Central Banks to the Rescue

OK… Well, the old saying that “the currencies rally while Chuck is away” was drug out of the closet and dusted off yesterday. The currencies did rally, and rally strongly, I might add! But all that good rallying is being wasted this morning, as the dollar fights back.

The Eurozone leaders are meeting in Poland as I write… (This is the meeting that US Treasury Secretary Geithner is attending to lend his expertise in ending a debt problem… OK… I’m laughing so hard right now, I can barely type!) Anyway… The irony of all that can’t get in the way of what’s being discussed, which is a way to give everyone a warm and fuzzy on collateral for the loans they are giving to Greece… Finland has been a real pain in the rear for the Eurozone leaders, as they have, and rightly so, demanded good collateral for their loan participation…

And the euro (EUR) was deep sixed this morning when the Finnish Finance Minister said it was unlikely that any agreement on collateral would be reached at this meeting… That was an indication to the markets that the problems are not being resolved, and they took away the “rally hat” from the euro…

The “rally hat” was given to the euro yesterday, after it was announced that the Fed — along with the Swiss National Bank (SNB), The Bank of Japan (BOJ), and the Bank of England (BOE) — would all join in to lend to Eurozone banks… Don’t get this mixed up with the normal course of business that allows banks to borrow from the Fed and other central banks for liquidity… Those loans are normally for just one week… This new lending line will allow the Eurozone Banks to take out loans for three months, during three auctions that begin next month and continue through December.

My friend, Addison Wiggin, over at The 5 Minute Forecast, reminded everyone yesterday that the timing of all this is interesting, in that: 1. French giant bank Soc. Gen was just downgraded 2. It was reported on Wednesday that US money market funds had cut off French Banks and 3. It was the 3rd anniversary of Lehman Bros. closing their doors…

Another thing weighing on the euro and the other currencies this morning, is a strange forecast that the U. of Michigan Consumer Confidence report is going to rebound for the first two weeks of September… And for what reason? I have no idea whatsoever! Unless they kids at U. of Michigan were calling people who just learned that the president is going to provide them 99 more weeks of unemployment benefits… OOOHHH… Did I sound sarcastic there? That’s me Mr. Sarcastic… But really, give me a good solid reason people would feel more confident with all that’s going on…

Speaking of what’s going on… We’re five days away from the next FOMC meeting. And I truly believe that at that meeting next week (9/21), we’re going to hear about the Fed’s latest form of stimulus… I’m so sure that they are going to do this, that I would bet the farm, if I had one! HA! Seriously though… I would be quite surprised to not hear about a new stimulus for the economy that has gone stagnant, next week…

I know that for the most part the Fed Heads want to see deflation before they implement anymore stimulus… And yesterday’s print of CPI doesn’t exactly lend itself to a deflationary economy… The “stupid” CPI report for August, showed an increase in consumer inflation of 0.4% versus July. But the year-on-year number was just nudged up to 2%… So… According to the government, inflation in the US has only risen 2% in the past year… When you add in food and energy, the number rises to 3.8% YoY… But if you actually calculated inflation the way it should be calculated, like John Williams does over at Shadow Stats… you would see consumer inflation at: 6.5%…

You know how I’ve always told you that each individual should measure their own inflation by just applying everyday things to their measurement… For instance… I noticed this yesterday… Last year, a Mizzou Football game that would not be televised by a regular cable channel, would be offered as “pay-per-view” at $20… This year, if you want to watch the game, it will cost you $40! It’s not like they are going to increase the quality of the telecast 100%!

OK… Back to other things… Gold is back below $1,800 as it saw a major stream of selling yesterday that has carried through to this morning’s trading. The last time gold fell below $1,800, I picked up some additional ounces… I’m tempted this morning to buy more… For… I look at $1,800 like I looked at $1,100… Remember when gold would go back and forth, above and below $1,100 for a few weeks, and I would tell you that I would look to buy on the dips below $1,100? Well… That’s how I feel about $1,800… Of course I could be wrong, but… Since I’ve bought gold going back to about $500, I can “dollar cost average”, and then $1,800 doesn’t look that daunting!

Here’s another thing that makes one wonder how consumer confidence could be stronger… Across the country, foreclosure filings were up 7% in August over the previous month, representing the biggest month-over-month increase since August 2007… And when you go to the “hot spots” of the housing meltdown you see some real bad numbers… Like California saw foreclosure filings increase by 55%… OUCH!

OK… I could go on and on about this consumer confidence thing, but until reality smacks them in the face, I would be doing nothing but spittin’ into the sea… So, I’ll stop…

Now here’s some sage advice… “One of the starkest ways to emphasize the importance of Europe getting on top of this is that you don’t want the fate of Europe to rest in the hands of those who provide financing”… Eh, eh, eh,… Yes, that was our US Treasury Secretary, Geithner, chiding the Eurozone leaders and pointing out that they need to correct their debt problem or face leaving the fate of Europe in the hands of those that provide the financing… Was he talking to Eurozone leaders, or US leaders? Because, folks… That sounds very much like what I’ve been saying about the US debt problems for years now! In fact, I’ve talked about owing so much to China that they begin to dictate policy in the US. So… I guess Geithner could be talking to both, here, right?

So… After a week of turmoil in the markets, we head into the weekend with things pretty much still up in the air… Greece hasn’t defaulted yet, even though the markets strongly believed that would happen last weekend, and still have priced in a default to the tune of 91%… I have to tell you that the Fed coordinated this lending facility to Eurozone banks, because they are well aware of what I’ve told you for months now… That the US’s exposure to a Greek default is HUGE…

Gold has really backed off, but haven’t we seen this before? Yes, and many times, I might add… And Chinese renminbi (CNY) continues its march toward stronger levels versus the dollar. And one week down for the Swiss National Bank (SNB) who placed a floor on the franc/euro cross of 1.20 last week… Many analysts and observers have talked about how this is a HUGE mistake… But, one week into the huge mistake and there’s been no movement in the cross…

The Aussie dollar (AUD) has rebounded the past two days… This morning it is getting some underpinning from Australia’s Prime Minister, whom I’ve heard isn’t well-liked in Australia, now that she’s been elected… Anyway… The PM told an interviewer that she expected China’s demand for Aussie raw materials to remain strong…

OK… I have two “then there was this” items for you today… The one is a no brainer that it had to be here… And when I read about this yesterday, I thought, “not a good day for you to be out of the office Chuck”… You’ll see what I’m talking about… Here’s the first “Then there was this”…

UBS said a rogue trader, Kweku Adoboli, racked up about $2 billion in losses related to unauthorized derivatives trades. Adoboli, a director on UBS’ “Delta One” derivatives desk, has been arrested in a case that raises questions about banks’ ability to manage risk and regulators’ ability to supervise it. UBS suspended several other members of the derivatives desk as executives try to determine whether anyone else was involved.

Management must understand the workings of any investment, derivative, etc. If they don’t… This is what happens…

And then there was this… From The Chicago Tribune

Solyndra Inc. was a California-based maker of advanced solar panels. Its executives talked a good game, and the company attracted substantial private investment. It also caught the fancy of the US administration just as a pile of money came available from the $787 billion stimulus legislation of 2009. The US government guaranteed loans of more than $500 million to Solyndra. Fast forward to the not-so-bright and prosperous present: Solyndra is bankrupt, its factory shut down and its workforce on the street. The FBI raided its headquarters earlier this month, presumably suspecting fraud. Its top executives failed to appear Wednesday at a hearing on Capitol Hill where Republicans were itching to grill them.

A series of emails between White House officials and Office of Management and Budget watchdogs suggests that Solyndra got its federal guarantees prematurely, under pressure from the administration.

Not playing politics here, folks… Just pointing out another example of how, when it’s not “your money”, you’re not very diligent… And that ticks me off as a taxpayer, that the government is more diligent with my money!

To recap… The currencies rallied strongly yesterday when it was announced that the Fed and other central banks around the globe would provide a lending facility to European Banks. This removed some of the fear that had hung over the euro for a couple of weeks now… Well, that fear is back this morning, as questions about the type of collateral Finland would receive is causing friction in the Eurozone leaders meeting in Poland. Gold is back below $1,800… Is it an opportunity price? And Chuck questions how consumers can be confident…

Chuck Butler
for The Daily Reckoning

The Daily Reckoning