Another Government Bailout

Good day… And a Marvelous Monday to you! We had some historic economic news over the weekend as the government has decided to take over Freddie Mac and Fannie Mae. When I heard the news, I made sure I would check on the currencies later in the day when the Asian markets opened. At first, it was all dollar negative news, and the euro (EUR) was flying high to near the 1.44 handle. So… I went to bed thinking that the markets would be a shambles this morning when I got to work, etc. etc.

But, that’s not the case… As I turned on the currency screens I saw that the euro had lost all that ground it had gained and is back to looking sickly around 1.42 again. In fact, I just looked over, and the single unit has given up the 1.42 handle and is trading below. I’m searching and searching for news on this strong dollar move, and can’t seem to find anything… So, I’ll go on with the normal fun, and see if something pops up later as I go along.

The Jobs Jamboree on Friday was not anything to light a fire under the dollar, as we saw a Bureau of Labor Statistics (BLS) trumped up -84K loss in jobs for August. I say trumped up, because… The BLS added +115K jobs, through their Birth/Death Model, or “ghost jobs” as I like to call it. The unemployment rate jumped to 6.1%, the highest in five years, but the dollar did not lose ground.

The fact that the dollar didn’t lose ground on this awful data print, is a sign… It’s a sign that we’ve moved to a period of time, much like in 2005, when bad data doesn’t affect the dollar. It’s like I’ve said a couple of times now, that the markets have become comfortably numb with the awful data in the United States and it would take something BIG to make them notice it these days.

Something Big like Fannie and Freddie being taken over by the U.S. government, which will cost taxpayers billions and billions of dollars… But… Apparently not! Why not? I have no idea! This is something, a risk event that should have shaken the U.S. dollar down to its foundation! But NOOOOOOO!

I’ll tell you something that the takeover of Fannie and Freddie will push the markets to do… And that is TAKE ON MORE RISK! Oh, yes… Risk, and more risk, and why not? The government will be there bail you out if you get in over your head! OK, excuse me for a minute I’m going to go yell at the wall!

OK, I’m back now… That feels better, but doesn’t change anything! The Wall Street Journal is reporting that Washington Mutual’s CEO has been shown the door. The Bloomie says that Lehman Bros. announced some shuffling of their top ranked officials for the third time this year. Apparently, things aren’t getting any better for these two.

So… The return of risk taking to the markets did help the beaten and downtrodden Aussie (AUD), kiwi (NZD) and South African (ZAR) currencies last night. But, I’m not a fan of this risk taking mentality not at this time, when there is so much risk in the air you could cut it with a knife!

That means that the funding currencies for the carry trade – which is being put back on with the return to risk taking – the Japanese yen (JPY) and Swiss franc (CHF), are seeing selling… UGH! Oh… And on Friday, my fat fingers were the reason the Swiss franc had a price that would make most people smile! Unfortunately it was a fat finger price.

This will not be a strong week for data on either side of the Atlantic, but we will see July’s trade deficit and the August budget statement on Thursday, and then we finish the week with August retail sales. The BHI tells me that retail sales will show some life because of the “back to school” purchases… But that will be short-lived! And then finally on Friday (which I will not be here for), we’ll see the U. of Michigan Consumer Confidence report… And of course, the mental giants they survey will be very confident, because the government keeps BAILING OUT ANYONE THAT GETS INTO TROUBLE! (OK, could you tell that I was yelling while typing that? I bet you could!)

This is going to be a little longer than usual this morning, because I came across a story this weekend that is quite important and I want to bring this to you…

Under the heading of: Problems Brewing In China…

The NY Times ran an article over the weekend that was picked up by my local paper, regarding China’s central bank dealing with the declining value of U.S. bonds and mortgage debt that they have purchased over the years. I’ve long said that this is the stuff that’s pushed way back in the deep dark closet of economic horrors for the United States, and hoped that we never had to deal with this.

Here’s a snippet of the story…

“It has been on a buying binge in the United States over the last seven years, snapping up roughly $1 trillion worth of Treasury bonds and mortgage-backed debt issued by Fannie Mae and Freddie Mac.

“Those investments have been declining sharply in value when converted from dollars into the strong yuan, casting a spotlight on the central bank’s tiny capital base. The bank’s capital, just $3.2 billion, has not grown during the buying spree, despite private warnings from the International Monetary Fund.

“Now the central bank needs an infusion of capital. Central banks can, of course, print more money, but that would stoke inflation. Instead, the People’s Bank of China has begun discussions with the Finance Ministry on ways to shore up its capital, said three people familiar with the discussions who insisted on anonymity because the subject is delicate in China.”

OK… This was a long story, and I can’t bring you the whole thing… But it goes on to say that this problem may slow down the appreciation of the renminbi (CNY). (Remember, the renminbi is the “official” name of the Chinese currency, and the yuan is just the slang name. It has always been my contention that the media picked up the use of yuan as the Chinese currency because it’s easier to say and type!) Anyway… This is something we need to deal with… But, the report did not mention that the Chinese would “stop” the appreciation, just slow it down.

Well… The price of oil has pushed higher over the weekend, as Hurricane Ike heads towards the Gulf of Mexico. The good news is that there aren’t any other hurricanes in the Atlantic right now. So, Hopefully we can get Ike to fizzle out, and go on with normal life in the Gulf. The price of oil saw an 8% drop last week, as Hurricane Gustav didn’t have the strength it was thought to have had.

The price of gold moved higher too, in the face of a rallying dollar… So, that’s not something you see every day!

The Brazilian real (BRL) took this return to risk taking in stride, and rallied for the first time in a week. The real, South African rand, and Mexican pesos (MXN) had seen some strong selling in the past week, but a tourniquet has been wrapped around their wounds, and they have all rallied strongly overnight.

And while the United States was losing almost 200K jobs in August, Canada was adding 15K jobs. So, the two countries’ economies aren’t as closely tied together as many think they are. And… Maybe, just maybe, the Bank of Canada (BOC) will see the error of their ways… (Read rate cuts). The loonie (CAD) has moved back above 94-cents…

The euro has bounced off that move below 1.42 and is pushing higher as I head to the Big Finish!

Currencies today 9/8/08: A$ .8185, kiwi .6735, C$ .9410, euro 1.4230, sterling 1.7640, Swiss .8860, ISK 87, rand 7.8450, krone 5.6190, SEK 6.6450, forint 169.40, zloty 2.4360, koruna 17.52, yen 108.80, baht 34.54, sing 1.4275, HKD 7.8040, INR 44.58, China 6.8430, pesos 10.43, BRL 1.7150, dollar index 79.19, Oil $106.96, Silver $12.37, and Gold… $808.07

That’s it for today… My radio gig on Friday morning went so well, that the Rocky Mountain Radio Network, asked me to be a regular on Friday mornings! WOW! Good thing it’s just a quickie 5-minute gig, as I don’t have time to take on any other “things” these days! A BIG win for my beloved Missouri Tigers and my little buddy Alex’s 7th grade Lindbergh Flyers on Saturday… Alex recovered a fumble while playing linebacker, so he was pumped! I’ll be gone all next week, on the first phase of the currency tours. Seattle, San Diego, and Dallas here I come! I won’t be in one city long enough to enjoy the city, so… I’ll just be passing through. Friday I’ll be at the hospital most of the day for tests… I’m keeping my fingers crossed… Got the news last week that we’ll be moving into the building (that’s under construction right now) next to us next year… We’ve grown so much that a larger space was needed, and with a building going up right next to us, it made abundant sense! Time to hit the send button, and get to work, as Mondays are always crazy around here! I hope your Monday is Marvelous, and you have a Wonderful Week!

Chuck Butler
September 8, 2008