanks, Big Ben and Hank.”

Trichet “got the message”… That’s how I truly believe the day went. So, we are sitting with the euro almost 3-cents lower than on Thursday morning when I signed off… U-G-L-Y… With the Big Dog euro getting whipped, the rest of the currencies suffered as well. Not much else to say about all that.

So, let’s get back to basics… The fundamentals of the U.S. economy continue to be rotten. The Jobs Jamboree posted net negative jobs of 62K, and the previous month’s job losses were revised up to negative -62K (from -49K). The Bureau of Labor Statistics (BLS) did their part, just as I suspected they would on Thursday, by adding 177K jobs with their Birth/Death Model. They even had the gall to add 29K construction jobs! Geez Louise, Serenity Now! This is getting preposterous! When will this all come back to bite the BLS? Probably not for awhile, as they will want the dust to settle for some time before they come clean. But for the record… The job losses in June would have been negative 239K, added to May’s negative 279K, if there were no Birth/Death Model.

The data cupboard is empty and needs restocking. But… Did you hear this little ditty about the Fed Reserve? The Fed is going to be faced with a general inspection by the IMF. The story printed on Wednesday last week, but you didn’t hear about it on your favorite cable news station, now did you? Here’s the skinny… Officials with the International Monetary Fund (IMF) have informed Bernanke about a plan that would have been unheard-of in the past: a general examination of the U.S. financial system. The IMF’s board of directors has ruled that a so-called Financial Sector Assessment Program (FSAP) is to be carried out in the United States. It is nothing less than an X-ray of the entire U.S. financial system. No Fed chief in U.S. history has been forced to submit to the kind of humiliation that Ben Bernanke is facing.

I wonder what the IMF will say about those “wonderfully performing bonds” that the Fed took in the Bear Stearns bailout? The writer of the story, Gabor Steingart, had this great line, which sounds like it came right out of the Pfennig… Here it is… “Inflation is going up and up, and this year’s average will likely top 4 percent. But this time Mr. Dollar is also Mr. Powerless. He can raise interest rates in the fall, or he can pray, which would probably be the better choice. At least prayer would not prevent the US economy from growing, a highly likely outcome if interest rates go up.”

So, the Fed has to deal with that embarrassing “audit” from the IMF, while the economy is melting down. I truly believe that consumers are being beaten around the head and shoulders with high gasoline and food prices, their house values falling, credit as tight as a drum, the stock market going to hell in a hand basket, and now job losses for 6 consecutive months. This all sounds like the late ’70s early ’80s to me. The only thing missing are interest rates as high as the sky!

But, the “boys” have successfully diverted the market’s attention away from all of this rotten stuff for now… And they got their brother-in-arms, Trichet to play along with them for now too.

The latest G-8 meeting kicked off overnight. I wonder what they’ll talk about? Could it be, spiraling oil and food prices? Could it be global inflation? Could it be the fate of the dollar? Recall that at the last G-8 meeting, the ministers decided that there had been enough dollar selling… But what did they do to change that besides talk about it? Nothing… No action… Words, and no action usually lead to no one paying attention to you in the future… Ask the boy who cried wolf! HA! And so it just might be for G-8 this time around.

Gold didn’t fare any better than the currencies on Thursday and Friday, as it has lost about $15 since Thursday morning before the “memo”… Even our recent “belle of the ball”, Brazilian reals, (BRL) saw some selling. UGH!

And Aussie dollars (AUD) also saw a ton of selling. Of course this, in my opinion, does nothing but give investors that are just now figuring out that the dollar has lost a ton of purchasing power – and need to diversify to hedge this loss of purchasing power – an opportunity to buy at cheaper levels.

This week will be quite the letdown from last week. Shoot Rudy, we don’t even have any data to deal with today! And the data prints this week won’t have the “star power” of last week’s Jobs Jamboree. We will see the color of the May trade deficit, which will probably get worst… And the first week’s reading of the U. of Michigan’s Consumer Confidence report. But that’s all later in the week.

I just checked the data calendar for the G-7 countries and there’s not much there this week either… On Wednesday we’ll see the trade balance in Germany, and that’s the highlight of the week as far as I could see.

So… I’ll just head to the Big Finish, watching the euro with its tail between its legs. The un-dynamic duo of Bernanke and Paulson won this round… But what kind of damage will they do going forward? We’ll have to wait-n-see.

Currencies today 7/7/08: A$ .9580, kiwi .7540, C$ .98, euro 1.5660, sterling 1.9690, Swiss .97, ISK 76.90, rand 7.7580, krone 5.0870, SEK 6, forint 148.65, zloty 2.1150, koruna 15.05, yen 107.50, baht 33.65, sing 1.3640, HKD 7.80, INR 43.30, China 6.8666, pesos 10.34, BRL 1.61, dollar index 72.96, Oil $143.80, Silver $17.84, and Gold… $919.82

That’s it for today… OK… Not such a good weekend for my beloved Cardinals as they lost 2 of 3 to the Cubs. It sure would be nice to play them with a full arsenal of pitchers, like former Cy Young winner Chris Carpenter, and current ace Adam Wainwright, who are both currently injured… But you play with what you’ve got, and they beat us. Summer has finally arrived in St. Louis, as the heat index will reach +100 today. It had been so cold and so wet for so long that at least one day of that heat will be welcomed by me! But then, I’m inside all day, not out there working in the heat like some people. Not that much longer till the ’08 Olympics, love the track & field, swimming, and basketball events. Looks like we’re sending a real “team” for basketball this time… So, stay cool today, and have a Marvelous Monday!

Chuck Butler
July 7, 2008