Does the Fed Control Everything?

Have you been following the goings on with the investigation into the Bank of America (BOA) purchase of Merrill Lynch? Whoa, there partner! I thought for sure this would get all swept under the rug, but it’s all coming out, every dirty deed! Dirty deeds done dirt cheap!

Before we get into the goings on there… Let’s talk about the currencies and their huge jump yesterday, only to see chicken traders come out of the woodwork overnight to support the dollar going into the G-8 meeting.

Yesterday, the currencies had it all going on versus the dollar… The euro at one point in the afternoon hit a high of 1.4170! You can imagine the long, stale trades that finally could take a profit there, eh? Well… It happened, and by the time I left for the day, the euro had backed off that lofty figure. But not like it backed off overnight… The reason I call these guys chicken traders, is that they are afraid to be short the dollar going into the G-8 meeting… Now… I have to ask this question… Did they NOT KNOW there was an upcoming G-8 meeting this weekend yesterday when they took the euro (EUR) to 1.4170? I did… In fact, I told you three days ago that there was going to be a G-8 meeting!

Here’s the skinny… The chicken traders are scared to death of having short dollar positions ahead of the G-8, where they fear U.S. Treasury Secretary Geithner will say that the U.S. favors a strong dollar! Geez Louise! Here we go again! How many times can a U.S. Treasury Secretary go to the well with that saying and get positive traction? For each time they do say that, they follow it up with an attack on the Chinese renminbi (CNY), saying it must appreciate. Well, how can that happen if they “truly” believe in a strong dollar? Add to that, the goings on now… How can anyone in the government say they believe in a strong dollar when they are implementing quantitative easing?

The other thing boosting the dollar this morning is a report that Big Ben Bernanke is calling for reduced bond buying, thus reducing the pressure on the dollar. Now… That would be great news, if it were really going to play out… But these guys are like junkies now, this quantitative easing is like cocaine to the Fed, and the bond markets… And soon enough, the bond guys will be clamoring for more cocaine/bond buying/quantitative easing! And the Fed is the pusher…

So… The dollar will end the week getting some love from the chicken traders…

The news that the Fed “might reduce bond buying” hit the high yielders in the mid-section, knocking the air out of them! But, these currencies are resilient, and after the wind is restored in their mid-sections, they climb back on the rally tracks! You have to love currencies that show resilience!

The dollar received an additional boost overnight… You’ll want to sit down for this one… And put the coffee down, to not risk spilling it and burning yourself! Here’s the skinny… Japanese Finance Minister Yosano who stated that “we have complete trust in the fact that the U.S. views its strong-dollar policy as fundamental,” and “so our trust in US Treasuries is absolutely unshakable.”

What else did you expect from a country that is the second largest holder of U.S. Treasuries? But… The dollar basks in the sun from those comments.

Did you hear that U.S. Treasury Secretary Geithner is clamoring for more power for the Federal Reserve. In Geithner’s mind the Fed should be the Big Dog regulator in the markets… Hmmm… Let’s see now… Could he want to see that because of the Fed’s “wonderful” track record of allowing the dollar to lose over 90% of its value since they took over the stewardship of the currency? Yeah, that’s the ticket! I shake my head in disgust that this is even being talked about… The Federal Reserve Bank is not even a government agency! The Fed is a farce! Come on people, get your rakes, and pitchforks, and let Geithner and the administration know this is not in the best interest of this country!

OK… Right after I hit “send” yesterday, the central bank of Brazil announced a rate cut… This was a huge rate cut versus the forecasts… The central bank cut 100 BPS or 1%. Let me tell you what’s going on here… First of all, Brazil see’s an opening… They can promote growth, and get a foot in the door of countries that have been struggling to show any growth… But first, there’s the real (BRL)… The real has really seen some strong winds in its sails lately… It has gained nearly 20% versus the dollar in the past three months… And what did the central bank Governor say about three weeks ago?

Well… Let’s draw this out… The real was trading around 2.03, and the central bank Governor said he “would keep the real above 2”… You may recall at the time I said that in the old days, traders would take that statement as a challenge, and go after the real big time to make it stronger and to put egg on the face of the central bank… Well… While there may have been some of that… The currency pushed higher on the back of the high yielders, and commodity prices rise… And the real soon was trading below “2”! (Real is a European-style currency so the lower the price the more value it returns in dollars!) In fact, the real traded to 1.93!

Yesterday, after the announcement, the real lost some ground – as a currency should when a central bank debases the currency with an interest rate cut! But soon, the real was rallying once again, having put the rate cut in its rear view mirror. Now… That was a good sign for the real… But, I truly believe that the central bank here will look to lower interest rates on a couple occasions in the future… To me… That kind of information is like manna from heaven! For if the currency is going to weaken briefly after rate cuts, but rebound quickly, that would make for some good trading info… Of course, just because it’s happened in the past, doesn’t mean it will continue!

OK… Now… Let’s talk about the Bank of America (BOA) and Merrill deal… First, you might recall me telling you about a month ago that BOA Chairman, Ken Lewis, testified that the Fed and Treasury pressured him into buying Merrill Lynch, and not disclosing the losses on Merrill’s books… The government even gave BOA the money to make the purchase! And… You may recall that Big Ben Bernanke immediately dismissed these statements, as false… Well, someone with some intestinal fortitude decided to investigate this deal.

The other day I told you the records had been subpoenaed and that I thought it would get all swept under a rug… But NOOOOOOO!!!! Yesterday, it was revealed that Fed officials sharply criticized Bank of America and CEO Kenneth Lewis in emails to each other after the bank tried to pull out of its deal to buy troubled investment bank Merrill Lynch, according to documents unearthed by Congressional investigators. The emails confirm Fed Chairman Bernanke was willing to threaten Mr. Lewis’s removal as CEO if he reneged on the Merrill deal and later sought assistance. WOW!

And now… Ken Lewis is telling lawmakers that government officials pressed him to buy Merrill Lynch even after he became aware of major losses at the investment bank. Uh-Oh! The Fed and Treasury need to pull a Lucy here and do some ‘splainin’!

The data cupboard was busy yesterday with retail sales and Weekly Initial Jobless Claims… First, retail sales for May were bang on expectations of a 0.5% gain… A closer look though revealed that the major move here was in gas prices, which if you take them out, retail sales only gained 0.2%… But you know me, I don’t like taking things out, or adding things in… Let the data speak for itself!

The Weekly Initial Jobless Claims were better than recent reports coming in at 601K versus the previous week’s 625K… The problem here folks is that while the corporations may be cutting back on the layoffs, people that are out of work are remaining that way. The continuing claims rose to 6816K from 6757K the previous month… I mentioned on the desk yesterday, that the media was reporting the 601K number as “good,” but somehow forgetting to mention that the continuing claims weren’t good! There comes a time when you just can’t fire anyone else!

The Daily Reckoning