Why Are We Afraid of a Recession?

Good day… And a Terrific Tuesday to you! Some of you were wondering what happened to the Pfennig and me yesterday… No worries! Banks were closed to celebrate Martin Luther King Day. I know that I seldom actually take a day off, but I did yesterday… But then again, if I was checking email, I don’t know if that counts as a day off.

I was looking all over for a tourniquet to apply to the currencies yesterday… I don’t know what was causing the major selling of euros (EUR) and other currencies, maybe it was a delayed reaction to not getting the emergency rate cut by the Fed last week. A week ago, we were looking at the euro getting ready to hit 1.50, and today, we are looking at the euro in the 1.45 range… OUCH!

Or it’s just a general sell off because the markets fear the rest of the world will circle the bowl when the United States goes into recession. I just don’t believe that will happen. But the markets are forcing their will right now… And if there’s one thing I’ve learned in all of these years, it’s to not fight the markets.

Anyway… The stock meltdown has the risk takers running for the hills, which means carry trades are being unwound… And that leaves, Iceland (ISK), South Africa (ZAR), Brazil (BRL), New Zealand (NZD), Aussie (AUD), Sterling (GBP) and other “high yielders” getting sand kicked in their collective faces. These currencies are getting smacked hard… While yen (JPY) and Swiss francs (CHF) remain well bid.

Here’s what I see… As I left you on Friday, the darkness of the shadow that was cast upon the U.S. economy by Big Ben Bernanke had the markets as scared as schoolgirls watching the first Halloween movie… (A young Jamie Lee Curtis!) But then the “feel good” stories hit the streets. Paulson, Bernanke, Kudlow, Cramer… They all sang from the same song sheet… “Give the public money and they’ll get this economy rolling again!”

This stock market rot is really playing over to the currencies. As we’ve discussed on several occasions in the past, Japanese yen and Swiss francs have performed admirably versus the dollar, while the rest of the currencies get hammered. With Japanese yen, I know, I know, I’ve been beating the drum for yen for a few years now. I have to put this down to me “being ahead of the markets.” HAHAHAHA! Seriously though, with this stock market rot removing risk… And with the thought of the Fed cutting rates throughout 2008, and the Bank of Japan maybe throwing us a bone with a 25 BPS rate hike, I think it’s time to set our sights on yen 100 again.

And the markets bought it… Hook, line and sinker! Stocks still sold off, but not to the degree of earlier in the week… And the dollar rebounded like Paul Silas! (OK only old people like me will get that one. Paul Silas was on the Celtics teams that won all the time, and he was known as a “rebounder”).

So… Here goes folks… We could see this going on for an extended time, with the dollar basking in the sunlight of all this gibberish. Patience is going to be the key here… Are you patient? I know there will be people calling the desk and wanting out of their currencies, because they have no patience… But as I tell people all the time… A trend, which the dollar is in, is not a ONE-WAY street. There is volatility… We saw it in 2005, and it looks as though, as long as the “spin doctors” can pull the wool of the public’s and market’s eyes… We could very well see it again.

But how long can this deception last? Well… Continued bad data, losses of jobs, and Fed rate cuts will eventually cause the markets to look more closely under the hood of this economy. It may take weeks, even months, but eventually it will happen… And when it does, we’ll get back to the task at hand, and that is getting the euro going to 1.50 again!

Today, could be so ugly for stocks, the markets may look as though they were not only beaten with the ugly stick, but quite possibly the whole forest! I only say this, because the global stock markets were all sold extremely hard yesterday, as the United States enjoyed a holiday. I’m not even your last choice as a “stock guy”… But to me… It looks like it’s time to play catch up.

A long time friend emailed me last night, and said that he thought today would be an appropriate time to announce an emergency rate cut by the Fed, to throw off the panic that will reside in the stock market. Hmmm, he’s got a point there! Wish I had thought of that! But then, I’m still licking my wounds from calling for an emergency cut last week that never developed! Once bitten… Twice shy, babe…

Oil has fallen off its high perch, as has gold to go along with the euro. Oil is down 11% since hitting $100 on January 3. Gold fell to a two-week low yesterday, and the euro to its lowest level in four weeks versus the dollar.

I believe the true culprit in all of this dollar strength is the weakness of the stock market. Margin calls, and the overall thought of: “I’m getting out of everything till the dust settles” attitude.

So… How about the plan to spend $150 billion on a stimulus plan to goose U.S. consumers into spending money? Great! Just Great! Another $150 billion on the debt side of the ledger… Probably not accounted for like the war! Big Ben Bernanke thinks it would be a good thing for the economy, but fears widening the budget deficit in coming years. Ahhh, forget-a-bout-it Big Ben! Those are just numbers… There’s nothing wrong with deficits… Remember, “They don’t matter!”

OK… I’ve got to stop there, because the things going through my head right then, were not going to look pretty in print!

But, I’m writing my congressman… And I’m letting him know that I am NOT in favor of the government spending more money! I think you should do the same… Maybe, just maybe we could get somewhere… But I doubt it.

You know, my friend, Addison Wiggin, who co-authored with Bill Bonner, Empire of Debt, sent the book to every elected lawmaker in Washington D.C. three years ago. Now, I know we don’t exactly have propeller heads in Washington D.C. but they’ve had three years to read the book, and realize that what they were doing was ruining our country… I bet the only person to get past the foreword was Ron Paul. That’s pretty sad.

Addison and crew made a documentary based on the book and I hear it’s doing well in the screenings… I was asked to do a commentary for the documentary, but I’m sure it got left on the editor’s floor! That won’t stop me from getting a copy once available though!

But I think you know where I stand on this adding to deficits that we already can’t even begin to repay… There are no “new rules” folks… There is no new “paradigm” folks… There is simply more money floating around than at any time the past, and it skewers things so that people that should know better, and were taught better, start blabbering about “new rules” and “new paradigms”.

What you borrow… Has to be repaid…

After last week’s wild roller coaster rides, the data and event risks go down significantly this week. There’s not much in the data cupboard this week, and with the Fed taking a flyer on the emergency rate cut last week, the event risk meter is no longer in the red. However, should they (the Fed) decide that today’s the day for an emergency rate cut… That would be the horse of a different color!

We will see the Bank of Canada’s rate announcement this morning. I wouldn’t be surprised to see the bank lower interest rates… The loonie (CAD) is getting tarred with the brush that was used on the U.S. dollar for so long.

It looks as though the “Treasury guys” were already pricing in a recession on their bonds… And the flight to safety was in place, which meant Corporate bonds were getting sold like funnel cakes at a State Fair. But, now there’s a whispering campaign going on that goes something like this… The recession talk is overblown, and it could end up being nothing more than a “fly over” recession.

I just don’t get it! What would make these people think that? We’ve never been in a debt situation, government or public, like we are today, so I’m wondering how they think a stimulus package that puts money into people’s hands that go out and spend it and it’s gone, whoosh, vanished into thin air, is going to be the magic elixir for the economy.

I’ve said this before… But it needs to be repeated… Something has changed… And suddenly we are afraid of the “R” word. And it’s to be avoided at any cost (in this case it’s $150 billion of more debt on the books). What’s wrong with a recession? We’ve had several of them over the years… And, as my grandfather used to tell me… “Boy, if it doesn’t kill you, it will make you stronger”. Which is what a recession is for… Clean out the excesses of the previous boom, and set a new base on which to build on…

But, NOOOOOOO! We can’t have that! No Fed Chairman is going to have that on his watch! Secretly, they all want to say that they were better than Paul Volcker! Big Al, or Big Ben couldn’t carry Paul Volcker’s lunch! On that note, I’m heading to the Big Finish!

Currencies today: A$ .8575, kiwi .7480, C$ .9645, euro 1.4480, sterling 1.9490, Swiss .9050, ISK 67.22, rand 7.2450, krone 5.5570, SEK 6.5550, forint 179.50, zloty 2.52, koruna 18.12, yen 106.40, baht 30.92, sing 1.4450, HKD 7.8090, INR 39.52, China 7.2380, pesos 10.98, BRL 1.8310, dollar index 76.96, Oil $87.83, Silver $15.66, and Gold… $864.30

That’s it for today… Pretty crazy day yesterday even with the U.S. out on holiday! Congrats to the Patriots and Giants for reaching this year’s Super Bowl… The Patriots are two touchdown favorites in the Super Bowl. I’m not saying the Giants don’t have a chance… The odds makers are saying that! Another six points banged in by my little buddy, Alex, at his basketball game this weekend. I hope your weekend was grand… I was able to rest my leg quite a bit, which helped big time. It was so bitter cold out, I didn’t want to leave the warmth inside! I sure hope things settle down in the markets, so we can have a terrific Tuesday and rest of the week!

Chuck Butler
January 22, 2008