Iceland Melts Down

Good day… And a Terrific Tuesday to you! Well, folks… The wheels (or what’s left of them anyway) are really coming off this economy. It’s a sad sight to see, but it’s happening nonetheless, and there’s no bailout, stimulus check, mortgage bill, truck loads of money supply, or whatever, that’s going to stop this recession bus. Memo to Paulson and Bernanke… Don’t throw yourself under this recession bus.

Well… The dollar continued to push the envelope against a handful of currencies yesterday. Up front and center, the high yielders got beaten about the head and shoulders by the dollar. Aussie (AUD), kiwi (NZD), real (BRL), rand (ZAR), all took major hits from the dollar. It was one of the worst days I can remember seeing for these currencies. This huge sell-off showed two things going against the high yielders… 1. Commodities (other than gold) are getting whacked, and 2. The carry trade is dead.

To add insult to injury, the Reserve Bank of Australia (RBA) surprised the markets with a shock 100 BPS rate cut last night. A short-lived rally in Aussie after the announcement leads me to believe that interest rate expectations are not driving currencies right now. Instead, we’ve got the same kind of strange thinking in the markets, much like in 2001 and 2002, where the markets rewarded currencies that had central banks that cut rates to promote growth… It was the first time I had seen currencies gain after being debased, but it was there right before my eyes, and now this… It could be happening again…

Yesterday, Japanese yen (JPY) actually traded for a good part of the day with a 100 handle! That was a 3.5% gain in one day versus the dollar! Talk about the carry trade being dead… WOW! I looked up from my attempt to work through trading yesterday and saw yen with a 100 handle, and shouted out… “Hey! Look here everyone… Yen is 100! I told you all that yen would get to 100!” Then some smart alec yelled back… Yeah, you said that two years ago, now sit down and trade currencies! HAHAHAHAHA! Funny guys.

On the very serious side folks, is the news that we came across yesterday when attempting to deal in Icelandic krona (ISK)… There was no forward market! Dealers would only quote spot transactions! The banking crisis had reached a point that basically shut the markets down. The currency dropped 33%!!!!! This was serious stuff, folks; I was scrambling around trying to find a forward market so our CD’s could roll to the next maturity… But there was none. Well, maybe one could be found if the buyer wanted to take HUGE LOSSES… One that was 1000% away from the previous week’s bad forward points.

Basically, what happened is that, as I reported yesterday morning, the Icelandic Central Bank was waiting to hear from the Nordic Central Banks regarding a bailout, when they had to take the second largest lender, Landesbanki, into receivership. This news spread quickly, and caused the currency to drop to depths not seen in recent years. Since then, Iceland has announced that they have received a 4 billion euro loan from Russia to provide the banking system with help and liquidity.

Now… The central bank has announced plans to peg the Icelandic krona to the euro at a value of 131. So… Like I said above, there is no forward market, the Icelandic krona CD’s that remain will have to be closed when they come due. And they can NOT be traded/broken ahead of maturity, as there is NO FORWARD MARKET. A sad ending to what was once an exciting currency to be in… But had faded badly since early this year when the banking crisis arrived on the Icelandic scene.

So… There are a lot of theories as to why the dollar continues to rally in the face of increasing debt burdens, job losses, factories nearly shutting down, etc. In the end it really is just a case of the United States and Europe being in a bind, and them coming back to dollars as a safe haven… There’s the CDO’s unwinding, there’s the capital requirements on toxic waste bonds, there’s a ton of things going for the dollar right now, and I won’t deny it… Which is why I said yesterday, that I needed to go sit in a corner with my back to the room, for not seeing this ahead of time… I was so myopic about all the bad stuff causing problems for the dollar, and didn’t see the bad stuff causing dollar strength… It just didn’t make sense to me; the dollar looked like it didn’t have a prayer.

OK the focus today, since the data cupboard is basically in need of a trip to the grocery store, will be on speeches… First, European Central Bank (ECB) President, Trichet, will speak at the World Policy Conference in France. That will be followed by Big Ben Bernanke talking at a Capitol Hill boondoggle. Fed Head, Stern, will speak in Chicago on Financial Shock, which should be quite current, eh? The thing to think about here is that Trichet, and the hawkish Fed Heads, including Big Ben (remember he said in June that he was an inflation fighter) are all going to have to back off their hawkish statements. This is not the time to be putting the fear of higher interest rates into the markets.

The Wall Street Journal (WSJ) reported yesterday that Bank of America announced a cut in their dividend by 50% and raised $10 billion through the sale of common stock. This tells me that fundamentally, the U.S. economic position is teetering… So, will the dollar’s run be short-lived? Well… As far back as July I can remember telling anyone who would listen that I thought the dollar strength would last through the elections and probably through year-end. So… That’s my story and I’m sticking to it.

We will see the color of the Fed’s FOMC meeting minutes from September… One would think that it would be, if they were honest with themselves, a picture of an economy in shambles… Plus that was the time when all the “you know what” was hitting the fan with Fannie and Freddie, IndyMac Bank, AIG, and a host of other problems… Should be interesting reading… If it isn’t, then they were hiding things.

OK… Let me go through this gold and silver stuff again… Some of you missed class the last time I talked about this, so here goes… The metals dealers don’t have ANY supplies of coins or bars, PERIOD! Metals dealers haven’t received shipments in some time. The minters had stopped minting because of a backlog in orders. It really is a HUGE mess! And there’s nothing that we, the dealers, or minters can do about it.

Now… I know what you’re saying… “But Chuck, if there’s a shortage, the price should be going through the roof for the metals…” And to that I would say, you are correct sir! (And ladies!) Can you say, hanky panky? There’s hanky panky going on here folks.

BTW… Gold rallied yesterday. Oil was down… The dollar was up… And gold rallied? That seems strange to even type much less say! But it’s true; it’s true; I did see a gold rally! And… It’s rallying again this morning, up $22 right now on the day!

So, the turmoil in the markets continues today. Stocks were off 800 points at one point in the day yesterday before rallying back to close down “only” -370 points… The DOW is now trading below the 10,000 level… YIKES! All I can say is that I’m glad I sold all of my stocks last October! I have no idea what moved me to do that, except that I saw this all coming, as I had chronicled in the Pfennig, and for once in my life I have someone who needs me… No wait… For once in my life I acted on my thoughts for the market!

The euro seems to be in a mini-rally this morning, as I’ve seen it move higher throughout the time I’ve been here writing. There was profit taking in Japanese yen overnight, and the currency is trading back to 102, but 102 is still better than 110! I see where China’s renminbi (CNY) moved higher versus the dollar, the most it has in one day, in 7 months! Remember, China was on holiday all last week, and therefore left the renminbi unchanged on the week. But that was quickly changed in the first two trading days, and that has to be a good sign for all that talk about a China slowdown!

The Chinese government indicated that the move downward in the renminbi before the holiday was too much, and that they want a “stable currency” to stabilize their markets. Makes sense, eh?

Our little Christine told me last night when we were leaving that she had received a truckload of CD breaks for this morning. UGH! This is not the time to sell into this kind of a market folks. It’s akin to catching a falling knife! But… It’s obvious that they are in panic mode, which I don’t blame them for… I don’t know their personal investment situations… According to the FDIC, CD holders must have a “financial reason” and a “need for the funds” to break a CD… So, that’s all I have to go on!

Currencies today 10/7/08: A$ .7160, kiwi .63, C$ .9070, euro 1.3585, sterling 1.7450, Swiss .8760, ISK (no quote), rand 8.8130, krone 6.1825, SEK 7.1250, forint 183.90, zloty 2.5350, koruna 18.07, yen 102.10, baht 34.52, sing 1.4640, HKD 7.7660, INR 47.95, China 6.8170, pesos 11.93, BRL 2.1790, dollar index 81.24, Oil $90.40, Silver $11.63, and Gold… $882.25

That’s it for today…  I made it through a whole Pfennig without talking about the bailout package! YAHOO! I arrived home late last night, but still in time to see my darling little granddaughter, Delaney Grace, who is really a cutie! She dropped something and said UH-OH! Cracked me up! She sure loves her uncle Alex (my little buddy). She just lights up when he comes into the room. Hugs him, kisses him, hangs on his leg, it’s so darn cute! Long time colleague, Jennifer, had her son, Drew, were here for a few minutes yesterday. He’s getting so big! OK, enough kid-talk! Got a chance to spend some time with the Big Boss, Frank Trotter, yesterday… That’s a treat, as he is always gone or busy with something… We’ll both be in New Orleans this year for the New Orleans Investment Conference… It’s only about a month away! Time to go… Hope your Tuesday is Terrific!

Chuck Butler
October 7, 2008