Bailout Package is Ready

Good day… And a Marvelous Monday to you! A Wonderful Weekend for yours truly, as the weather was Chamber of Commerce-like. I got to see all the kids, and little Delaney Grace two days! I also got to enjoy two football games, one that Alex played in, and one that Alex went with me to! Fabulous stuff!

OK… The data on Friday was the stuff that should have sent the dollar to the woodshed, but like all the data lately, it just gets swept under the rug, as the market movers are myopic with the bailout package. Lawmakers worked all weekend to iron out the details of the package, and King Henry (U.S. Treasury Secretary) has announced again that the package has been agreed on by Congress. The vote doesn’t actually take place until tomorrow or Wednesday, but that hasn’t stopped King Henry from pounding his chest over his latest victory. I like what I heard from former Fed Governor (and Mark Twain Bank economist) Laurence Meyer, who said: “This has a reasonable chance of pulling back from the brink and having some success, but it’s far from certain that will be the case.”

And that’s where the spanner is in the works folks… And I don’t see how it can be the case! Not with trillions of toxic waste bonds on the books of lenders, and no clear indication of how the government will pay prices that not only help the taxpayers but keep banks from failing… But again, we’re singing the Grass Roots hit… Sha, la, la, la, la, la, live for today, and don’t worry about tomorrow, yeah…

But all these questions haven’t stopped the dollar bulls from coming back in force. The dollar has rallied hard since Friday morning, and throughout the Asian and European overnight markets. The euro (EUR) is now trading with a 1.43 handle, and… It just keeps moving downward. Does this make sense to anyone? The U.S. government is planning on pumping dollar after dollar into the system. They are planning on taking on $700 billion in more debt that will most likely become at least $1 trillion and more. And it still won’t prevent lenders from failing. But the dollar rallies… Sounds like currency intervention, smells like currency intervention, and walks like currency intervention… It must be currency intervention!

You don’t have to stretch your conspiracy thoughts too much to come to that conclusion… The dark storm clouds are forming over the dollar, and it miraculously rallies?

Looks like Wachovia is in advanced talks to sell itself to Wells Fargo, according to the Wall Street Journal this morning… Better that, than to have the FDIC have to come in and seize the bank… Not that I know what’s going to happen, I’m just saying it’s better to sell while you can.

Overseas… Fortis, the Dutch-Belgian Bank whose roots date to the 1800s, is on the verge of becoming the latest target of a government rescue. The governments of Belgium, Luxembourg and possibly the Netherlands, the three countries in which Fortis operates, were planning late Sunday to offer the bank a lifeline after failing to find a buyer, also according to the Wall Street Journal.

So… The rot on the U.S. vine is spreading. This won’t be a one and done, but the rot shouldn’t be the same kind that killed the golden goose here in the United States.

I just finished an article for my new paid letter, The Currency Capitalist, on how the Nordic countries were faced with a banking crisis in the early ’90s, and how they dealt with it in a completely different manner…

But in the end, it all comes back to the problem that I’ve been harping about for over a year now. The financing the deficit problem… I just can not get my arms around the idea that foreign investors are going to keep footing the bill for the U.S.’s indiscretions. A financing of the deficit problem has been, is, and will continue to be the Sword of Damocles hanging over the United States and the dollar.

I’ve explained this before, but for new readers… When a country faces a deficit financing problem they only have two choices… They can raise interest rates aggressively to attract foreign investment, but run the chance of bringing their economy to its knees… Or… They can opt to allow a general debasement of the currency. With a cheaper currency, foreigners then get to buy U.S. assets at a discount… So, given the choice, a country will always choose what’s behind door number 2!

But… The country (the United States in this case) can’t allow a “run” on the currency. They want it weaker, but can’t allow currency traders and investors to take big chunks of the currency causing it to slide too far too fast. That would scare the bejeebers out of the foreign investors who buy our assets to finance the deficits. If they feel as thought they are going to continue to lose money on the currency exchange, eventually, they will say, “No Mas”!

So… We start the week with the dollar in the driver’s seat, against all currencies… Even the Canadian loonie (CAD) is seeing some weakness, albeit not the kind of weakness the euro is seeing, as the loonie still has a 96-cent handle!

The data on Friday was not good… Here you go… Second quarter final GDP came in weaker than the preliminary number of 3.3%, falling to 2.8%. The export number of that 2.8% was still the major driver, thus the GDP number is a house of cards. U of Michigan Confidence fell from 73.1 to 70.3… But as I said, the data just gets swept under the rug.

So… Back to the bailout package… I read that King Henry’s original bailout package consisted of three pages, and has now grown to 110 pages now that lawmakers have had a chance to deal with it! That’s so typical isn’t it? Anyway… There will be three tranches of payments of $250 billion as soon as it’s passed, $100 billion after a progress report to Congress, and the remaining $350 billion, only if needed… Yeah, right! Like it’s not going to be needed!

Anyhoo… The stock jockeys will be dancing in the streets today, you bet your sweet bippee! I guess, we’ll just have to hunker down again on the currency side, and let all this slide by and play out… The currency euphoria we saw earlier last week has slipped away… Maybe, these are more buying opportunities… Maybe… You never know!

Today, we’ll see Personal Income and Spending, and the Personal Consumption Expenditures (PCE), which is THE inflation indicator that the Fed uses. Tomorrow we’ll see the S&P/CaseShiller Home price index, Chicago Purchasing Managers Index (manufacturing), Consumer Confidence, and so on… More later in the week as we turn the calendar to October, and we’ll talk about those at that time.

And before I head to the Big Finish… The goings on in gold and silver are really making people scratch their heads (in my case, bald head). We have major precious metal wholesalers out of gold and silver, except in sizes nobody wants. So… If there’s a shortage of the gold and silver, why aren’t the prices of these two just kicking rear and taking names later?

Mark O’Byrne, of Gold and Silver Investment, Ltd. had this to say about this scenario… “Bullion shortages and the confluence of unprecedented demand and limited supply in conjunction with macroeconomic, inflation and systemic factors is leading to extremely bullish conditions for the gold market – probably even more bullish than in the 1970s when gold rose some 3,000% from $35 to over $850 in just 9 years.”

Currencies today 9/29/08: A$ .8150, kiwi .6750, C$ .9610, euro 1.4325, sterling 1.80, Swiss .9030, ISK 99.75, rand 8.24, krone 5.7825, SEK 6.7630, forint 169.50, zloty 2.3690, koruna 17.20, yen 106.20, baht 34.04, sing 1.4340, HKD 7.7640, INR 47, China 6.8450, pesos 10.88, BRL 1.8450, dollar index 78.23, Oil $103.50, Silver $12.98, and Gold… $880.35

That’s it for today… Strange goings on in precious metals, eh? My beloved Cardinals finished the season with a six game winning streak, too bad that couldn’t have come when it mattered! They did actually win more games this year than they did in 2006 when they won the World Series! 10 games over 0.500 for a team picked to have 90 losses this year, ain’t too shabby! But… Not good enough to get them in the playoffs! UGH! My little buddy Alex, played football on Saturday, against some HUGE kids from the country. (I guess what they say about growing them big in the country is true!) But his team held their own and won going away. This is a HUGE week for my beloved Missouri Tigers, who take on big bad Nebraska on Saturday night. The Tigers haven’t won in Lincoln Nebraska since 1978… That’s right, folks. In 1978, my darling daughter wasn’t even born, and I was running the back office of a brokerage firm in Des Moines, Iowa… That’s a long time ago! And time for the Tigers to STOP that streak! OK… I’ve carried on long enough today, but can’t leave without mentioning the loss of Paul Newman over the weekend. OK… Time to hit the send button, Mary and Mike are here, I’m late! I hope you have a Marvelous Monday!

Chuck Butler
September 29, 2008