More Recession Talk

Good day… And a Tremendous Thursday to you! The week is flying by… Well at least it seems to be, given that I sleep a lot during the day! That’s got to end! At least I’m well rested!

The currencies, as I feared yesterday, were a non-event. The trading was thin… Volume just wasn’t there… So, the currencies have on the same clothes that they wore yesterday.

OK… So what to talk about then? Well… We could talk about an article that was in the Telegraph paper in the U.K. the other day. The article was an interview with former U.S. Treasury Secretary Larry Summers, who said, “It would be far too premature to judge this crisis over.” He was talking about subprime, etc. He went further to warn, “that the United States may be heading into recession. And that the risks of recession are now greater than they’ve been any time since the period in the aftermath of 9/11.”

Hmmm… Not that I’ve ever been a “fan” of Larry Summers, as he was cut from the same cloth as Robert Rubin… But I’ve got to admit, he’s singing from the same song sheet as myself these days!

Or… We could talk about the latest hedge fund to file Chapter 11. This time the firm was headquartered in Australia… But, here’s the thing that begins to get scary with these hedge funds going belly up… They all trade with each other… They all hold paper from each other. If hedge fund “A” is short derivatives, hedge fund “B” is long them. When one side of a trade goes away, everything begins to unravel.

Or… We could talk about how the credit market is again experiencing a tight squeeze. Before I go further let me explain something… LIBOR stands for the London Interbank Offered Rate… And the rate that most deals are done based on. Well… Yesterday LIBOR increased to 5.64% from 5.41% the previous day. It’s just a pinch below the 5.68% peak it hit during the credit crunch a few weeks ago.

This looks as though it could very well come to a boiling point again soon. And with this hanging over the markets like the Sword of Damocles, risk aversion is back on the table, which means yen (JPY) and Swiss francs (CHF) were well bid yesterday.

One thing moving the LIBOR higher could be a problem that European Banks are having getting U.S. dollar funding. This is where you might hear about the Fed putting together a swap with the European Central Bank (ECB) to inject U.S. dollars to provide liquidity and bring that LIBOR rate down. Of course… A Fed funds rate cut to go along with this swap would do the trick!

Have you seen the absolutely ridiculous statements by Senator Schumer? Oh my goodness. I think voters in the state of NY need to hear this stuff! One writer on Bloomberg called him “subprime Chuck”. He not only wants independent auditors to tell corporations how to better run their businesses, but he wants Countrywide to share the load with consumers trying to refinance. Whoa… Mr. Schumer! Did you not read the other day the Bank of America had to basically step in and make a huge investment in Countrywide to, in my opinion, keep them afloat? Like they can start taking more losses.

And what’s up with these letters you wrote to the big auditing firms telling them to “assist this country’s mortgage crisis and urge your clients to do their part to keep our housing markets afloat, by modifying subprime loans that are at risk of default.”

That’s just wrong! Wrong, Wrong, Wrong! That’s not what an independent auditing firm is supposed to be doing! Geez Louise… This is the stuff we have to work with? I shake my head in disbelief!

And finally, under the category of what else can we talk about, comes this story. The former head of Barclay’s European collateralized debt obligations, Edward Cahill has gone missing. Cahill resigned from his post last Thursday and has not been seen since, by anyone associated with him!

Does this story have a familiar ring to it? Of course it does. Recall the rogue trader, Nick Leeson, who fled when everything came crashing down on him. Remember him? They even made a movie out of his story.

Anyway, Mr. Cahill, resigned last week, after the collateralized debt obligations (CDO’s), which Chris and I have talked about in the past, as the securitized loans, collapsed! That’s right collapsed! Let’s hope this isn’t another Nick Leeson. I don’t think the markets could absorb another situation like that at this time!

I see where oil has edged up to $74 this morning, well, to be exact, $73.87, but that’s close enough to round off, eh? Oh, and wouldn’t you know it, right before the Labor Day Holiday weekend! I wouldn’t be surprised to see $75 come very quickly.

And, I’ve got to hand it to Bank of Japan board member, Mizuno, for stepping out and doing and Aaron Neville… You know… Tell It Like It Is… Don’t be afraid, to let your conscience be your guide… Yeah! Mizuno probably just wanted to get this off his chest, so he did! What did he say, Chuck, you killing me Holmes!

OK… Mizuno said that the low interest rates in Japan might have contributed to the global market jitters stemming from U.S. credit problems. Here’s his actual quote… “Recent turmoil in the financial markets proves that keeping rates that aren’t in line with economic fundamentals could lead to risks of destabilizing financial markets.”

Or… Maybe… He was talking about Big Al Greenspan, whose low interest rates despite rising inflation, fueled this housing mess to begin with! Either way, the guy is bang on with his comments, which is strange for a Bank of Japan board member. They usually don’t “stir the pot” without being asked to fall on a sword.

As I get ready to go to the Big Finish here… The euro (EUR) and other currencies are getting sold, with the bias to buy dollars quite evident at this given moment. Position squaring ahead of the holiday weekend? Maybe… Anyway… Just general daily noise in the currencies, obviously no change in the weak dollar trend!

Currencies today: A$ .8155, kiwi .70, C% .94, euro 1.3620, sterling 2.001, Swiss .83, ISK 63.80, rand 7.2075, krone 5.85, SEK 6.8850, forint 188, zloty 2.8125, koruna 20.28, yen 115.40, baht 32.55, sing 1.5250, HKD 7.7990, INR 41.16, China 7.5420, pesos 11.09, dollar index 80.92, Silver $12.05, and Gold… $674.10

That’s it for today… Geez Louise for someone that didn’t have a lot to talk about when I started today’s letter, I sure ended up with a lot! So… do you have big plans for the Labor Day Holiday? I have my beloved Missouri Tigers football game on Saturday, and a small gathering of friends for a bar-b-que on Sunday. I’m getting fired up thinking about getting outside and cooking again, something I truly love to do, especially when the grill is covered with all kinds of stuff to eat! OK… My mouth is watering… Time to go… Have a tremendous Thursday!

Chuck Butler
August 30, 2007

The Daily Reckoning