Another Event Risk Week

Good day… And a Marvelous Monday to you! I hope your weekend was grand. We finished up the World Money Show on Saturday afternoon, and returned yesterday to a very cold St. Louis… BRRRR… I’m staying home today to get my leg up and the swelling out of it… All that walking and on my feet at the booth stuff got to me on Saturday… But, see! Even though I know that Mondays are tough days on the trading desk, I’m staying home to rest… I think I should get a gold star or something!

The currencies had a small bounce back on Friday… The trading range wasn’t much to speak of, but what trading range there was showed a bias to sell dollars. The euro climbed back to 1.45, and held it throughout the day. I think by the end of the day on Friday, most traders and investors in the currency arena, came to the realization that the ECB isn’t in any big hurry to cut rates… Well… If they had only listened to me I could have saved them the trouble!

Over the weekend, G-7 met and must have set a record for consecutive time playing Battleship, because in the end they had nothing… Absolutely nothing, say it again! Really… Here’s some of their “it’s a happy day” communiqué…

“We welcome China’s decision to increase the flexibility of its currency, but in view of its rising current account surplus and domestic inflation, we encourage accelerated appreciation of its effective exchange rate.”

Ooooohhhhh… I bet the Chinese are shaking in their army boots! NOT! G-7 is as useless to getting currencies moving as a broken crutch!

Overnight in Asia the currencies continued to add gains VS the dollar, albeit small gains… But gains nonetheless. As I said before, traders had a V-8 moment, and decided that the dollar’s fundamentals are worse off than the euro’s and others… That’s not to say that the dollar’s mini-rally is completely over… It just looks like it is…

This week is chock-full-o-event risk, again… The bond insurers are teetering on disaster folks… And think back a few months ago… Who was the first to tell you about this brewing problem? Anyway, the way I see this all is that the longer wait for something to happen here, the more the delay leads to skepticism… Yes, the skeptics are now thinking that there will be a plan to rescue the bond insurers, but it will end up looking like the “Super SIV” plan, which will all know fell flat on its face!

Fed Chairman Bernanke, and U.S. Treasury Sec. Paulson have a date to speak to Congress this week about the economy… This won’t be pretty folks… And if it borders on pretty, then they are BIG FAT LIARS!

Fed Speak gets another round of hogwash with Poole and Yellen speaking this week… Poole looks at everything through rose colored glasses.. And Yellen has on occasion spoke the truth about the deficit and such… We’ll have to wait and see what these two have to say though…

The data cupboard will yield Retail Sales this week… The Butler Household Index (BHI) tells me this is not going to be a robust Retail Sales report… In fact, I’m looking for a negative number here… Just another nail in the economy’s coffin…

Last night, The Reserve Bank of Australia (RBA) lifted their 2008 forecast for inflation, and warned that more rate hikes may be forthcoming. The RBA believes that inflation will remain above 3.5% throughout 2008. Remember… The RBA’s inflation target is 2-3%… So, this should have additional rate hikes written all over it! And again… Hopefully, the rate hikes, resulting in a wider positive rate differential, will be enough to offset the selling of the carry trade unwinding, to underpin the currency.

I saw this heading on my Bloomie this morning… Bank of America says Buy euro, sell dollar… Hmmm… I love it when people jump on my bandwagon!

I have to tell you about a group of people that I don’t believe will ever be on my bandwagon, nor would I want them to be! I was flipping through channels the other night, and came across this round table discussion led by Jim Cramer… They were ripping Dallas Fed Head, Fisher for warning that aggressive rate cuts may “juice up inflation”…

I wonder if inflation jumped up and hit these guys right between the eyes, if they would see it, recognize it, and acknowledge that it exists! Hey! I’m the first one to jump on the Fed Heads.. But when one of them is actually doing his job… That’s nutty to jump on him… That is unless your long stocks, and you need people to feel good so they will buy and push your stocks higher…

OK, enough… Did you see this piece of data from Friday? I bet you didn’t… Oh! I guess I should tell you what piece of data I’m talking about, eh? I’m talking about U.S. Wholesales… U.S. Wholesales dropped 0.7% in Dec, the worst decline since Jan’07, causing inventories to spike 1.1%, the largest gain since 2006. The rise in inventories was boosted by a 3.5% rise in autos, the biggest surge since April 2006, as sales collapsed 2.2%.

What you have here is a failure to communicate! This report tells us that the economy has slowed down dramatically… Just another nail you might say… But then again, you might say, Why didn’t I hear about this? Because… It’s another nail! The mass media can’t be going around be Eeyors! That certainly wouldn’t get us out there spending!

Oh, and another sign that the Credit Crunch has settled in on us like the cold of a winter’s night… CDO (collateralized Debt Obligations) (the ones that have caused major problems for banks that issue them and buy them) CDO trading got off to its worst start for a year in a decade in January… As I’ve tried and tried, and tried, and tried in every way I could… To make you see how much I love you… I thought you understood… NO WAIT! How did that happen? Here I am, being Mr. Serious, about CDO’s and I break out into a song! UGH!

Anyway… What I’m trying to say is that I’ve painted this picture many times for you all… (that’s my South St. Louis talk coming through) That issuance is drying up… And when that happens… Credit goes away… And when Credit goes away, loans go away, and the when loans go away, so does Commercial Paper… And Corporate Bonds… And other higher yielding assets that could have been used to attract foreign investors to help finance the current account deficit… It’s getting scary folks… Can you hear the Jaws movie music playing?

Gold (and silver) has really rebounded nicely from that awful two day selling about 10 days ago… With this rebound, Gold has added 11% to its previous phenomenal gain, just this year! There was some fine print though in the G-7’s communiqué’ about allowing IMF to sell Gold to allow the IMF to meet their budget…

I don’t like the sound of that at all! However, here’s the catch… The U.S. has veto rights over any IMF decisions like this… The last time the IMF tried to sell off some of their Gold to meet expenses in 2005, the U.S. vetoed it… So… There’s always the chance that this gets nixed and Gold is allowed to continue its move toward $1,000.

And finally… We got asked this a lot in Orlando, and then there was an email from a reader asking me to explain our exposure to sub prime… Well… We don’t have any! We don’t sell them, and we don’t buy them, and we don’t own them! The Bank made a decision (and a very wise one I might add) a couple of years ago, not to get involved in the creative loan business… And for those of you wondering about our mortgage division, they produce loans and buy servicing. The loans we produce are sold within 30 days, for the most part… So, there you have it!

Currencies today 2/11/08: A$ .9045, kiwi .79, C$ 1.0019, euro 1.4555, sterling 1.9520, Swiss .9120, ISK 68.25, rand 7.8110, krone 5.5250, SEK 6.4690, forint 182.72, zloty 2.4875, koruna 17.6480, yen 106.70, baht 31.70, sing 1.4180, HKD 7.7960, INR 39.68, China 7.1920, pesos 10.75, BRL 1.7675, dollar index 76.28, Oil $91.84, Silver $17.36, and Gold… $929.50

That’s it for today… It was good to see the folks from Jacksonville at the Show… Our marketing team was there, along with our legal team… Just to make certain I don’t say stuff I’m not supposed to! HAHAHAHAHAHA! And… I got to meet our World Markets Account Opening guru, Michelle Nucci, who was there to “see what we do”… The Show was good… The Town Hall meeting went quite well, I think… It quickly turned into a “ask Chuck, currency questions”, which was fine, and I took over the meeting from there! Gee, it’s good to be back home again… You know it is… Little Delaney Grace came to see me yesterday, I think she forgot me already! OK… Back to the recliner to get this leg up, where it will remain all day! Have a Marvelous Monday… And a Wonderful Week!

Chuck Butler
February 11, 2008

The Daily Reckoning