A Gusher of Federal Money

There was very little in the way of movement in the currencies yesterday. The euro (EUR) moved to 1.4150, but was brought back down to the 1.41 handle overnight. Stocks rebounded yesterday, which gave a few risk takers the intestinal fortitude to dip their toes back into the risk assets water… But there just weren’t enough of them to give the currencies the push they deserved to get.

In a classic case of “the markets do what they’re supposed to do, just not when”… There are more than a handful of very well educated people and well respected investor types that have see the writing on the wall for the dollar… But… The markets have decided that it’s just not the right time.

This is what I always say about diversification, folks… It’s the hedge or “insurance” if you will, that the markets do what they’re supposed to do… Now! Or whenever it is they do it… There won’t be any tornado warning sirens, it will just happen… And you’ll either be diversified with a portion of your investment portfolio out of the dollar or you won’t. The great thing about this country is that you have the freedom to choose what goes in your investment portfolio… At least right now you do.

The reason this whole idea came to light for me this morning is a story that appeared on the Bloomie that was a reprint from a NY newspaper that I refuse to mention. The title line on the story goes like this: “Buffett Says US Federal Debt Poses Risks to Economy, Dollar.” OK, so you know that this had to pique my interest, eh?

Calling it the “gusher of federal money”… Buffett had this to say… “The US must address the massive amounts of ‘monetary medicine’ that have been pumped into the financial system and now pose threats to the world’s largest economy and its currency.”

So… Just chalk this down to yet another Big Kahuna, that sees the writing on the wall for the dollar, but the time is not right… That makes me think of those old wine commercials that would say, “We will sell no wine before its time”.

The folks over at PIMCO (Pacific Investment Management Co), the world’s largest bond fund, also believe that the dollar will weaken as the US pumps “massive” amounts of money into the economy. They even go further, in a letter to customers, saying that the drop of the dollar will come mostly against the emerging market currencies. “The greenback is losing its status as the world’s reserve currency,” said Curtis Melbourne, a PIMCO portfolio-manager. He went on to say… “Investors should consider whether it makes sense to take advantage of any periods of US dollar strength to diversify their currency exposure.”

WOW! Isn’t this what I always say to you… I always say to use dollar strength as opportunities to buy at cheaper levels! But the really funny thing that I saw was this… A reader sent a link to this story from PIMCO to me… And said… “Maybe if they read the pfennig they would have had a clue before today?” HAHAHAHAHAHA! That’s absolutely correct! And I’ll tell you this… A lot of Big Houses have people in research and trading desks that read the Pfennig each day.

There’s more risk aversion creeping into the markets overnight (thus the drop back to 1.41 in the euro we just talked about), as the Shanghai Index fell -4.3% overnight. That weighed on European stocks this morning, and will carry over to US stocks most likely.

The data cupboard has been emptied out and is looking to get restocked today… So the only thing besides sentiment moving the markets today will be the direction of stocks.

Talk about being tied to China… The Aussie dollar (AUD) pushed to 83-cents yesterday before the rot on the Shanghai Index’s vine was exposed… And the Aussie dollar is back to 82-cents this morning.

And… Just to confirm one more time that the risk aversion campers have taken over the campground, Japanese yen (JPY) is the strongest it has been in weeks, looking as though it will take out the 94 handle… Feeling stronger every day, I know I’m all right now.

One currency that seems to “hang in there” the most, with no upside or downside to speak of, is the Swiss franc (CHF)… Wanna know why? It’s not because the Swiss National Bank (SNB) has warned the markets about franc strength… It’s because the SNB has been selling francs every time it begins to move higher. SNB member Thomas Jordan was interviewed yesterday, and he confirmed what the markets had suspected for some time now, and that is that the SNB was selling francs to stem gains.

You know… I don’t like it when a country’s central bank sells its own currency… You may recall that the Reserve Bank of Australia (RBA) has done this in the past to keep their currency from moving too high too fast. This is where I think central banks overstep their job description… They are supposed to protect the value of the currency… NOT harm the value of their currency! I understand what these central banks are attempting to do here, it still doesn’t mean that I have to like it!

Speaking of central banks… The cartel, I mean the Fed Reserve, has been keeping very quiet recently. I think that since Big Ben Bernanke told Congress that he had no idea where $500 billion dollars that left the Fed went, he’s doing damage control… He is up for reappointment in January, and that statement won’t be a gold star on his resume’, eh? I was reading my friend, John Mauldin’s newsletter this past weekend, and he mentioned that some pretty important people who are “in the know” made a bet that the President won’t reappoint Big Ben in January… WOW! One and done for the helicopter Ben? I’ll have to see that to believe it, as he has gone along with all the back room deals, brokerage sales, and changes to power that the administration is orchestrating. Whatever administration it was or is… Doesn’t matter, folks… There’s been no change, except for the different color of lipstick on the pig.

Speaking of such a thing… That was the title of my presentation to that HUGE crowd of people in Vancouver at the Agora Financial Investment Symposium last month. That presentation was so well received, that I’m using it again in San Francisco on Friday… Updating it of course! Right, Jason? And that is… “Applying a different color of lipstick to the pig”… Of course long time readers know that I’ve used the phrase, “You can put lipstick on a pig, but it’s still a pig” for a long time, and way before it became popular last fall during the election. The pigs in this case are the deficit and the dollar.

For instance… The deficit continues to grow to record levels each day, but is Washington DC addressing it? NO! They have decided to place all their attention on another item that’s taking all of their time and efforts. Just applying different colored lipstick to the pig, folks… That’s all it is.

We learn these things in media training… To divert… To something you want to talk about. That’s what’s happening here.

A long time reader sent me some notes yesterday, and this one snippet I think addresses this in its entirety… “Here we are with the Japanese experience, fresh on our doorstep, and we (or at least our government) are doing almost exactly the same thing… REFUSING to acknowledge weak balance sheets, denying reality, and virtually guaranteeing that the problems will continue and get worse.”

OK… Enough of that! I could get started down a road that would lead to my blood pressure shooting through the roof, so… Let’s not go there!

We haven’t heard the term “green shoots” from Big Ben lately, either… Again, I think that once you get the taste of your foot being in your mouth, you don’t want to experience that again! Remember when I told you that Big Ben’s “green shoots” were nothing but nut grass, weeds, if you will? Here’s the image I would get whenever Big Ben or the copycat media types would mention “green shoots”… A guy feels ravenously hungry late at night and raids the fridge. All that’s in there is a plate covered with aluminum foil. He removes the foil and finds a putrid piece of meat, covered with mold. He holds his nose and takes a close look. “Great”, he says, “green shoots”… (OK, I didn’t make that up, a reader sent me that note, and I told him that I definitely would use it in the Pfennig!)

I don’t recall how long ago it was that I said this, but I do know that I said this at some point in the past… And that is that the so-called recession that we’re in is really a depression, and each time it looks like we’re going to come out, we fall back. I think I even said that we could have a quarter of positive growth, only to fall back to negative the following quarter… Let’s face it, folks, this is a depression, not a recession.

Yesterday’s data cupboard had the semi-stupid PPI (wholesale inflation) print for July, and the index printed a -0.9%! Reversing June’s jump to +1.8%… Year on Year, PPI is -6.8%… That spells price deflation, folks… And just means that things should be cheaper… But wait! Do you see cheaper prices? The thing I’ve been noticing lately is that when we send out for lunch each day, that the prices of things might not have moved, but the size of what you get sure got smaller. Which means that we’re paying more for less! Not less for more! Something is awry here don’t you think?

We also saw Housing Starts and Building Permits, which I carried on about yesterday. Well, they did not expand as forecast, but fell in numbers instead. Housing Starts were forecast to be 599,000, and came in at 581,000. And Building Permits were forecast to be 577,000 and came in at 560,000… Not as lofty as the forecasts, but still… 581,000 new housing starts when we are already choking on the inventory of houses that we have… I don’t get it… I really don’t…

I’m watching the euro pop up here in the past few minutes gaining 1/4 euro, which isn’t much, I’m well aware of… I’m just marking the move up…

The Daily Reckoning