Are Freddie and Fannie Insolvent?

Good day… And a Happy Friday to one and all! A Fabulous Friday indeed! The euro (EUR) broke out of that tight trading range yesterday; we had a distorted Weekly Jobless Claims number; and the un-dynamic duo of Ben and Hank got taken to the woodshed by Ron Paul… All this and more as we head into the 2nd Friday of July!

OK… First on this Fabulous Friday, I forgot to talk about ex-St. Louis Fed President William Poole’s comments about Freddie and Fannie yesterday. These comments were responsible for bringing the mortgage meltdown front and center to the markets once again… So… What did Poole say? Well… Poole flatly stated, “Freddie and Fannie Mae are insolvent”. Uh-Oh! As I thought earlier this week, this meltdown of Freddie Mac and Fannie Mae could be the risk event I’ve been talking about. Well… If Poole is correct… We’re here.

So, with the renewed fears of a financial crisis looming once again, the dollar began to get sold. Recall a couple of weeks ago before Trichet got the “memo”? The euro had finally passed the 1.58 figure, but then tumbled, stumbled, bumbled and fumbled that figure. Trichet was to blame for putting his tail between his legs and not sounding hawkish… But get this… He sounds different now that the potential Perfect Storm passed.

On Thursday, ECB President Jean-Claude Trichet said that Eurozone inflation, which is running at 4%, would remain above the central bank’s desired level for longer than first expected.

I signed off yesterday with the Aussie dollar (AUD) just hitting 96-cents on their strong jobs data. The Aussie dollar spent the rest of the morning hitting upward toward 0.9630. A strong currency and high yield… This should pave the way to parity. But then, that’s just my opinion, and I have been/could be wrong.

I didn’t get a chance to see the “theatre” but I hear it was really good. I’m talking about Big Ben Bernanke and U.S. Treasury Secretary Paulson testifying to U.S. Lawmakers. I hear that Ron Paul took them to the woodshed for their handling of the economy. We all had a great big belly laugh at Paulson’s claim that the “long term fundamentals will direct currency movements” That’s right Hank! Those U.S. fundamentals OOOOOHHHHH, what a show! Reminds me of one of my fave movies of all time… Night Shift. There’s a scene where this guy is watching The Flintstones, and another guy walks in and questions his choice of TV show… The first guys says, “Ahhh, that Barney Rubble, what an actor!” HAHAHAHAHA!

I also saw where some lawmaker announced that there would be a committee meeting this summer to discuss the dollar… Now, that ought to be good!

Have any of you received an email from an airline company requesting your help in reducing the skyrocketing oil/fuel prices? This is really something! They want more transparency and disclosure in the oil markets. They believe that speculation in the oil markets is the culprit… Well, it might be responsible for about 20% of oil’s price-rise, but it’s not the “end-all” of oil’s rise.

Yesterday, the Weekly Jobless Claims posted last week’s unbelievable collapse of 58K to 346K. This is so distorted that it can’t possibly be believed… And the markets did believe it at first, before someone had the brains to say stop! This is distorted! The continuing claims, which are not subject to seasonal distortions, continued to rise to 320K, a high exceeded only in the wake of the 1990-91 and 2001 recessions.

OK… Are you ready for some gloomy reading? How’s this? Today, we’ll see the May trade deficit, which will most likely bounce to $62 billion from April’s $60 billion… And then we’ll see the color of the first week of July’s survey of consumer confidence as measured by the U. of Michigan. With all the stuff going on like soaring fuel and food prices, and stocks looking soft, I would expect this index to fall even further than last month’s awful reading.

Neither of these two pieces of data will give the dollar any love going into the weekend. I fully expect to see the dollar going out the door to the pub this afternoon with a whimper.

Speaking of consumer confidence… Japan’s consumer confidence fell to a record low in June… UGH! As if the yen (JPY) needed any excuse to weaken versus the dollar and euro! Talk about gloom and doom… This index, which has a boom or bust line of 50 (like our ISM manufacturing index) reached that level for the first time since 1990 in April of 2006, but unfortunately, has fallen ever since… The index now stands at a paltry 32.6.

The Bank of England (BOE) did leave rates unchanged yesterday, as I fully expected them to. They are really in a bind… And now the U.K. banks are asking for more liquidity from the BOE… Sound familiar? It’s all happening here as well, dear reader.

There are a few large financial institutions that have been put on the burners this week. There are too many to start naming names, and besides, what good would that do? Besides, do you really think, after what we saw with Bear Stearns, that the Fed/government would allow a large financial institution to fail? Noooooo sirree Bob! They’ll be rewarded for their mistakes and greed by being bailed out… Of course if I worked for one of those large financial institutions, I would want to be bailed out too, eh? That’s right.

So… If there’s a perception of nastiness in the markets right now, why haven’t the carry trades unwound yet? Well… Maybe, just maybe (’cause you never know), they are holding on because they truly believe the Fed’s rhetoric of higher interest rates, thus propping up the dollar?

The Chinese renminbi (CNY) just hit a 6.86% return year-to-date. That’s what it made all of 2007! So… The currency appreciation of the renminbi continues… Not as fast as U.S. Treasury Secretary Paulson would like to see (or probably all renminbi holders), but still, it’s appreciating, eh?

It’s important for the renminbi to continue appreciating, as it gives the other Asian currencies the opportunity to appreciate. You see these Asian countries are all in competition with their exports, and they need to keep their currencies somewhat in the neighborhood of the other Asian currencies… So… In the end, renminbi appreciation should lead to yen strength… And Singapore dollar (SGD) strength and so on…

So… The dollar is teetering this morning, and looking like it will go into the weekend with its tail between its legs. Let’s hope there aren’t any “memos” going around to keep the dollar from falling further, like we had last Thursday! (If you’re puzzled here, I suggest you read Monday’s Pfennig

I just can’t head to the Big Finish without having some fun with this article in The Wall Street Journal yesterday… Here’s a snippet…

“Economists are deeply divided over whether the Federal Reserve should focus more on fostering growth or keeping inflation in check, according to the latest Wall Street Journal forecasting survey. Of 53 economists surveyed, 22 said the Fed should be more concerned by economic weakness than inflation, while 21 said inflation should be the greater concern.”

See what the Fed is up against here? Economists don’t know what to do any more than the Fed Heads. Something like… Between a rock and hard place, eh?

And… Finally… How about those precious metals this week? Gold has really recovered nicely, along with silver.

Currencies today 7/11/08: A$ .9630, kiwi .7596, C$ .9855, euro 1.5810, sterling 1.9785, Swiss .9745, ISK 76.30, rand 7.7670, krone 5.10, SEK 6, forint 146.60, zloty 2.07, koruna 14.88, yen 106.90, baht 33.65, sing 1.3580, HKD 7.8020, INR 42.88 (rupees have had a great week, eh?) China 6.8340, pesos 10.31, BRL 1.6050, dollar index 72.43, Oil $145.30, Silver $18.37, and Gold… $950.52

That’s it for today… It’s been a tough week for my beloved Cardinals, I think they truly need the All-Star break to regroup. OK! My interview on the PBS radio show On The Money is now live on our website. When you research a currency, on the right hand side there are links to my radio interview and my Bloomberg TV gig. This will be a “boys” weekend at the Butler house as my beautiful bride is heading to Chicago to see what she can personally do to correct the slow consumer spending, and to help prop up the economy! My good friend Rick was by to see me the other night. He used to be my neighbor; now I rarely see him any more. So it was good that he stopped by… Ending my 3rd week of the required 4 on my cancer treatment; it really blows chunks, but… I’m not going to complain, not that it would do any good anyway! So… Let’s get to the weekend and have some fun, eh? I hope your Friday is Fabulous and… Your weekend is Wonderful! Be careful out there!

Chuck Butler
July 11, 2008

The Daily Reckoning