Paulson and Bernanke Ride to the Rescue
Ahoy thar maties… Yesterday was a very volatile day in what has become an incredibly choppy week. The currency and metals markets began the day rallying versus the dollar, as it seemed yet another huge financial firm was circling the bowl. But late in the afternoon the dollar came charging back, and gold fell back below $850 after surpassing $900, ARRGH! So what caused this quick reversal? Senator Schumer was credited with turning the markets around. He announced, mid-afternoon, that the Federal Reserve and Treasury were going to create a new government institution that would purchase all of the toxic debt instruments being held by Wall Street. Wall Street obviously thought this was just a fantastic idea, and the stock market immediately rallied, taking the dollar with it.
The details of the plan still aren’t available, but the markets have been desperately searching for a hero to come and rescue them, so even the hint of a rescue was enough to shoot stocks back up. The proposal currently being discussed in congress involves moving troubled assets from the balance sheets of American financial companies into a new government backed institution. The SEC also instituted a ban on short selling of financial stocks, copying a similar ban that was instituted yesterday in London. Chuck had a travel day yesterday as the FXU moved from San Diego to Dallas, but he was keeping an eye on the markets and sent me this last night:
“The SEC is contemplating a ban on naked short selling… WHAT? OK… So… This is a free country, and a free market, as long as you follow the government’s rules? Oh Geez Louise, I give up! Not that this has anything to do with currencies, but it does have something to do with the overall direction of this country, which in my opinion is socialist!
“All of you know that I’m a person that is usually happy… But I’m telling you now… These things that the government is trying to do to plug up the leaking damn, are useless! I’m really upset with all this… And I thank my lucky stars that I thought to sell every stock I owned last October! I’m tired of all this junk (read what you want here, because I can’t say it) and I’m not going to take it any more!
“I’m with well-respected investment analyst, Marc Faber, when he says that the hopes for the return of a Bull Market is in ‘fantasyland’…
“So go ahead and lock us down like a police state! I’ll guarantee you it won’t solve a darn thing!
“I had better stop now, because I feel my blood boiling…”
You can always count on Chuck to tell it like it is! He will be back in the saddle on Monday morning with plenty more to say about all of this week’s shenanigans in D.C. and Wall Street.
Bernanke and Paulson have been worn down from the one-off situations they have been dealing with, and finally came to the realization that the problem is much more pervasive than previously thought. Options that U.S. officials are considering include establishing an $800 billion fund to purchase so-called failed assets and a separate $400 billion pool at the FDIC to insure money-market funds. What’s next? Maybe the government will buy all of the Icelandic krona (ISK) that our customers still own. Nope, you and I are just ‘investors’ and have to live with the bad investments we make. That is why this gets me so angry. The folks on Wall Street who made all of these very poor investment decisions using huge amounts of leverage aren’t being held accountable for their actions. These guys should be made to walk the plank, but instead they are skipping away with nice severance packages.
And what does this do to the balance sheet of our federal government? You have to remember, Paulson made his name on Wall Street – where leverage is king and the short term is all that matters. Do you really think he is worried about the billions of debt he has saddled the U.S. taxpayers with? It is almost hard to keep track of all the obligations Paulson and Bernanke have transferred from Wall Street to Main Street. The Treasury has pledged to buy up to $200 billion of Fannie and Freddie stock to keep them solvent, while the Fed agreed on September 16 to an $85 billion bridge loan to AIG. The Treasury also plans to buy $5 billion of mortgage-backed debt this month under an emergency program and the Fed has begun to accept just about any collateral the banks want to pledge at the lending windows. Yes, these two scoundrels have turned the federal government into a giant dumpster for any illiquid assets which Wall Street needs to get rid of.
The question is just how much debt can the United States take on? We are already running deficits that blow my mind; and interest on all of this debt will squeeze out spending for ‘good’ governmental programs. Yesterday the Treasury announced $200 billion in special Treasury bill sales to help the Fed expand its balance sheet. Senator Richard Shelby of Alabama – along with some others in congress – are critical of these takeovers. “We cannot protect all risk in the market, and we shouldn’t do it at the risk of the taxpayer,” Shelby, the ranking Republican on the Senate Banking Committee, said in an interview on Bloomberg this week. But Shelby and others in opposition to more debt won’t be able to combat Schumer and the powerful lobbies of Wall Street firms. The rescue plan will go through.
But where does that leave currency and metal investors? The dollar rallied on the rescue news, with the euro (EUR) falling back below $1.4350. The yen (JPY) got sold off as the Wall Street investors actually started moving back into leveraged carry trade positions. And why not? When the U.S. government will be there to bail out your worst investments!! The carry trade moves actually helped investors in the high yielding currencies of South African rand (ZAR), Brazilian real (BRL), Aussie dollar (AUD), Mexican peso (MXN), and the New Zealand dollar (NZD).
Several readers have asked me to write about what has been happening to the Brazilian real, which has been one of the best performing currencies up until the last two months. The sell-off in Brazil has been due to the ‘deleveraging’ of carry trades. Some investors borrowed funds at a low interest rate to invest into the higher yields of Brazil. With the turmoil on Wall Street, these investors have had to reverse their leveraged positions, selling the Brazilian real and converting back into the Japanese yen or Swiss franc to pay back their loans. So the sell-off has had nothing to do with the Brazilian economy. Brazil still has an abundance of commodities, including large deposits of minerals and oil, which will continue to be in demand. The stability of their political system is also not in question. The question now is just how much of the appreciation of the Brazilian real was due to the ‘carry trade’ investors, and just how far it will fall due to these reversals. I believe the proposed ‘solution’ on Wall Street will not end the recent market volatility. With higher volatility, these carry trades will continue their on-again off-again pattern. Look for further volatility in the carry trade currencies over the short-term. Longer-term holders should be protected by the commodity resources of Brazil.
The South African rand rose against the dollar for a second day as demand for higher-yielding assets and a rally in gold stoked demand for the currency. The rand was the best performer versus the U.S. dollar yesterday and rose as much as 1.4% to 8.0632 per dollar paring its weekly decline against the U.S. currency to 1.3%. As I stated above, the Aussie dollar also rose close to 2% versus the U.S. dollar overnight and the kiwi rose just over 1%.
When the carry trades get put back on, the big loser is the Japanese yen. Financial firms who are having problem borrowing U.S. dollars have turned to the Japanese banks where they borrow yen and then sell them into dollars. The yen dropped over 2% versus the U.S. dollar overnight due to this borrowing.
The Chinese renminbi (CNY) has slowed its appreciation over the past month. Chinese officials have cut interest rates in an effort to stimulate their economy. Traders believe the government will slow the appreciation of the renminbi, the appreciation of which has put pressure on Chinese exporters. I still believe the Chinese economy will be the economic engine of the world in the coming years, and the turmoil on Wall Street and the amount of debt the United States is acquiring further backs this thought. The renminbi will continue its slow climb versus the U.S. dollar in the coming months.
U.K. Prime Minister Gordon Brown is trying to put down a mutiny, as his cabinet members jostle to find his replacement. Calls by more than a dozen labour lawmakers this week for a vote to replace Brown will reach a head during a five-day annual conference beginning tomorrow. Cabinet members are under pressure from lawmakers who are concerned that they’ll lose their seats in the next election, which must be called by 2010, unless Brown is replaced. Brown this week fired three lawmakers from government posts after they called for a leadership vote. Political uncertainty will continue to keep selling pressure on pound sterling (GBP).
Batten down the hatches, as the day is shaping up to be another volatile one! Arrgh, I am running late today, so better end it and get to the currency roundup:
Currencies today 9/19/08: A$ .8113, kiwi .6778, C$ .93919, euro 1.4237, sterling 1.8069, Swiss .8917, ISK 92.42, rand 8.0565, krone 5.817, SEK 6.7208, forint 168.88, zloty 2.3327, koruna 17.079, yen 107.74, baht 34.17, sing 1.4347, HKD 7.7852, INR 45.83, China 6.8378, pesos 10.6785, BRL 1.8965, dollar index 78.86, Oil $99.99, Silver $12.08, and Gold… $839.75
That’s it for today… As you are hopefully realizing by now, today is national ‘talk like a pirate’ day. It’s a big deal here on the desk, as we have some folks who just love to act like pirates. This is also a big night for two of the buccaneers here on the desk, as soccer greats Ty Keough and Don Ries will both be inducted into the St. Louis Soccer Hall of
Fame. The captain of the EverBank ship, Frank Trotter, has purchased three tables for the big event, so it should be a great time. Congratulations to both Ty and Don, you both certainly deserve the honors after all you have done for soccer in the St. Louis area. That will do it for today, batten down the hatches, as I expect more rough waters ahead!! Have a Fantistico Friday!!
Septemeber 19, 2008