Coordinated Rate Cuts

Good day… And a Wonderful Wednesday to you! Well… There’s a ton of stuff to talk about today, one of which is the amazing run that Japanese yen (JPY) has had in the past month, and particularly the last week! No need to sneak a peak at the currency round-up, Japanese yen is trading at 98.80! WOW! I could be acting like a contortionist and trying to slap myself on the back, but that would unprofessional… And besides, the rest of the currencies are taking shots to the mid-section. Anyway… Blow the horn, the carry trade (for yen) is dead, may it rest in peace!

OK… The currencies tried like all get-out yesterday to rally versus the dollar, and the euro (EUR) did end the day 1% higher on the day, which, after the bloodshed of the past month, I’ll take that any old time! I would love to go back to 2005 (not really, but for this conversation’s sake I will) and pull out some old Pfennigs where I talked about all the naysayers talking about a break up of the euro… We had the NO votes from France and Denmark on accepting the European Union’s (EU) Constitution, we had riots in the streets of France, and we had rising interest rates in the United States… So dozens and dozens of naysayers called out the euro and said it would collapse under the weight. I said then, and I’ll say now… HOGWASH!

Shoot Rudy! If this had all played out like the EU Finance Minister bragged about just two weeks ago, the U.S. economy would be drowning without a life preserver, and Europe would be pointing their finger saying neener, neener, neener… But the Finance Minister misspoke and didn’t get the memo that Europe had toxic waste bonds too! So the euro, which should be basking in the sunlight, is being tarred with the same brush that was used on the dollar when the markets thought it was just a “U.S. problem”.

Front and center this morning, we have news that the U.K. Governor has unveiled plans to partially nationalize major banks, with taxpayers taking a share stake in a bid to restore stability to the banking industry. Eight banks have signed up for the recapitalization plan, which isn’t a marker on who’s doing bad and who’s doing OK… These banks, Abbey, Barclays, HBOS, HSBC, Lloyds, Nationwide Building Society, Royal Bank of Scotland, and Standard Chartered, see a chance to shore up their balance sheets… Who wouldn’t sign up of that these days?

I don’t really know what to make of this plan… I like it because taxpayers get a share of what they paid for… But I don’t like it because, once again, the Governor has gotten involved!

Well… The DOW fell another 500 points yesterday. I read something last night that reported that U.S. retirement assets are down $2 trillion dollars in the past 15 months! I guess the markets are calling for “more” from Big Ben Bernanke. The “more” they are asking for now is an interest rate cut, and not some measly 25 BPS… Hey, use the Reserve Bank of Australia (RBA) as your guide… They felt the need to jump start their economy with a rate cut and came out with a 100 BPS cut! No sense in messing around, eh? I mean, if you believe you will need to cut 100 BPS over a period of time, why not go for the gusto and get it over with?

That’s how I’ve always worked on things… If I have things to do at work or home, don’t stop until it’s done, and then take a break.

So, anyway, back at the ranch… Big Ben is getting pelted with requests for rate cuts. I wonder if he has the intestinal fortitude to do a Saturday Night Special? (A rate move, out of meeting, and on a Saturday night, like Paul Volcker did back in the ’80s.) If Big Ben’s speech yesterday is any indication of what he might do, then the “fix” is in for a rate cut. You see… He gave a strong indication that interest rates may need to be lowered… “The combination of the incoming data and recent financial developments suggests that the outlook for economic growth has worsened and that the downside risks to growth have increased.”

WOW! He finally sees that the downside risks to growth have increased! A round of applause for the Fed Chairman! Don’t ask me what they heck he’s been looking at if he’s just now come around to seeing downside risks to growth increasing!

Even sadder news than the Fed Chairman just now waking up to smell the coffee, is the unwinding of the carry trades for Aussie (AUD), kiwi (NZD), Brazil (BRL), and any other high yielding currency that was purchased in the carry trade. Yes, it’s all seashells and balloons for Japanese yen, but the currencies of Australia, New Zealand, Brazil, South Africa (ZAR) and others are getting hammered with the unwinding going on. The Aussie and kiwi currencies have fallen to 5-year lows versus the dollar. What took 5-years to build, has been knocked down… I can’t believe it with my own four eyes!

The Brazilian real, which had been the belle of the ball for the last two years, has really fallen on a sword… And it all comes back to the unwinding of carry trades folks. Should “risk” return to the markets, we could see these trades come back in a hurry… But I wouldn’t hang my hat on the thought that “risk” will return to the markets any time soon. This is the worst period of time in the financial markets that I have ever seen… And just so you know… I began my career in the brokerage business in 1973! So… That covers some time, eh? And I’m not just saying this because these currencies have fallen so badly… This IS the worst period of time that I have seen in the financial markets, period.

Shoot Rudy, the stock market crash of 1987 is like a party compared to this mess!

Stocks are circling the bowl; the high yielders are, too; you are lucky if you can get a 50 BPS yield on a 3-month T-Bill, and so on… But gold… Gold is back above $900 this morning, and has rallied three days in a row, after dipping to $859 on Monday.

There’s been a lot said recently about gold and silver for that matter, too, and the theories on why they have not soared to the moon, given the shortage of gold and silver. Swiss Asia Capital CEO Jurg Kiener was on CNBC the other day to talk about gold, and he noted the disparity between the explosive physical market price and the sluggish paper market price. He also blamed the speculation of Wall Street banks for the latter, and predicted the failure of the paper market and the quick doubling of the gold price.

That’s some aggressive talk there, Mr. Kiener… While I’m a big gold fan, I can’t get all caught up in aggressive talk like that… Got to stay steady Eddie.

You know… One would have thought that the Fed’s announcement on Monday (that they were going to begin paying interest on reserve balances), would have given the markets some room to breathe. Then follow that announcement up with the Fed’s announcement yesterday about how they plan to purchase commercial paper directly from issuers, and that should have really gotten the market’s attention… It got mine! This is huge folks… Those corporations that depended on commercial paper issuance as a part of their financing, had seen this market dry up and wilt away since last August (2007).

Of all the things the Fed has done and I have ripped them for, this is one that makes some sense… But again, why is the Fed having to step-in to deal with this? Who gave them the authority to do this? Is that part of the Federal Reserve Act of 1934? Or whatever year it was they became a power!

But nooooooooo! The markets don’t care right now, they have focused strictly on unlocking the seized up credit markets. I was asked during a radio interview yesterday whether this credit market seizing up was the “real” culprit in all this… I said, “Well, it is now! Obviously, there have been other culprits – subprime, toxic waste bonds, FASB accounting rules, etc. – but right here, right now, it’s all about unlocking the seized up credit market”…

As I look at the currencies right now, I see a massive overbought U.S. dollar… (That’s my opinion, as I see it.) It has gotten in this overbought position based on a flight to safety into U.S. Treasuries. But what happens when/if all the plans of the Fed and Treasury do work, and brighter days are ahead for the U.S. credit market and financial institutions? Will we see massive amounts of U.S. Treasury purchases that were made this year, sold, and repatriation to the base currency of the investors? Now that would certainly lead to a weaker dollar once again, and the fundamentals would come shining through, eh? Well, that’s the way I see it… But I hear you asking… “Hey, Chuck… What happens if the un-dynamic duo’s (Paulson and Bernanke) plans don’t spell relief like Rolaids” What then, Big Guy? Hmmm…” I guess you would still see the Treasuries being bought, and a stronger dollar… The dollar/currencies trades could end up being strictly tied, too, if the United States is in trouble or not.

Speaking of being in trouble or not… Yesterday, I told you about the Icelandic krona (ISK) being pegged to the euro at 131… Well, I called a dealer yesterday to see where he was quoting krona, and he had it pegged at 255 euro, which would be $187 in dollars… And… Our foreign bonds trader, Don Ries, came to me yesterday and said he thought his clearing broker would deal in krona… I said, “Get him on the phone and make certain of that.” Soon, Don came back to say that clearing broker withdrew his bid/offer on krona. I know it wasn’t a popular decision on Monday to have to sell the krona we had due, since there was no longer a forward market, but it sure looks like it was the best one we could have made!


The Fed, European Central Bank, Bank of England and the Bank of Canada have all cut interest rates in a coordinated rate cut move before the markets open in the United States! The Fed cut rates 50 BPS to 1.50%! I’m looking all over the board for the size of the other central bank cuts… The Fed made the announcement, and said the other banks would announce their rate cuts.

I saw a blip that the ECB said “inflation risks had weakened”… Since when? I guess when Big Brother (the Fed) calls and says they need a rate cut from them, they say, “How big?” I’m shaking my head in disbelief… The ECB has allowed the Fed to dictate rate policy.

OK… I now see that the ECB also cut 50 BPS… So… You see, the Fed needed a cut, like I said earlier today, and to keep the markets from jumping all over the dollar for lack of rate differentials, the Fed got the ECB to keep in line, to keep the differentials the same, etc.

The yen has lost ground since this move was announced, and the euro has gained a ½-cent… So, the crosses to yen are causing problems! So… Earlier I talked about yen moving to 98… Well it’s back to 100… So much for all that!

I could go on all morning about this move, but I have to tell you it has really lit a fire under the euro, and it’s now up one full cent since the announcement!

I’ll have more on this tomorrow, you can bet your sweet bippee!

Currencies today 10/8/08: A$ .6675, kiwi .6010, C$ .9050, euro 1.3720, sterling 1.7550, Swiss .8840, ISK 187, rand 9.20, krone 6.1150, SEK 7.0640, forint 184.10, zloty 2.5225, koruna 17.9850, yen 100, baht 34.40, sing 1.4640, HKD 7.7625, INR 48, China 6.8175, pesos 12.84, BRL 2.3110, dollar index 80.62, Oil $87.45, Silver $11.86, and Gold… $912.25

That’s it for today… So… The rumored coordinated rate cuts came to fruition… Very interesting, eh? I’m enjoying a morning of listening to Carlos Santana as I write the Pfennig today… He’s my fave guitar player of all time… Him, Joe Satriani, Eric Clapton, Stevie Ray Vaughn, and too many others to name… My little buddy Alex, is quickly becoming one of my fave guitar players. He has the gift. I hope he keeps at it… Because, unless he begins taking some growth hormones, his football playing days will end about the same time mine did! Well… Mary Owens just came in… So, that means I’m late out the door again today! The last two days have been pretty crazy on the trading desk. I have little time to even look up and see what’s going on around me, but I can hear it, and it’s crazy! I have to cut back the long days though; I promised myself, my beautiful bride and doctor that I would not return to 14 hour days, and I’m going to keep that promise! Besides, my beautiful bride reminds me every time I stay late! Our little Christine does the same, always calling out the time of day, etc. So, I have help in keeping that promise! I hope you have a Wonderful Wednesday! Now, on to reading more about these coordinated cuts!

Chuck Butler
October 8, 2008