Geithner's Plan Disappoints

Good day… And a Wonderful Wednesday to you! Well… Tim Geithner didn’t experience a Terrific Tuesday, as I had wished for him… And now, it looks as though the shine is coming off the new President as more and more individuals are “not buying” his appeal to the nation to get a stimulus package passed. The currencies rallied and then sold off after Geithner gave the details of his “new and improved” plan. We’ve got some potential market-moving data printing today and more! So… Let’s go to the tape!

Front and center this morning, we have some data that could potentially move the currencies today. I’m talking about the trade deficit for December. The “experts” have forecast a narrowing of the December trade deficit from $40.4 billion in November, to $35.7 billion. Now, that all sounds wonderful, as this is one of the twin deficits that I have banged on for years now. But the resolution is completely different than what I wanted to see. I wanted to see U.S. exports bring the trade deficit down… Instead we have a complete collapse of demand for imports… And with the dollar stronger than it was 7 months ago, exports are falling like a house of cards.

Now, here’s the potential market-moving piece of this data… Last month (January) when the November $40.4 billion deficit printed, it was narrower than forecast, and sparked the dollar to a 1.5% gain in one day. But that’s not all… The rest of that week, the dollar gained 2.5% (in the dollar index)… So… While this isn’t the path on which I would have liked to see the trade deficit narrow, it is narrowing.

Unfortunately, for the twin deficits, the other deficit that resides in the budget is taking up the slack. I now figure that the budget deficit could very well hit $3 trillion this year. We already have $1.2 trillion from the Congressional Budget Office, $838 billion in the “new and improved” stimulus package the Senate passed yesterday, and don’t forget the $350 billion in TARP money that was carried over from last year, that will be spent this year. And you know, there will be “another” spending package coming in the future, because people like you and me are calling out this “new and improved” stimulus package.

A recent poll by Pew Research Center found that a narrow majority of Americans – just 51% – support the stimulus. And that’s down from 57% in January. Even worse for the administration, support seems to be dropping among people who say they’ve learned more about the stimulus… From 49% to 41%.

And here’s something in the plan that I bet you didn’t know was a part of it… I thank a dear reader for bringing this to my attention. He’s a doctor, so I believe he knows what he’s talking about here, folks…

“This past weekend, I took the time to read ‘The Obama Stimulus Plan.’ I will leave both politics and my economic perspective aside. (I majored in Chemistry and Economics at Bucknell). What I will NOT leave aside is what is buried in ‘The Bill’ from a health care standpoint. YOU NEED TO KNOW… The ‘stimulus bill’ is a Trojan Horse… Hidden in ‘the horse’ is the legislation to NATIONALIZE HEALTH CARE.”

So… Do I have your attention now?

Back to the task at hand… The Geithner Plan was a bust according to the markets. Here’s what the Wall Street Journal had to say about the stock sell off… “Financial stocks led a broad move down in the market on the heels of Geithner’s unveiling of the Treasury’s bank-rescue plan and Senate passage of the stimulus measure. The Dow Jones Industrial Average dropped by roughly 350 points, or 4.2%, reaching its worst levels of the day in mid-afternoon trading. Bank of America and Citigroup experienced double-digit percentage losses.”

Currencies followed along with stocks, like they have for a couple of weeks now. The euro (EUR), which had traded up to near 1.31, fell back to yesterday morning’s figure of 1.2975, as if nothing had happened. The high yielders like Aussie (AUD), kiwi (NZD), and Brazil (BRL), had all been trading higher this week on hopes that the Geithner Plan would bring the risk takers back to the markets. But that didn’t happen, as Geithner really disappointed the markets with his plan.

It was reported yesterday that economic advisors for Obama were in a tug-o-war with Geithner on this plan, and that Geithner had won. Given the reaction by the markets, I think I would like to see what the advisors had planned, to make a choice between the two! Maybe Geithner is swayed by the old regime at the Treasury, given that he had his hands in there, helping the old Treasury Secretary Paulson with his bailouts and TARP, last year. Hmmmm… Makes you wonder.

I read the text of the Geithner Plan… And was very disappointed. I will say that the Treasury’s plan to make this all transparent is good… But, the rest of it was the same old song and dance – spending taxpayer funds on shoring up financial institutions… Could go up to $1 trillion!

You all know where I stand on this spending that we can’t afford, and placing the burden of paying it off on our grandchildren… It’s downright immoral! Let the financial institutions that can’t cut the mustard sell themselves to someone who can, or close, and when all the dust settles, we’ll be left with the financial institutions that are strong and ready to grow! But that won’t happen. It’s like what my friend Bill Bonner, here at The Daily Reckoning says about the Fed and Treasury propping up these institutions… He calls them “the meddlers”… Great term!

So… As I said above, the Geithner plan rubbed the markets the wrong way, and stocks and currencies hit the skids. Bonds had a banner day… Of course, you knew they would after I talked about how they had started the year off with the worst performance since 1980! UGH! And… As always – well at least for the past six months – as the risk takers took their high yielders rally and went home… Japanese yen (JPY), rallied. And there was another currency that rallied along side yen yesterday… Swiss francs (CHF)… But that didn’t last through the night.

One of the biggest losers (to use the name of the TV show my beautiful bride can’t miss each week) was the Swedish krone (SEK), as the Swedish central bank – the Riksbank – made a larger than expected rate cut of 100 BPS (50 BPS was forecast). The Riksbank also basically outlined their plan to cut rates further in future meetings.

British pound sterling (GBP) lost ground too, when the Bank of England’s (BOE) Governor Mervyn King made some statements about the U.K. being in a “deep recession” and that it would “probably require lower interest rates and an increase of money supply”.

Now, the lower interest rates aren’t what put the kyboshes on the pound’s recent strength… It was the comment about increasing money supply – which in my book of how to value a currency is one of the top valuation indicators. You see, inflation in the United Kingdom has fallen to 0.05%, 1.5% below the ceiling target for inflation, and lowering the interest rate is one thing, but increasing money supply? I truly believe that increasing money supply places the velocity of money rule in place, and inflation can spiral when that happens. It’s akin to “playing with fire”… Somebody is going to get burned!

And here’s a sign that a country’s currency is on the downward slope… Mexico’s central bank said that it would “continue to intervene to support the peso”. UH-OH! Let’s see what this intervention has gotten the central bank so far this year… The peso (MXN) is down 4.7% this year, and lost 2.3% of that yesterday! The central bank bought $1.1 billion worth of pesos last week to prop up the currency. Their foreign reserves now stand at $82 billion worth, so they could play this game for some time… But, in the end, the markets have deeper pockets, and if they smell blood in the water – like I think they do now with pesos – they will test the central bank’s willingness to spend those foreign reserves!

The folks over at Citigroup issued a report on China yesterday, and they are bucking the trend to downplay China in 2009. Citigroup believes China will surprise on the upside, and that their currency, the renminbi (CNY), will continue to gain versus the dollar in 2009 – to 6.6, from the current levels of 6.83… So… This is one of the few reports that follow along with my general feeling of China.

The Geithner plan was good for gold, as the shiny metal gained $20 yesterday, and is up another $10 this morning – trading at $924.69… I gave a long interview yesterday regarding deflation and inflation. I tried to explain how the deflation we are seeing right now is asset deflation, not your ordinary monetary deflation, for that would require a contraction of money supply. I was asked what assets perform well in a deflationary cycle… Cash… And while gold is the same as cash… Gold! I have a new term that I came up with for gold… An “uncertainty hedge”… How do you like that one? Everyone is uncertain as to what’s going on and what will happen with all this spending going on, and what performs well? The “uncertainty hedge”!

And on that note… I think I’ll head to the Big Finish! And don’t look now, but the price of oil is falling again.

Currencies today 2/11/09: A$ .6530, kiwi .5230, C$ .8025, euro 1.2950, sterling 1.4360, Swiss .8655, rand 9.8980, krone 6.7175, SEK 8.2430, forint 227.50, zloty 3.5140, koruna 22.0850, yen 89.90, sing 1.5060, HKD 7.7510, INR 48.69, China 6.8330, pesos 14.60, BRL 2.2890, dollar index 85.60, Oil $37.84, Silver $13.39, and Gold… $924.69

That’s it for today… I tried and tried to get “something” out of the Geithner plan last night, but it totally lacked specifics, and I understand why the markets began to circle the bowl. Speaking of last night… I tried to watch our Blues play hockey, but they were just not playing well, so I switched it off, and began to do some research for today’s letter! Now that’s how bad the Blues were playing! Lots of young talented players, but it looks like they won’t make the playoffs again this year. UGH! T-minus three days left till Valentine’s Day… Are you ready? Tomorrow is Lincoln’s Birthday… His 200th birthday! WOW! Can anyone explain to me why he doesn’t have a holiday? That putting all Presidents into one holiday is a bunch of bunk in my book! OK… Suzy Q just arrived, so that tells me it’s time to get this all wrapped up in a bow and sent! I hope your Wednesday is Wonderful!

The Daily Reckoning