An Upgrade for Brazil

Good day… And a Happy Friday to one and all! No three-day weekend this week… Shoot, Rudy! Today is a “food day” in the office as we celebrate our cake maker, Cheryl’s birthday. I brought Krispy Kremes for the crew, as they truly eat them up whenever I bring them in.

Well… It wasn’t a Tub Thumpin’ Day for the currencies on Thursday, as the dollar was in the driver’s seat doing the Tub Thumpin’! There was a bias to buy dollars all day long and that carried over into the Asian and European markets. The euro (EUR) is now looking up at 1.55.

The dollar bulls were all dancing in the streets when the second revision to first quarter GDP was revised up to 0.09%, which was bang on expectations. Now, I would have one question for the dollar bulls, (if I could just get them to stop with the dancing in the streets long enough for me to ask it, that is)… What’s so good about GDP at 0.09%? Let’s say, for instance that we didn’t get a preliminary of 0.06%, and this was the first print… Most observers would gasp for air and turn into Chicken Littles, all screaming that the sky was falling!

Another thing giving the dollar some love these days is the falling oil prices… Oil dropped o $125.75 yesterday.

But that’s the story Larry… Oh, and the dollar is hogging so much of the spotlight these days that dollar bulls failed to see the problems with an interview that took place, which doesn’t shed any sunlight on the financial problems in the United States. Let’s listen in…

“MARGARET POPPER, BLOOMBERG NEWS: It could be huge. You’re talking about the securitization issue and how that market drying up drives up the ability of consumers to shift their debt around. So they’re in essence, facing a liquidity crisis just like Wall Street did in the capital markets…

“WHITNEY [MEREDITH]: No doubt. Margaret, there are two things that are going on here, number one, there’s been an over reliance on consumer liquidity coming from the securitization market. So, for example for [every] $1 of mortgages that was put on bank balance sheets since 2007, $7 of mortgages, or seven times that rate has been securitized in the broader market.

“So, most people think when the securitization market shuts down, oh [let’s] look at the revenue decrease, revenue declines in investment banks. The bigger deal is it constrains consumer liquidity.

“Now, the second issue is that regulators that have clearly gaffed on the housing bubble are now going to make up for lost time and are going to make it so prohibitive for credit card lenders to make profits, maybe that’s a good thing long-term, but what’s it’s going to do is extract, I think, over $2 trillion of liquidity from the consumer balance sheet. So the consumer is going to get it from all sides, consumer spending is going to decline and I think consumer defaults are really going to pick up.”

OK… Back to me… And… So it’s not just me that thinks we are far from being out of the woods with this whole mortgage mess. Sometimes I feel like I’m all alone on this island shouting to the wind all these thoughts, while obviously no one can hear me… But then I wake up and realize that I have tons of readers that know what’s going on… Too bad the markets aren’t waking up to smell the coffee!

You know, within the past 10 days I’ve mentioned the fact that Treasury yields seem to be on the rise. The fact is that they are rising. The 10-year yield moved over 4% to 4.08%. This increase in Treasury yields began in April, albeit slowly… I just don’t see how this helps the mortgage mess… Or the consumer.

Nor would a rate increase from the Fed help the economy/consumer. It might take a small chunk at inflation’s armor, but to stomp our inflation, the Fed would have to aggressively go after rates to move them much higher… And… Turn off the money supply spigot! But, they can’t do that. It’s like a drug for the Fed Heads… And getting them off the drug will be a tough row to hoe!

OK… So Fed Head Kohn was speaking yesterday and thought it was important to give the audience a wink and nod that the Fed window would remain open for business. Again, this is one of the things that has the markets all revved up and ready to roll – the removal of “risk”… If a financial institution gets in trouble with the junk they have on their books, no worries, just take it down to the Fed Window. The Fed will take it as collateral and lend money to keep the financial institution going.

My friends over at The 5-Minute Forecast, Addison and Ian, talked about this “collateral” in their newsletter the other day… Addison and Ian do a GREAT job with The 5, as they call it. It’s a must read each day! Anyway, here’s what they printed the other day.

“‘Illiquid collateralized debt obligations – including mortgage-backed securities,’ says our government stats watchdog John Williams, ‘now total in excess of 20% of the collateral backing the Federal Reserve Notes.’

“Yikes. One-fifth of the U.S. currency is backed by fetid CDOs. Think about that.

“‘According to the Fed,’ John explains, ‘U.S. dollar currency in circulation is estimated at $818 billion, the better portion of which circulates outside the geographic confines of the United States. While the U.S. currency has been a fiat currency for decades, the Federal Reserve Notes presently in circulation are collateralized by securities held by the Fed.

“‘Those securities traditionally are U.S. Treasury securities.

“‘Since the onset of the banking solvency crisis and the establishment of various new lending facilities by the U.S. central bank, however, an increasing portion of the U.S. Treasury securities held as collateral has been lent to troubled financial institutions in exchange for largely illiquid collateralized debt obligations.'”

OK… Enough of that… But really these are the storm clouds that are brewing, and the markets are ignoring them. I sure hope they get to the storm cellar before the twister touches down… They don’t want to get caught outside the cellar like Dorothy!

One currency bucking the trend to weaken versus the dollar is the Brazilian real (BRL)… Brazil received some more good news yesterday, when the rating agency Fitch, announced that they were upgrading Brazil to “investment grade”.

This is a huge deal folks… You see, there are pension funds, etc. that DO have investment criteria (unlike our Federal Reserve Bank) of which, buying bonds with investment grade is a standard… So, all these “buyers” that have been shut out of the Brazilian market, are now able to join the rest of the world that has seen Brazil as an investment choice.

So, obviously, the news helped push the real stronger versus the dollar. The real’s performance year-to-date is +8.63%… Not too shabby, eh?

OK… As I’ve been writing, the euro has turned around, and is back above the 1.55 level, so maybe, just maybe, you-never-know (Joaquin Andujar’s favorite word) (a St. Louis joke), someone has said “enough”!

Today, we’ll see personal income and spending data from April. We’ve been spending more than we make for so long now, I just can’t see this changing. We’ll also see the color of the last reading to the U. of Michigan Consumer Confidence for May. I would expect this to remain near the 59.50 index level it hit at the last print, which is its weakest level since 1980.

We’ll pay the devil his due with inflation data in the form of the PCE Deflator, which measures U.S. Personal Consumption Expenditures. This data is expected to fall, which means U.S. consumer spending slowed. Of course one would think that with higher food and energy prices, they would easily make up any slow down in spending. So, we’ll have to see, eh?

I just think that the U.S. consumer has been backed into a corner, (OK, the consumer did some backing of its own!) and there are only a few paths out of that corner. One path leads to runaway inflation, one path leads to deflation, one path leads to recession, and another leads to bankruptcy and foreclosures. That’s dire straights right there folks… Whenever I say, “dire straights” I think of Mark Knopfler (dire straits), and the song Money for Nothing… That cracked me up!

Currencies today 5/30/08: A$ .9570, kiwi .7825, C$ 1.0110, euro 1.5520, sterling 1.9745, Swiss .9540, ISK 74.55, rand 7.59, krone 5.1025, SEK 6.0175, forint 155.50, zloty 2.1750, koruna 16.20, yen 105.50, baht 32.50, sing 1.3650, HKD 7.8050, INR 42.50, China 6.9410, pesos 10.33, BRL 1.6370, dollar index 73, Oil $125.85, Silver $16.85, and Gold… $883.15

That’s it for today… So, a Happy Birthday to Cheryl, who has been with us almost since the beginning of EverBank World Markets. My little buddy, Alex, broke out of his slump and got the game winning RBI hit last night. I was holding my breath as he strolled to the plate. His swing had gotten all messed up and I tried to help him (as best I can given my immobility)… But a nice soft liner over the 3rd baseman’s head brought home the winner! Another game tonight and one on Sunday! I just heard on the radio that Harvey Korman died… He was great in Blazing Saddles and High Anxiety!

Cards take two of three from the rival Astros… Now that’s a good thing! Any time you can beat that team! My long time neighbors, Kevin and Lisa, moved out of the “hood” yesterday. I must be running the neighbors away, that’s the second good neighbor that has moved in the past year! UGH! OK… I could go on, but it’s time to go! I hope you have a fabulous Friday!

Chuck Butler
May 30, 2008