Gripped by Fear

Good day… And a Marvelous Monday to you! Friday was quite the wild ride in the markets, and it all started with the Jobs Jamboree… I’m not the only one pointing out that the Bureau of Labor Statistics’ (BLS) method of adding jobs in a slowing economy is wrong to do. The latest to point out the problems with adding ghost jobs in a slowing economy is my friend, John Mauldin.

OK… So the BLS says 166K jobs were created in October… But when we look under the hood, we find that it probably lost 211K jobs! OUCH! Did you know that the BLS actually does two surveys? One is the payroll survey, which they massage… The other is the household survey, where they call 60,000 homes (at random) and ask how many people are in the home, how many of those people have jobs (part-time or full-time), how many people want jobs who don’t have them, and so on. This survey covers people who are employed both by large and small employers, illegal immigrants, etc.

John Mauldin tells us, “These surveys tend to parallel each other, except at turning points in the economy. Then there can be some large discrepancies.” That’s where things get ugly… The household survey says we lost 211K jobs… But guess which number the BLS used this month? That’s right, not the negative 211K… More the massaged payroll number that had 103K ghost jobs added.

So… I believe the markets are coming around to seeing these lies and videotape that the BLS uses as just that. Because the dollar did not rally one iota after the number was announced… And proceeded to lose ground all day.

The euro (EUR) traded above 1.45 as I was preparing to leave for the day, which happened to come at least two hours after I intended to leave… We were absolutely swamped! Seems that our investment guru friend, Jim Rogers, was back in the news… He followed up his comment about Fed Chairman, Big Ben Bernanke, earlier in the week when he called him a “madman”, with a new description of Big Ben, calling him a “nut” for cutting interest rates. He also talked about buying Chinese renminbi (CNY), and that people could buy it from EverBank… The phones lit up!

Anyway… Back to the currency rally… The currencies were led by the Big Dog, (euro) which traded above 1.45 again for the second time last week. Here’s where things can get a little sticky for the euro – in the short term, that is… Normally, when a currency bumps a psychological number like 1.45 a few times and falls back, traders in that currency will grow tired of looking for it to eclipse the figure and move on to another currency.

If that happens to the euro, I doubt that the “move to another currency” lasts very long… With the European Central Bank meeting this week, the downside risk to the euro is strong this week… Now… Does that mean it will happen? NO! Does it mean it has a downside risk this week? YES! But that’s all, there ain’t no more… It is what it is, and so on.

Wouldn’t it be grand to see the traders and investors move to the Asian currencies? Now, that would be something we could really sink our teeth into! The Asian countries hold all of the I.O.U.’s that the United States has printed… To gain any ground in the current account deficit, the Asian currencies have to participate in the weak dollar trend. So far, they have thrown the weak dollar trend a bone or two, but nothing like the 80% gains versus the dollar that the New Zealand currency (NZD) has made during the weak dollar trend!

I personally think the Asian currencies will be the cat’s meow in the future when everyone has gotten every drop of blood out of the likes of euros, sterling (GBP), Aussie (AUD), New Zealand, and others… Here’s what I see in my crystal ball (HAHAHAHAHAHA!)… Traders begin to move to marking up the Asian currencies… And they react with strong moves versus the dollar. Meanwhile back at the ranch, the euro, sterling and others inch along with gains versus the dollar… Role reversal if you wish!

Speaking of Big Ben Bernanke… He heads to Capitol Hill to give his views on the economy this Thursday. This will be the highlight of the week, as the data cupboard is pretty bare. On Friday, I heard that Citigroup had declared an emergency board meeting for the weekend. Most thought it would be used as a way to announce mortgage loss write-downs… Turns out that their CEO, Charles Prince announced his resignation. Citigroup also said it will take an additional $8 billion to $11 billion in write-downs related to mortgage-related securities.

This news has brought “risk” back into the market equation… And if I’ve schooled you well, you’ll be saying right now, “If ‘risk’ is back, that means the carry trade is being unwound again.” And you would get a great big shiny Gold Star!

As if the markets weren’t already gripped by fear… Credit and liquidity fears are back… Again. Here’s a list of things to scare the bejeebers out of you, that you didn’t see on the media news… First there were rumors that Barclays had to obtain financing from the BOE. Later, a rumor circulated that Goldman would suffer a large write-down, and an analyst report suggested that MBIA and Ambac, the largest bond insurers, would suffer significant CDO-related losses.

These things weren’t lost on the markets and gold rose to $800!!!!!! WOW! And it didn’t stop at $800 to collect $200 or to pass Go! Gold just traded right past $800 and didn’t look back… I’m sure there’s some profit taking that will take place this week, but when, and how much is the question.

The data cupboard may be bare here in the United States and Big Ben isn’t speaking until Thursday… But… The fireworks could come from the Eurozone this week. On Thursday, the European Central Bank (ECB) and The Bank of England (BOE) will both have rate meetings. I expect the ECB to keep rates unchanged and talk tough about inflation, while the BOE could spring a surprise rate cut on us. I’m thinking that they will wait until December… But they could go early this week, which would take the wind out of the sail of pound sterling, which is so close to the 2.10 level now it can taste it!

Tomorrow we’ll see Eurozone retail sales figures, and German factory orders. I would suspect both to show a slow down in the economy of the Eurozone, which has some of the “downside risks to the euro” that I talked about above.

OK… Before I head to the Big Finish… I picked up a call on Friday, and the caller asked me a question that I didn’t have an answer to! Well, actually that would happen a lot, but we won’t go there right now! HA! He wanted to know why I don’t talk about Czech korunas. Well… Hmmmm.. The only reason I think I don’t talk about them is the fact that they are preparing themselves to go into the ERM II, which prepares a currency for conversion to the euro… I truly believe that if the euro rally ends, the rallies in Czech, Poland and Hungary end too. They are so tied to euros right now that to talk about them and euros is redundant… But! These three currencies have really lit up the stage, as one would think they would, given the euro’s rise to fame!

Currencies today: A$ .9180, kiwi .7640, C$ 1.0735, euro 1.4465, sterling 2.0835, Swiss .8665, ISK 59.20, rand 6.5850, krone 5.41, SEK 6.4040, forint 175, zloty 2.5225, koruna 18.6450, yen 114.30, baht 30.68, sing 1.45, HKD 7.7650, INR 39.29, China 7.4525, pesos 10.7150, BRL 1.7520, dollar index 76.42, Oil $94.74, Silver $14.56, and Gold… $805.40

That’s it for today… It was a great weather weekend here in St. Louis. We had a great time at our makeshift tailgate party before the Missouri Tigers football game. And then, what a great game for my beloved Tigers! WOW! I get goose bumps just thinking about where this team might go! My little buddy’s football team ended their season with a victory, making them undefeated in their first season of tackle football… Alex wanted a party! OK… Time hit the send button… I hope you have a Marvelous Monday, and Wonderful week ahead!

Chuck Butler
November 5, 2007