Currencies Hold Their Gains

Well… The currencies (for the most part) kept the heat on the dollar throughout the day and in the overnight markets. The euro (EUR) did rise to 1.45 and change yesterday, while it is hovering right at that figure this morning, so it did give a little bit back.

There were no big announcements last night like we saw on Monday, so the currencies didn’t have anything to push them further. In fact, there may be a “letting the dust settle” period of time, with the Big Dog, euro, before we see any further advancement, given the euro’s huge gains yesterday.

We did have “Mr. Yen” Sakakibara, tell a crowd of people that he believed the dollar would remain the world’s reserve currency for 20 years… Hmmm… Apparently, the IMF and UN haven’t let him in on the news that they desperately want to do something about the dollar! Not to mention the BRIC countries of Brazil (BRL), Russia (RUB), India (INR) and China (CNY), of whom, have already stated their case for a change!

Chinese stocks were up again last night, so that could lead the way to further gains by stocks here in the US, which would bring even more risk takers out of the walls… That is, of course as long as the trading pattern that has existed for nine months remains in place!

I did read something last night about a complete collapse of consumer borrowing here in the US… Hmmm… Well, on one hand, if that’s true, that would mean that consumer spending is down, and saving has replaced it, and that would be a good thing! On the other hand… Consumer spending is like 70% of our economy… Or was 70% of our economy I guess I should say! And if we’re going to see a further slowing of spending, then you can kiss the thought of a “V” shaped recession good-bye!

Gold was unable to hold $1,000 yesterday and last night… I was talking to my publisher for the Currency Capitalist letter yesterday, and I was telling her, that while I’m a firm believer that this stock market rally is going to crash and burn, bringing all risk assets along to the fire, which would adversely affect the prices of currencies, and commodities, including gold… There’s no mistaking the appearance of a rush to gold in the past week… And why did the rush occur? Well, to me – as I explained yesterday – it’s simply an understanding that inflation is on the other side of what we are now experiencing, and if you can pick gold up now at those levels that existed last week (sub $1,000), why not, before it takes off?

So… I was assigned to write a piece on gold… See how that works in the publishing biz? You mouth off with your thoughts, and the next thing you know, you’re doing research for a piece that has to be done in three days or so! UGH! But… The thing I thought of was simply this… We may be getting to a new level, where I used to say I thought it was good to buy gold when it dipped below $900… That might have to be changed to $1,000… That is, if we don’t have the crash and burn…

The commodity currencies that were so strong yesterday have given some ground back versus the dollar overnight. The only thing that makes sense to me here, is that it is profit taking, for these commodity currencies, (except Canadian loonies (CAD)) have yield-advantage over the dollar… Shoot, they have yield advantage over all the major currencies… Euro, yen (JPY), sterling (GBP) and dollars! And for the most part, interest rates in these countries will be the first to rise beginning later this year… So, it had to be profit taking!

But, what do I always say when there’s profit taking? That’s right! It gives us a chance to buy at cheaper levels!

One currency that continues to baffle me and probably many others with its rise from the ashes, is pound sterling… (Cable, as currency traders call it.) I’ve had quite a few readers send me notes asking me about sterling’s strength, given the fact that the UK is probably in more dookie than the US… There are two things I can think of that probably explain it… But even these don’t do that good of a job explaining this rise in sterling…

1. The talk of using SDRs… SDRs currently consist of: euro, yen, sterling and dollars. So, if SDRs get wider use, then more sterling will have to be bought by the IMF (who issues the SDRs)

2. The crosses… Because most of the currencies are rallying and have been rallying against the dollar since March, sterling gets dragged higher in the crosses.

I’ve explained these crosses many times in the past, so I’ll just touch on it here… Whenever you buy a currency, you have to sell a currency… So the two currencies that make up that trade are called a “pair”… These are also called “crosses”… Here in the US we only think of dollar versus another currency… But all over the world, people are crossing euros for yen, and vice versa, Swiss francs (CHF) for Aussie dollars (AUD), etc. A lot of those crosses have sterling in them, and therefore, sterling gets dragged higher… Not a fundamental thing.

But we’ve seen this over the years, especially with yen… And the dollar of course!

Well… You might have missed this news yesterday… But the US Senate is going to have to raise the federal debt limit beyond $12.1 trillion by mid-October! Hmmm… Anyone have a guess as to who blocked the raising of the debt ceiling in 2006 and said… “Washington is shifting the burden of bad choices today onto the backs of our children and grandchildren”? It’s the same person who is now asking Congress to raise the debt ceiling to $13 trillion…

But, the reality of this is that our budget deficit this year will be $1.6 trillion, by government accounting standards… By Chuck standards, it will be $2.5 trillion when it’s all said and done… And we just keep finding more ways to spend money we don’t have, don’t we? I’m going to stop here, because this all just ticks me off, and I don’t want to say something that will fill my email box with name calling…

Did you see the story in The Washington Post regarding the resetting of ARMs? Here’s the skinny from The Washington Post…

“Between now and 2011, roughly 70% of option ARMs, with a total value of about $189 billion, will reset.” The rating agency, Fitch, put together the numbers and did the research… And none of it spells good times for homeowners that are already stretched to make mortgage payments.

Here’s how I believe they work… Option ARMs, also called pick-a-pay loans, allow borrowers to choose how much to pay each month. Nearly all the borrowers who took out this type of loan from 2004 to 2007 chose to pay less than the interest due. Sometimes they paid as little as 1% interest. But the loans eventually require the borrowers to start paying the principal and full interest rate, so the payments shoot up.

So… This mortgage meltdown will continue to remain in the news, eh? $134 billion of these ARMs will reset in the next two years, and the monthly payments are expected to jump 63% on average, or $1,053 per month, for loans adjusting this year and next… Can you imagine getting that letter in the mail? Dear Homeowner, your next mortgage payment will be xxxxxx…

That’s a really sad thing… Very sad… But it’s just another reason why I say this is a depression and not a recession! It’s going to carry on, and on, and on…

There was more Happy Days (NOT!) news in The Washington Post yesterday… “There is little chance US taxpayers will recover all of the billions spent on rescuing Chrysler and General Motors, according to a report by the Congressional Oversight Panel.”

Great! But in reality, we didn’t expect to recover it, did we? I know I didn’t! The government doesn’t have a good track record of preventing losses much less recovering them… And I’m not just talking about the current brand of government… It goes back many years.

My friend, David Galland, gave a quick history lesson in his letter this past weekend, and while this may be depressing, it does give what I said above, credence…

A Quick History Lesson

The US Post Service was established in 1775. So they’ve had 234 years to make it work. It is broke.

Social Security was established in 1935. They’ve had 74 years to make it work. It is broke.

Fannie Mae was established in 1938. They’ve had 71 years to make it work. It is broke.

Freddie Mac was established in 1970. They’ve had 39 years to make it work. It is broke.

The War on Poverty started in 1964. They’ve had 45 years to make it work. About $1 trillion of taxpayer money is confiscated each year and transferred to “the poor.” It hasn’t worked.

Medicare and Medicaid were established in 1965. They’ve had 44 years to make it work. They are both broke.

AMTRAK was established in 1970. They’ve had 39 years to make it work. Last year it had to be bailed out and today continues running at a loss.

$700 billion bailout of 2008. It has yet to create a single new private-sector job.

Cash for Clunkers in 2009 went broke after 80% of the cars purchased turned out to be produced by foreign companies.

Now that it’s put like that in black and white, it sure doesn’t look good, does it?

I really got on a roll today regarding the goings on in the US and didn’t pay much attention to the currencies… But, that’s because they are trading in yesterday’s clothes this morning… With no data to talk about yesterday, and so on…

The data cupboard only yields the Fed’s Beige Book for us this afternoon… For those of you who don’t know what this entails… The Fed’s Beige Book is a summary of Commentary on Current Economic Conditions by each Federal Reserve District. It’s printed eight times per year, and usually about two weeks before an FOMC meeting. It was once believed that the Fed Heads would use the findings in the Beige Book to help them make their decisions on monetary and fiscal policies…

I say, “It was once believed” because… After reading Bill Fleckenstein’s great book Ignorance at the Fed Reserve, Greenspan’s Bubbles, I was scratching my head asking, but I thought the Beige Book was used to help make those decisions that Big Al Greenspan made?

So… Again, no real data today… So the currencies will get their direction once again from stocks… And like I said above, the Chinese stock markets was good to go overnight.

OK… So… Let me recap today… The currencies held onto gains, albeit giving back small amounts in what appears to be profit taking. The Senate needs to raise the $12.1 trillion debt ceiling. $189 billion in Option ARMs are coming due in the next three years, and no data today should leave currencies to be directed by stocks – that is if the trading pattern holds.

The Daily Reckoning