Goldman and Morgan Stanley are Now Banks!

Good day… And a Marvelous Monday to you! Someone along the road last week stopped by to tell me that I was too “Cheery” each morning with my salutations! He laughed because, of course, he was kidding… But as I told him… If you’re told what I was told last summer, each and every day is a day to be cheery, no matter what’s going on in the markets!

Well… That was quite the trip last week – 3 cities in one week. In October I do 5 cities in 10 days. And, of course, we had the goings on of last week. I really was upset and angry last week when I sent those notes to Chris for Friday’s Pfennig. Our government has spent hundreds of billions of dollars, and is looking to spend more to avert a crisis. Yes, it was a crisis, and something had to be done, but the way we did it reeks of socialism. My good friend, John Mauldin, whom I spent some time with last Friday, said, “I would sure like to see some regulation in Credit Default Swaps for all the money we spent!”

I was reminded of the old Grass Roots song… Sha-la-la-la-la-la; Live for today; Sha-la-la-la-la-la; Live for today; And don’t worry ’bout tomorrow; hey, hey, hey; Sha-la-la-la-la-la; Live for today; Live for today…

Because that’s what we’ve done folks… Oh and on a sidebar here… I saw this on Friday and it cracked me up… “US TREASURY TO REPAIR TOM BRADY’S KNEE. EXPECTED TO PLAY” Hey why not? The Treasury is coming to rescue everything else! Oh… And the newest guy on the desk sent me an email on Friday, saying that the Manchester United (football/soccer team), which is sponsored by AIG, has the letters AIG across the chest of their jerseys. I said… ” That should now say USA!”

On Friday, U.S. Treasury Secretary Henry Paulson introduced a bill to create an RTC-like institution to take in all the toxic waste mortgage bonds that financial institutions have on their books. While we wait for Congress to vote on this… I thought I would explain to you that it would have a cap of $700 billion… Unfortunately, the total of the mortgage bonds that could probably fall under this umbrella is much greater than this, according to HSBC. “Total mortgage debt outstanding as of June 2008 less GSE and Agency/GSE backed pools (i.e.. assuming these have already been dealt with by the effective nationalisation of Freddie and Fannie). This total is USD9.4trn.”

But seriously, this is $700 billion more on our tax bill, folks. I mentioned something on Friday about socialism, and someone said, “No, it’s probably fascism, and at first I agreed, but on second look I go back to socialism.”

The stock market may love all this, (I don’t understand why they would, but they do) but currency traders are not looking through the stock jockey’s rose-colored glasses, and have begun to mark down dollars again. And if the Fed and Treasury are going to ride to the rescue, then risk is back on the table with a flurry! And if risk is back on the table with a flurry, then the carry trade is going great guns again, and thus the Aussie dollar (AUD) is trading near 83-cents again! WOW!

So… Goldman Sachs and Morgan Stanley are now Bank Holding Companies, and report to the Fed, which allows the Fed to make loans to them more easily. Add Merrill Lynch to that list of brokers that now have a bank as a holding company, and are able to obtain loans from the Fed. Money, money, and more money… Dollars, dollars, and more dollars… We’re printing them like there’s no tomorrow… And that’s because we only “live for today, and don’t worry about tomorrow”.

Of course I worry about tomorrow, because I see my beautiful little granddaughter laughing and not having a care in the world, and wonder what kind of tax burden she will have hanging around her neck when she grows up. Speaking of my little granddaughter, Delaney Grace, you should have seen her in her cheerleading outfit for my little buddy, Alex, and his football team, Saturday! Too Cute!

See… I’m able to balance all this junk with the good stuff!

And… It looks like currency traders are beginning to worry about tomorrow too, as they begin to mark down dollars once again. Eventually, the underlying fundamentals do come to the top, just like I said they would. You see, it’s not just the $700 billion bailout… Recall we had the $150 billion in stimulus checks; we had the mortgage bill costs; we have the ongoing costs of the war in Iraq, Afghanistan, and on terror; and just for good measure, we now have an additional $400 billion to guarantee money-market funds, that just last week “broke the buck”.

Let me explain something to those who may be confused here… Money Market Funds are different from Money Market Accounts at a bank. Money Market Funds are like mutual funds, and can go up and down in price, whereas a Money Market Account at a bank is FDIC insured, and is not subjected to market fluctuations. So… When I said that Money Market Funds “broke the buck” last week, it means that their market valuation fell below $1, for the first time, ever!

So… Just last week, the U.S. Treasury and Fed spent over $1 trillion to keep things running… And that’s $1 trillion dollars that will have to be printed folks. That means more supply of dollars, and once again, the dollar should be punished for that indiscretion!

That’s right… All the Fed and Treasury’s doings might have restored investor confidence – not my confidence, but someone’s, I guess – but… The underlying bad fundamentals will come back into focus, and I truly believe that we’ll see the dollar come under extreme pressure once again, which will wipe out all of its gains of the past two months, and hopefully send those dollar bulls who were pointing fingers at me and laughing, running off to the hills with their tails between their legs!

The euro (EUR), for instance, was trading around 1.44 last night when I went to bed. It was 1.4565 when I turned on the screens this morning, and in the past 45 minutes, it has risen to 1.4610… And how about the shiny metal… Gold? WOW! When I left you all on Sept 11th, gold was trading less than $750 at $747. Today, it’s hit $880 again… And silver, which had fallen to $10, is now $13!

Looks like metals investors got the memo on all the dollars that will be printed too!

So… Does all this scare the bejeebers out of you like it does me? I don’t make this stuff up folks… It’s all there on the screens, the Wall Street Journal and the Internet… Shoot Rudy, even the folks on TV were talking about all this, like they know what they’re talking about! But, if they’re talking about it, then it’s up there on the scare meter.

Last week, I would explain to the audiences in each city, that Deficits Do Matter! And when people who should know better say that deficits don’t matter, they remind me of the guy standing on the Empire State building who he decides to jump off… As he passes the 56th Floor, he says… “So far, so good!”  Then after the laughter would calm down, I would say, “Yes, that’s right… ‘So far, so good’ because he hasn’t hit the ground yet. And so far, so good, for these ‘deficits don’t matter’ folks because we haven’t hit the ground yet. But when we do… The government will have two options to pay the interest on this debt… Raise taxes to the roof… Or… Pay it back with cheaper dollars. Guess, which one will be picked?”

So… I say that if the government is eventually working toward a cheaper dollar, why not oblige them; get the dollar weak now to get it over with! Why take the clogged up roads, when the dollar could take a ride on the slippery slope right here, right now, there is no other place I’d rather be… No wait, no time for Jesus Jones! (A band from the ’90s)

As I look at the currency screens, I see that most of the currencies have all seen some “healing” in the past few days… And that’s a good thing! Maybe people/investors will STOP panicking and just calm down… They bought currencies as a hedge against a falling dollar and to diversify their dollar denominated investment portfolios… And the first time the wind blew against them, they began to read articles that said the “dollar had bottomed” and other junk, and they sold in a panic. Hopefully, this return to the underlying fundamentals will bring about sustained currency strength once again.

Currencies today 9/22/08: A$ .8345, kiwi .6875, C$ .9575, euro 1.4595, sterling 1.8425, Swiss .9120, ISK 89.50, rand 8.0480, krone 5.5950, SEK 6.5325, forint 164.90, zloty 2.2580, koruna 16.55, yen 106.30, baht 33.90, sing 1.4180, HKD 7.7750, INR 45.46, China 6.8350, pesos 10.58, BRL 1.8290, dollar index 77.43, Oil $107.66, Silver $13.08, and Gold… $880

That’s it for today… Well… I want to thank everyone from the bottom of my heart, for sending along good wishes, thoughts and prayers for my scans to be clean, so I would be able to get off the cancer treatments. The power of those things really gave me encouragement to fight this disease. I’m cancer free! Now to keep it that way! I visit the doctor this week to go through the next phase of the game plan. My friends Erika Nolan, Jason Coots, Peter Fischer and Peter Laub, all celebrated with me last Monday night with a great meal and a wicked bottle of Champagne! Friday night with friend, John Mauldin, and his lovely daughter, Tiffany was a hoot. John was attempting to finish his weekly letter, and visit with me! I left him alone to finish it… Tiffany was working diligently on John’s Powerpoint Presentation for his trip to South Africa and London this week… (And I thought I had a wicked travel week!) Congratulations to my good friend Lizzie Brown, as she gave birth to a bouncing baby boy last week! OK.. That’s enough… Time to hit the send button… I hope you have a Marvelous Monday!

Chuck Butler
September 22, 2008