Obama Pleads for Help in the Economic War

Good day… The currency markets were mostly flat yesterday, with the dollar starting off the morning stronger, but giving back most of the gains in the afternoon. The economic data released in the morning was the cause of the dollar’s tick up, as the House Price index surprised the markets and rose 1.7% m-o-m. But a closer look at these numbers revealed that last months data was revised from a positive 0.1% to a negative 0.2% and with the conflicting price data earlier in the week, this positive 1.7% move was called into question.

Today we will see U.S. durable goods orders, which are predicted to have fallen 2.5% in February. This follows an adjusted 4.5% drop in January. We will also get more data on the housing market, with New Home Sales to be released mid morning. I obviously have been off in my predictions on the housing data so far this week, but I have to believe the New Home Sales number will be less than last months 309K figure. But the m-o-m change probably won’t be as bad as last months drop of over 10%, giving traders enough room to spin the numbers into another stock market rally.

President Obama did some cheerleading last night on the major networks, trying to convince the US taxpayers that his administration is steering our economy in the right direction. I applaud his efforts to keep the public informed, and to try to make sure we are all pulling together in this economic war; but I think his predictions for a turnaround by the end of 2009 are overly optimistic. Data released tomorrow will throw some cold water on Obama’s predictions, as we will see the 4th quarter GDP report. Economists are predicting a drop of 6.6%, and indications that the numbers will not improve any time soon.

Chuck has been keeping up with the news between spring training games down in Florida, and has grown tired of the rosy picture they seem to be painting:

“Just sitting here in St. Pete, watching the news, I ask myself, ‘Why doesn’t the media report the “whole news”?’

“Like this report that was in the Wall Street Journal… President Barack Obama plans to meet with about a dozen of the U.S.’s top banking chiefs in an unusual gathering designed to discuss the administration’s plans to shore up the financial sector. Attendees are expected to include Goldman Sachs, J.P. Morgan Chase and Citigroup. The meeting comes as relations between Washington and Wall Street are frayed following last week’s furor over bonuses paid to American International Group employees.

“OK… This has gotten out of hand! Why isn’t the media all over the Gov’t for their “hands on” experiment in payroll? I’m not here to debate bonuses… I’m here to debate that the Gov’t has ANY right to dictate to whom and how much. I’m telling you folks, this is going too far… Now that they have this, the Gov’t is asking for more expanding powers….

“That means Treasury Sec. Geithner is going to get to be the keymaster on an expanding list of companies in the U.S. to decide whether the Gov’t is going to keep them from failing, and if they should be taken over… SERENITY NOW!

“Where’s has the Capitalism gone… Long time passing… Mark my words folks… This is not going to lead to “good times” in the U.S. And you might be saying, ‘OK Chuck, that’s all fine and dandy, you up there on your soap box, but what the heck does it have to do with currencies?’

“Ahhhh Grasshopper… It all comes back to the dollar… And if the media was doing their jobs correctly, you wouldn’t need me to explain this to you. You would have seen it on 60 minutes and said, ‘Hey Chuck, did you see what’s going on?’

“There’s a HUGE G-20 meeting this weekend… I’ve reported here in the past week with notes to Mike and Chris that there is a whispering campaign to remove the dollar as the ‘reserve currency’ of the world. Did you hear about that on 60-Minutes? NO! Well, it all gets tied together with this bow… All of this costs money… Money we don’t have, unless we print it! And then monetize it like we did last week! This is all DEBASING OF YOUR CURRENCY FOLKS, and I’m not the only one shouting it from the rooftops any longer! Now, countries like Russia, and China, and others are lining up to question what is going on in the U.S. and say if it continues, they believe the promise the U.S. made in 1971 to allow the currency to float, but not ever get too far in debt’ is now in the past, and the dollar needs to be removed as the reserve currency of the world.

“I could go on forever on this folks… Principles and values need to be reviewed by our Gov’t and they need to be done NOW! I’m outta here, sorry to carry on, but I started typing and the next thing I know I was on the soap box!”

Chuck obviously has an opinion on the way the media has been handling the recent events. I can’t agree with him more on his point about the governments new found power to decide which companies will survive and which won’t.

This is something which I have been meaning to write about the past few days. Everyone has been talking about the large retention bonuses passed out to the executives at AIG; the same men who wrote credit default insurance policies which will eventually bring down the company. These men gladly accepted premium payments for these insurance policies for which they never intended to pay out. The claim they made is that no one could have predicted the financial tsunami which hit the US financial markets.

The solution to these ‘long term retention contracts’ which the government couldn’t legally break? Let AIG fail. Don’t give them the money to limp along, prolonging their eventual demise. Yes, the shareholders would lose their investment, but is it the government’s responsibility to guarantee equity investments? NO!! And I don’t buy the argument that the Treasury department has put forward, that the failure of AIG would bring down the entire US financial system. The government shouldn’t pull a Lehman Bros. and just let AIG close its doors overnight. They should install managers to run the company while buyers are found for the profitable pieces. Break it up and shut it down, similar to what happened over at IndyMac. An orderly shutdown is what is needed, not simply pumping good money after bad to keep the company alive while the same executives which put the firm in this position continue to call the shots.

The same should thing should happen to the Zombie banks which the Fed is keeping on life support. LET THEM FAIL!! That is what capitalism is all about. These financial institutions were poorly run and couldn’t adjust for the times. Executives at these institutions made bad decisions which are now coming back to bight them. Don’t bail them out, let other better run institutions buy up the pieces and take over the businesses which can be profitable. Yes, stockholders and the top executives are going to lose money, but that is what capitalism is all about. The stronger, better run companies survive while the poorly run companies fold.

Just yesterday I read an article in the New York Times regarding the Saab Automobile company. GM, who owns a majority share of Saab has asked the Swedish government to help keep Saab afloat. But Sweden’s answer, “The Swedish state is not prepared to own car factories.” Basically Sweden has told GM tough luck, let the chips fall where they will. If Saab has something that someone wants, a buyer will emerge. If not, then Saab will shut down and another, better run, more efficient firm will fill its place.

But back to the currency markets. The Australian dollar and New Zealand dollars finally gave back some of their gains of the last few weeks with the Aussie dollar dropping below 0.70 cents. The kiwi dropped in front of reports which could show New Zealand’s current account deficit widened to a record 9%. But the falls weren’t big enough to indicate a change in the mid term direction of these commodity based currencies. The longer term trend will continue, with investors searching out currencies with higher yields and economies positioned to take advantage of a global rebound.

The leader of a global rebound will likely be China. News out of China this morning indicates the Chinese economy will recover strongly in the second and third quarters of this year. Chinese Central Bank adviser Fan Gang said “China’s 4 trillion renminbi stimulus package is different from the US stimulus — we don’t have a financial black hole to fill, so all this money will go to the economy and drive demand.” He went on to say the economy “has already seen some recovery”. The government is still trying to reach an 8 percent growth this year, dramatically higher than the predicted growth in the western economies. It won’t be easy, with exports to these western economies dropping, but internal demand will take up some of this slack. The Chinese still have a growing middle class, which is just beginning to show signs of consumption. With their huge population, any small increase in internal consumption should go a long way toward helping growth.

As I mentioned yesterday, China will be presenting their plans for a ‘Super Reserve Currency’ to at the Group of 20 summit next week. China continues to be concerned about the value of its trillion dollar investment in the US, and would like to see an alternative to the US$. The announcement last week that the Federal Reserve would be purchasing $300 billion of Treasuries stoked China’s concerns. As we have explained, by purchasing Treasuries, the Fed is monetizing the debt and pumping money directly into the system. This is the most inflationary action the government can take, and the Chinese are obviously worried about the impact this action will have on the value of the US$.

The Japanese yen fell again yesterday, moving back above 98 for the first time in a week. Japanese exports dropped, reducing the demand for yen. I read a research report yesterday from Merrill Lynch Japan which predicted the yen would continue to drop all the way to 117 yen per dollar by year end. “The combination of Japan’s shrinking current-account surplus and the reversal of yen carry trades will continue to weaken the yen,” according to the report. Japan posted its first current account deficit in 13 years, and recently announced the economy dropped 7 percent in the 4th quarter of 2008.

Currencies today 3/25/2009: A$ .6956, kiwi .5612, C$ .8107, euro 1.3487, sterling 1.4560, Swiss .8858, rand 9.54, krone 6.387, SEK 8.0867, forint 222.26, zloty 3.3749, koruna 20.2453, yen 97.71, sing 1.5091, HKD 7.75, INR 50.695, China 6.831, pesos 14.368, BRL 2.2492, dollar index 83.93, Oil $52.86, Silver $13.29, and Gold… 920.95

That’s it for today… The Blues took another step closer to a playoff spot last night by beating the LA Kings. They are just one point out of the playoff picture with less than 10 games to go. Chuck is taking a short break from his vacation to speak at an investment seminar in St. Pete. The big boss, Frank Trotter, was at the Blues game last night but is headed down to attend the seminar with Chuck. We’ve been pretty busy on the desk this week, so I better put this on to bed and get ready for another day! Hope everyone has a Wonderful Wednesday!!

The Daily Reckoning