Have No Fear

Good day… And a Wonderful Wednesday to you! Our Terrific Tuesday really didn’t have much movement in the currencies. A cautious calm has returned to the markets. I say cautious because Treasury yields are still moving lower, which means the flight to Treasuries hasn’t cooled down completely.

Again, the central bankers of the world are all pounding their chests and crowing about how they “rescued the markets” with their injected liquidity, and the Fed’s discount rate cut. I got up on my soapbox yesterday regarding this, so I won’t go there again, well… At least not today! However, I really can’t express enough how badly I believe the Fed acted last week!

Some pundits are even calling the move a “rookie mistake” by the Fed. Let’s hope it doesn’t turn out to be a “bad rookie mistake”!

OK… So, as I told you yesterday, U.S. Treasury Secretary Paulson, and Fed Chairman Bernanke were going to meet with Senator Dodd, head of the Senate Banking Committee… And once again… These guys are signaling the “all clear horn”! UGH! Here’s the Senator who said, Bernanke [was] ready to use “all the tools at his disposal” to ease the liquidity issues troubling Wall Street. (A reader sent me a quote by Mark Twain that I thought was bang on with regard to my tirade yesterday… “If you tell the truth, you don’t have to remember anything.”)

As the Church Lady on Saturday Night Live used to say… “Well, isn’t that special?” Now we can all go to bed and sleep better tonight! The bubble creation machine (AKA the Fed) is there to bail out the markets every time they get GREEDY, CARELESS, OVER EXPOSED, and other things they do over and over again, and have NO FEAR of getting backed into a corner because they know the Fed will bail them out, and they won’t have to pay a dime for their indiscretions!

I had better stop there, I can feel my blood pressure rising. At least there wasn’t more talk of the “carry trade” returning again! Japan’s FinMin Omi declared that, “the carry trade has been unwound”. So… yen (JPY) has that going for it!

My trader friend at RBC told me yesterday that using the ratio of the yen to various equity indices as a proxy for carry trades suggests that trades put on this year are back to breakeven levels or slightly under water. However, longer-term trades that were placed in 2005 and 2006 remain profitable – but vulnerable to being cut out should we see another sell off in equities. In other words… The carry trade is down… But not out… Yet!

Canadian retail sales decline after surging in May. Retail sales declined 0.9% in June, below market forecasts for a 0.5% drop. In May, sales were up 2.6%. Looks like the Canadian consumers were all spent in May, eh? June’s drop led to the Canadian dollar/loonie (CAD) weakness on the day. Hmmm… Once again, we are seeing that gold stalled. Oil prices are cheaper, and weaker commodity prices are leading to a weaker loonie.

So, let’s take a poll. Do we think gold will remained stalled? Do we believe oil prices will continue to be weaker along with other commodities? OK… I’ll start the poll… And I don’t believe any of these to be in our future… So, when they rebound, the loonie will look to rebound too… Well… That’s my story and I’m sticking to it!

Sitting at home I have tons of time to read research papers, the Internet, and watch weather reports! And if you’ve seen what I’ve seen this summer, we’ve had one HOT summer! So… The question I have is… What kind of damage to our energy supplies have we generated to run our air conditioners during these heat waves?

I saw this little ditty yesterday and as Popeye used to say… It shivers me timbers! RealtyTrac, an online marketplace for foreclosed properties, announced U.S. residential foreclosures were up 93% year-on-year in July.

Oh… And here’s the next phase of the mortgage meltdown… Recrimination. Yes, the lawsuits are going to flood the country. Borrows who feel like their lender “did them wrong” are going to sue like there’s no tomorrow. Never mind that both sides probably have some fault here… This is going to be little old Mom & Pop claiming that their Big Bad Lender had fooled them into this new fangled loan and didn’t tell them. Never mind that the paperwork that has their signatures all over it spells the terms out!

On the other hand… The Big Bad Lender probably knew the terms of the loan didn’t fit Mom & Pop… But, shoot, Mom Pop wanted that 2% interest rate on their McMansion! Oh, this could go on and on, and will get very ugly as we go along.

Geez Louise, I got carried away there! OK… Back to currencies…

The Bank of Japan (BOJ) has started their two-day meeting to discuss rates… You know me… I can’t think of any reason Central Bankers need two days to discuss rates! I always accuse the Fed Heads of sitting around and playing Battleship… By, Joe… You sunk my Battleship! I have no idea what the BOJ ministers are doing… Maybe playing cards… Or, no, wait… Video games… Yeah, that’s the ticket, that’s my story and I’m sticking to it!

Anyway, after their two-day meeting, they will probably announce that interest rates in Japan will remain unchanged. You know… Before the Central Banks led the charge up the lack of liquidity hill, most observers felt the BOJ would probably raise rates at this meeting… But not now, Japanese officials have had the bejeebers scared out of them by what happened… And feel that that cannot afford to raise rates at this time… I say that’s a bunch of bunk! These guys at the BOJ keep claiming that they want to “normalize” interest rates, but then are too chicken to pull the trigger! Bawk, Bawk, Bawk… Oh… And the markets are taking yen back to the woodshed because of this “change of heart” by the BOJ.

Speaking of rate cuts… The rate cut widely expected to come from the Fed this fall was being discussed by Fed Head Lacker yesterday… Lacker told an audience that the Fed was seeking to avoid an emergency rate cut… I like what he went further to say… “Financial market volatility, in and of itself, doesn’t require a change in the target fed funds rate.”

That’s right! And I wish the Fed would keep to that!

So… Overnight… The dollar has gained a bit of ground on the currencies, because of this water being thrown, by Lacker, on the fall rate cut… So if you dragged your feet during the first part of the consolidation last week… Here’s what seems to be a second opportunity to buy at cheaper levels!

The data cupboard is bare today… So onto the Big Finish!

Currencies today: A$ .80, kiwi .8070, kiwi .7010, C$ .9455, euro 1.35, sterling 1.99, Swiss .8280, ISK 65.20, rand 7.2980, krone 5.92, SEK 6.95, forint 191.60, zloty 2.8380, koruna 20.50, yen 115, baht 32.50, sing 1.5250, HKD 7.8070, INR 40.90, China 7.5990, pesos 11.08, Silver $11.90, and Gold… $668.30

That’s it for today… Thanks to all the wrote me to welcome me back… And those that wrote me regarding my rant on drug prices… Good stuff! Things are looking better and I think I’m about ready to go back to the office… I’m sure my colleagues are excited about that… NOT! Just what they want… Some management person interfering with their days! HAHAHAHA! Anyway… Could be soon, and I’m sure my beautiful bride will love that day too, to get out of her hair! Oh well… I carry on despite my shortcomings! Have a Wonderful Wednesday!

Chuck Butler
September 22, 2007

The Daily Reckoning