Currencies A-Plenty

Yesterday did NOT turn out to be a Turn-Around Tuesday after all… The small rally I saw right before signing off on the Pfennig yesterday went “poof” and it was gone. The currencies then traded in a tight range the rest of the day. The high yielders and commodities have really taken on some water in the past two days.

In the overnight markets, Japanese yen (JPY) was the only currency other than the dollar to gain. We’ve seen this before… In fact from September of ’08 through February of ’09, we saw the Japanese yen and dollar move higher together. You may recall that I would question the mental capacity of a trader who thought that Japanese yen was a “safe haven” but at the same time decided that discretion would be better than valor, and not stand in front of that yen bus!

That leads me to what I really wanted to talk about today, and that is… What happens if this great run that stocks have been on since March, suddenly ends? What happens if smart people begin to take profits, and that leads to more selling, and before you know it, things are looking bleak for stocks again? Well… I doubt anyone knows… But… We can look back to last fall’s huge reversal of stocks for an indication… And I don’t like that indication!

As you know, I’ve chronicled over and over again, how stocks and currencies have been connected at the hip for some time now… This is contrary to the historical trading pattern of these two risk assets. Currencies have different pricing mechanisms than stocks, and have a low correlation to stocks… But… The markets have put stocks and currencies and even commodities in a bucket labeled “risk assets”… And all that historical trading has been shoved under the bed for now…

With that in mind, and no apparent break in the link of these asset classes in sight – although last Friday’s Jobs Jamboree gave us a glimpse of a break, but no follow-up occurred – we have to believe that a stock sell-off will adversely affect the nice gains the currencies have made this year since March. And with that, is my chance to step up on the soapbox…

Ahem… Hello? Can you hear me now? Is this microphone turned on? OK… Here we go… I have long told people that the most important thing they can do in their investment portfolios is to diversify, and to add the asset classes of currencies and metals to their portfolios. I ask them… You wouldn’t own just one stock would you? Then why own just one currency? Diversification, gives you a hedge against the potential drop in the dollar, which most people truly believe will happen eventually, but with short periods of dollar strength mixed in.

So, if one is “truly diversified” they don’t panic when the short periods of dollar strength occur… In fact, over the years, I’ve seen people whom I consider to be really intelligent investors, use the short periods of dollar strength as an opportunity to add to their positions at cheaper prices.

I told the crowd in Vancouver… Markets always do what their supposed to do – just not when…

So, the dollar may have second winds here and there – sometimes for up to five months – but the idea to diversifying now is to take away the risk of the markets doing what their supposed to do… now! And the idea is that eventually, the government will get what they want (a cheaper dollar to use to pay back their debts), and you will be diversified! And you’ll be singing: Jimmy crack corn and I don’t care!

OK… I’ll get down from the soapbox now… Be careful, Chuck, the balky knee might give out on you!

I had to chuckle this morning, but then the chuckles turned to crying, as I read this story on the Bloomie… “The dollar may weaken should the Federal Reserve unexpectedly say it will keep buying assets,” UBS AG said…

What UBS is referring to here is quantitative easing (QE)… And they feel that the dollar would be taken to the woodshed if the Fed decided to implement more QE.

OK, apparently, the strategist at UBS who wrote that note to Bloomberg doesn’t read the Pfennig! For had he read it, he would have known that the Fed has taken to what I call, “stealth QE”. Recall that on Monday I told you about a story by Chris Martenson (yes, my fat fingers on Monday typed Mortenson, UGH!) that revealed the plan that the Primary Dealers and the Fed put in place for the last auction of 7-year Treasuries. The Primary Dealers bought the bonds that nobody else wanted, and then a couple of days later, the Fed bought 47% of the purchased bonds by the Primary Dealers!

So… I guess, in the end, if most traders don’t read the Pfennig (boy, they don’t know what they’re missing! HA!), then I guess this thought about more QE might hold some water… But, here’s the rub… If the Fed can affectively buy back from the Primary Dealers what the rest of the world didn’t want, without announcing it to the world, why then, would they announce it? It’s all a shell game, folks… With the cartel, I mean, the Fed Reserve in control…

Speaking of the cartel, I mean the Fed Reserve… Their FOMC meets today… And wouldn’t it be nice if we could wake up in the morning when the day was new, and see that the FOMC came clean and told everyone that they bought 47% of the Primary Dealers 7-year Treasuries after the last auction? Yeah, right, if you believe that will happen then I’m sure the government has some land it would like to sell you.

I read where 71% of economists surveyed want the FOMC to announce in their statement today following the meeting, that the recession is over… WOW! Now, that would be right up the Fed’s alley wouldn’t it? I mean how wrong have the Fed and Treasury been about this financial crisis and resulting depression since the get-go? VERY WRONG! So… Go ahead FOMC; say the recession is over… It’s my opinion that they’ll be eating those words in the future.

OK, enough! Norway’s central bank, Norges Bank, is meeting this morning, and I don’t expect any movement in their internal interest rate of 1.25%. I would like to see something in writing from the Norges Bank that hints at rate hikes this year… Otherwise, the risk is for krone (NOK) weakness on the announcement.

I have to think that for now, all the recent good news in Australia has been priced into the currency. The reason I say that is simply because the last couple of data reports showing positive signs for the economy have not moved the Aussie dollar (AUD) one iota… Last night it was consumer confidence printing a nice gain of 3.7%, moving the data to the highest level since 2007. But there was still no movement in the Aussie dollar, except to follow the other high yielders to softer ground… UGH!

Today… The data cupboard will get a workout here in the US. We’ll see the color of the Trade Deficit and the Budget Deficits… Of course the color will be RED, for the deficits in these two will be larger than the previous print/month, and there’s no dreaming of a turn-around any time in the near or far future!

This Budget Deficit is something that every citizen should be banging on their representatives about every day! And it’s getting worse, folks! I’ve told you about how tax receipts are near the levels of the great depression, which means the revenue to the government is falling, while the government spending continues to grow! But don’t let that get in the way of government officials telling us how everything is on the mend, and soon it will all be seashells and balloons.

Remember a couple of months ago or so, I explained to you how when we get to the other side of this deflationary asset price scenario, that we would begin to see inflation pressures? I said that those pressures would be fanned by the fact that people will have money to spend, but retailers won’t have inventory to sell them, thus, money chasing too few goods… A few people scoffed at that thought and told me I would be wrong…

Well… It was reported yesterday that wholesale inventory has shrunk for 10 consecutive months! Businesses continued to draw down wholesale inventory in June for the 10th consecutive month, with a fall of 1.7%… Oh! By the way… The 10th consecutive month is a record for continuous inventory decline, according to the US Commerce Department… So, we’ve got that to look forward to!

OK… Before I go to the Big Finish… I’ve got an interesting story to share with you!

Before I talk about the story, I want to tell you that a friend of mine just returned from Greece and Italy, and he reports that for the first time he can recall, people there preferred euros to dollars… Hmmm…

OK, now the story… Well, it seems that it’s not just foreigners who are growing tired of choking on dollars… The LA Times reported that Communities in North Carolina, Massachusetts, Arizona and elsewhere are printing their own money to encourage shoppers to patronize local businesses.

Last popularized during the Great Depression, scrip, or locally created stand-ins for US currency, is making a comeback. Pittsboro NC, population 2,500, is one of a handful of communities that launched its own money in recent months. It reports an avalanche of calls from other communities that have lost faith in the global financial system.

Pittsboro calls their currency the Plenty… “The Plenty is not going to get siphoned off to Wall Street, or Washington, or make a stop in Bentonville on its way to China,” said B.J. Lawson, a software entrepreneur who is president of the board of the Plenty cooperative. “It gives us self-reliance.”

Here’s a link to the complete story in the LA Times Very interesting indeed!

And… No… I’m not going to add the “Plenty” to the Currency round-up! HAHAHAHAHAHAHA!

The Daily Reckoning