Infusing Capital

Good day… And a Terrific Tuesday to you! Monday we saw a Thanksgiving hangover I think, as the dollar got sold again, but in a relatively contained manner. Things just seemed to be moving at a slower pace in the currencies. But, as I said, the dollar did get sold, again… And that’s something we’ve grown quite accustomed to these past five years of the weak dollar trend.

Since there was no data to browse over yesterday, the dollar stood alone on its fundamentals. It wasn’t too long before it was stooping… And eventually kneeling. These past five years of the weak dollar trend have brought a lot of profits to non-dollar investors… But it wasn’t like the NASDAQ go-go years, where you could throw a dart at a list of stocks to buy and chances were you picked a winner!

No… There has been volatility in the weak dollar trend just to keep us on our feet… And then there was the “special dollar prop” year of 2005, when the dollar won back some friends, and brought many a nasty email to my mailbox. But with the props gone, 2006 went back to the task at hand in the weak dollar trend. When you look back at the currency gains since February 2002, it’s simply amazing… And you would think that currencies like the euro (EUR), Aussie (AUD) and kiwi (NZD) were beating the dollar like a rented mule! (OK, no animals were really hurt)

U.S. stocks sold off again yesterday, and that accounted for more carry trades unwinding. As I’ve explained in the past (about 1,000 times) the unwinding of the carry trades is not good news for the high yielding currencies of Iceland (ISK), New Zealand, South Africa (ZAR), and then the second tier high yielders of: Australia, and the U.K.

Now… Currencies like Norway (NOK), Sweden (CHF), and euros never got caught up in the carry trade… And on the other side… Japanese yen (JPY), and Swiss francs should look to benefit from any unwinding of the carry trade… But remember what our resident duck hunter told us a couple of weeks ago… The carry trade has more lives than a cat!

And if you look at the positive performances of Japanese yen, and Swiss francs yesterday, it just reinforces what I’m talking about. Yen hit a two and a half-year high versus the dollar, and Swiss francs traded over 91-cents! It wasn’t that long ago that people were writing about the Aussie dollar reaching parity to the green/peachback… I would have to say that pie in the sky talk should be switched over to Swiss francs!

I think that the general theme of risk aversion has really settled into the markets. Bond yields are dropping like out of shape marathon runners… Someone asked me a week or so ago about those dropping yields… How could the yields be dropping if the Japanese and Chinese are unloading Treasuries? Well… It comes from the risk aversion crowd. They are buying Treasuries and selling stocks… And any other risk filled investments… Except currencies and gold!

So… After I’ve written all of that, I see that Abu Dhabi is going to make a cash infusion of $7.5 billion to replenish Citgroup’s capital… Bond yields have gone back up a bit, and people are dancing in the streets! With this infusion, the Abu Dhabi Investment Authority will become Citi’s largest shareholder.

I don’t know, folks… Something about this smells… I can’t quite determine what the smell is, but it smells.

I see the euro-crowd is now taking boondoggle trips to China too… Hey! If Paulson, Bernanke, Schumer, and Graham can do it… So can European Central Bank (ECB) President Trichet, and Luxembourg Prime Minister, Juncker. These two are the latest high-level government figures to go to China thinking they can get the Chinese to allow greater currency flexibility in the renminbi (CNY)… In some strong words the ECB contingent said that China must let its currency strengthen against the euro or risk sparking a trade war. Ooooh… I bet the Chinese are shaking in their boots! NOT!

So… The United States is writing protectionist bills, and the Europeans are writing protectionist bills, what will the Chinese do? Nothing, absolutely nothing, say it again! They will smile… And tell the euro crowd that they will allow greater flexibility soon… They won’t tell them when… Or how… And the renminbi will go back to trading in small baby steps.

I’ve got a special treat for everyone today… Words from the Big Boss!

Frank Trotter, my friend, and partner in world currencies since 1985, when I ran the Bond Operations at Mark Twain Bank, and designed a way for the bank’s general ledger system to deal with foreign deposits… Sent me a note from the road on his latest trip. Frank is a great writer… And I think you’ll see what I mean here:

“Chuck – I’ve had a few minutes (well actually 15 hours) to think on this flight and have concluded that Bernanke’s comment regarding the weaker dollar not hurting U.S. consumers last week was possibly the most remarkably ignorant I have ever seen from an educated economist. Unfortunately in the good old U.S.A. we’re drying the death of 1,000 knives as our global purchasing power is hacked away purchase by purchase. It’s without question a hidden tax hike we have discussed so often in these pages cynically implemented by our ‘Deficits Don’t Matter’ friends in congress and the administration. And where are the speeches from any party out on the stump promising to send the fiscal mess to the emergency room for triage? Must have missed them; seems I have been hearing from all parties that they are looking forward to fixing this or that by spending more money and then borrowing to make up the difference. Last I checked there are only three things that can get a government out of this mess: 1 – raise revenue; 2 – lower spending; 3 – pay it back with inflated currency. Guess which one our brave politicians (and all of us voters) will choose? Argh!

“The math worked on the flight; Thanksgiving did not exist for me this year. Boarded in L.A., took off chasing the time changes across the pacific and hit the dateline only to find it was Friday before I even saw Thursday! Hope everyone out there had a great turkey day and truly acknowledged in your own way your place in the world’s best place to live. We have a ton of warts, covered often here, but wherever I go out in our Banana Empire the airports are full, restaurants are booked up, and people are saying things are ‘alright.’ Drunks on a binge say there’re ‘alright’ too but the economy is showing some resilience despite it all.

“I had the Australian dollar charts out on the way down this morning (talk about a fun travel partner) thinking about those 1,000 knives. In January 2002 right after you made to call on the declining dollar, the Australian dollar stood near 50 cents. Over 80% more expensive today – in the neighborhood of 90 cents – the Aussie dollar shows how a strong central bank not focused on indulging the politicians can produce a strong currency and the country can prosper. On a personal level, this means that with no local rise in price, my hotel, dinner, local plane fare and everything else is 80% more expensive just for having shown up. That’s one sharp knife; gotta go grab a tourniquet. Onward and upward.”

Thanks Boss! You know, Frank is one of the most intelligent people I’ve ever met, and I always value his viewpoint!

OK… Back to me! I think you all know about these SIV’s, right? Structured Investment Vehicles? They are the drudge on the bottom of a dirty water river… These are investment instruments that nobody really has any idea what they are worth… They are filled with mortgages, and other things people didn’t want exposed on their own, and decided to put them in the structured investment. Well… This is the next thing to go to the dumpster.

In that train of thought, I came across some news on SIV’s… HSBC announced it will take $45 billion of SIV assets on its balance sheet in an attempt to consolidate and restructure two ailing SIV vehicles. HSBC is the second largest SIV “player”, and Goldman analysts reported that Europe’s largest bank may have to write off a further $12 billion for subprime-related losses. Citi, the largest SIV player, still has $41 billion sitting in SIV’s. Citi was reported by CNBC to be contemplating laying-off 17-45K workers.

Oh joy… More bad stuff from the dark closet for the economy to deal with! The U.S. consumer is bound to show their displeasure any time now. In a report that never gets the spotlight… The UBS/Gallup Index of Investor Optimism fell to the lowest level since September 2005 following hurricane Katrina.

The bad news regarding a slower economy isn’t confined to here in the United States though. Eurozone growth, led by Germany, has slowed too. Obviously not as harshly as in the U.S., where if apples were counted as apples, and oranges counted like oranges, we would be sitting on the brink of a major slowdown/recession. But before we begin to put nails in Germany’s economy, the German Business Sentiment Index as measured by the think tank, IFO, surprised the markets with a rebound this month!

I kept reading stories of how this number was going to be so awful, yadda, yadda, yadda. Hmmm… This index rebound, and the news that Eurozone manufacturing increased this month as well, tells me the rumors of a Eurozone economic demise have been greatly exaggerated! Well, to this point they have. There’s no doubt in my mind that by next spring, when I’m getting ready to spend an enormous amount of time in Jupiter, Fla, that the European Central Bank will be entertaining thoughts of rate cuts due to the economic slowdown. But that’s four months away… Let’s live for today, and don’t worry about tomorrow, hey… Sha la, la,la la la, live for today…

So this news that printed this morning should be pushing the euro higher… And it’s not… The euro has moved just a quarter-cent overnight lower, than it was last night when I checked before heading off to bed. No biggie in my mind…

This morning, we’ll see the color of the latest Consumer Confidence Index. You may recall that last month saw a pretty exaggerated fall in the index… Well… As I look back, I see that after hitting an index high of 112.6 in July, the numbers have fallen each consecutive month leading to this month’s forecast of a 90 figure. Last month was 95.6, so a fall to 90 would not be good for the dollar’s complexion today…

Or going forward, if consumer confidence continues to rot away, there goes the neighborhood! And the economy will suffer, along with the dollar.

Currencies today: A$ .8770, kiwi .7565, C$ 1.008, euro 1.4860, sterling 2.0705, Swiss .91, ISK 62.80, rand 6.9870, krone 5.42, SEK 6.2650, forint 173.50, zloty 2.48, koruna 18, yen 108.15, baht 31.12, sing 1.4420, HKD 7.7860, INR 39.81, China 7.3870, pesos 11, BRL 1.8460, dollar index 74.98, Oil $96.63, Silver $14.70, and Gold… $822.80

That’s it for today… A little winded today… Sorry… You should have seen my desk area yesterday when I came in…. Our Suzy Q had decorated my desk with Missouri Tiger stuff… A helium balloon, a stuffed Tiger, and more… It was great! I am so excited about this next game for the Big 12 Championship, and… To dream on a bit, if we could pull out a win versus mighty Oklahoma, we would be playing in the National Championship Game! WOW! Just dreaming about that gives me the chills!

Thanks to those of you who sent along emails about their city, San Antonio… The hotels there, as you can imagine, are all Sold Out! I think I have a place to stay though, no worries…

I’ve carried on long enough today (with the help of the Big Boss) so… I’m off to work! I hope you have a Terrific Tuesday!

Chuck Butler
November 27, 2007

The Daily Reckoning