Paulson Speaks With a Double Tongue

Good day… And a Tub Thumpin’ Thursday to you! I was alone last night, and decided to write… Oh boy, dear reader… Are you in trouble when I begin writing at night for the next morning! My Cardinals were losing again, so my attention turned to putting down all these thoughts that keep coming into my head… Like Michael Keaton in Night Shift (what a great movie!) I need a recorder to put all these thoughts down… Like… Feed the mayo to the tuna!

OK… Front and center this morning, the euro’s (EUR) rally that went on all day yesterday and into the early Asian session (all the way to 1.5580) ended this morning. Someone, somewhere must have decided that the U.S. would be able to squeeze by this slowdown… Unfortunately, I don’t agree! I see the United States being involved with the multi-car accident on the highway… But as Pfennig readers you already know that. However, instead of just hearing from me all the time about this meltdown of the U.S. economy, let’s hear from an organization that tracks these things.

The LEAP/E2020 team has decided to launch an alert on the July-December 2008 period, in their Summer 2008 Special Edition of the Global Europe Anticipation Bulletin, the LEAP/E2020 team paints a pretty ugly picture… Here are some snippets of their thoughts…

“In a few weeks time (after the next G8- and other organizations-meetings have taken place), when it will be confirmed that there is no way to stabilize the US currency (not to mention the eccentric idea of pushing it up) because the US economy is sinking always deeper into the recession and because the world is already filled with US Dollars no one knows what to do with, then the global financial system will burst out in various sub-systems trying to survive as much as they can before a new global financial equilibrium is found. As he is embarking on this road to nowhere, consciously or not, voluntarily or not, Ben Bernanke is signing the end of the current financial system. The return to a ‘strong Dollar’ is a bit like…wishful thinking turning into a nightmare.

“A Dollar in distress (EUR 1 = USD 1.75 at the end of 2008): Panic-fear of a US currency and economy collapse eats into the American collective psyche.”

OK… To me, things are getting uglier every day, but the media and thus the markets aren’t paying attention. A reader in Jacksonville, sent me a note and wanted me to add Big Ben to the list of Pfennig readers. HA! Now that’s funny, right there! Big Ben reading the Pfennig? Maybe it would do him some good! Before I go on though… Here are a couple of items on the “bad” side of the ledger that might have slipped by the media and markets yesterday.

Did you see that Fifth Third Bank had to raise about $1 billion in new capital? I have to say here, right now, front and center, that the bad debt losses are just now beginning to mount. You think we saw some before? I would think we just scratched the surface.

John Paulson, founder of the Hedge Fund Co. Paulson & Co., believes the IMF’s forecast for $945 billion in write-downs is too light… He believes the total will be $1.3 trillion. Here’s what he had to say…

“We’re only about a third of the way through the write downs. There are a lot of problems out there and it will continue to be felt through the year. We don’t see any signs of stabilizing.”

Well… What do we have here? Another central banker out to make Big Ben look like a yellow belly when it comes to fighting inflation, that’s what! OK… So, I guess you want to know what/who I’m talking about, eh? Well, you all know that I’ve been sky high on the Brazilian real (BRL), right? So, this plays well with that feeling.

Brazil’s Central Banker, Meirelles, was talking about the difference between the Brazilian Central Bank and the Bank of England… Of course you could insert the Fed and Ben Bernanke in place of the Bank of England very easily! Here’s Meirelles….

“We have an inflation problem, we are aware of it and we will use the main tool at our disposal- interest rates- to make sure it doesn’t spiral out of control. The UK, on the other hand, acknowledges inflationary concerns but chooses to characterize it as ‘temporary’ and say that putting the monetary brakes on aggressively now is not an option because of its potential negative impact on growth. In short- they are willing to take a risk with respect to inflation for fear of a hard landing. Not very comforting.”

Hey! And speaking of people talking bad about other people (something I would never do! Well, never in my sleep! HA!) I came across someone else that is calling out U.S. Treasury Secretary Paulson and his so-called “strong dollar policy”. Here’s what the analysts at Barclays Capital wrote to their clients yesterday… “U.S. Treasury Secretary Henry Paulson is ‘double-tongued’ because he wants the dollar to gain to curb inflation while he lobbies Asian countries to strengthen their currencies, according to Barclays Capital.”

I’ve been pointing out the ridiculousness of Paulson’s “strong dollar policy” for years now… Nice to see someone else has finally figured it out!

Oh, and remember yesterday when I called the Fed the new “junk bond house”? Well… Now they are not only the new “junk bond house” they are also the new “ENRON accounting firm”… Here’s the story, by Jonathan Weil on Bloomberg…

“The Federal Reserve is just days away from completing the financing for its bailout of Bear Stearns Cos., after which the central bank will have another big decision to make: how to account for it.

“Flip through the footnotes to the Fed’s latest annual report, and you’ll come across an open secret. The Fed doesn’t follow normal accounting rules, as promulgated by any of the major standard-setting boards. Rather, the Fed writes its own, in a document called the Financial Accounting Manual for Federal Reserve Banks.

“If you ever wanted to design an accounting regime to help a bank cook its books, the Fed’s would be perfect. This doesn’t exactly inspire faith in the U.S. financial system, at a time when a good example might help a lot.”

Foreigners that buy U.S. assets and finance the current account deficit need to have faith in the U.S. Financial System to continue buying. The Fed’s not exactly giving foreigners a reason to buy U.S. assets, are they now?

So folks… The Fed’s FOMC meets next week on Wednesday. Just what do you think will happen once the Fed leaves rates unchanged and doesn’t remove their downside risks to growth? Well, if the last meeting is any indication, then the dollar will get sold like funnel cakes at a State Fair! The economy hasn’t shown one sign of recovery or strength… But inflation keeps rising, as do the unemployment numbers, so the Fed’s hands are tied… And the dollar will suffer.

While I’m being gloom and doomish… All the warnings about Iceland are coming to roost, as the country experiences a problem with their banking system. This is all played out in the Icelandic krona (ISK), along with the lack of liquidity… The once high interest rates available are no longer there when trying to buy, as dealers slice a fat slice of this currency as their payment for dealing in it… Even the euro rally yesterday didn’t help the krona.

OK… Enough of that dark side stuff!

The Swiss National Bank (SNB) left rates unchanged this morning, as expected, and the non-action has left the franc (CHF) holding the bag. I said earlier this week that I hoped that the SNB would put an end to the franc being used as a financing currency for the carry trade, by raising interest rates, thus making the borrowing costs too expensive… But NOOOOOOO! The SNB wouldn’t throw me a bone on that one.

In the U.K. this morning, the rumors of the U.K. consumer being dead have been greatly exaggerated! U.K. retail sales printed at a record pace in May, jumping by a remarkable 3.5% (the highest such print since the series began (1986) and a far cry from the -0.1% print expected.) Once again, the Bank of England (BOE) has to be kicking themselves for cutting interest rates ahead of data like this. Inflation here is the highest it’s been in a while… And retail sales are soaring. I think it’s time for the BOE to come back to the table and reverse their last rate cut with a hike… I would expect this news to give a nice push to the pound (GBP)…

The Norwegian (NOK) and Swedish currencies (SEK) have really backed off recently… But I have to continue to think that these are just buying opportunities, not crying opportunities. Positive Balance of Payment countries like these two don’t come around that often!

Currencies today 6/19/08: A$ .9470, kiwi .7575, C$ .9835, euro 1.5495, sterling 1.9690, Swiss .9585, ISK 82, rand 8.0280, krone 5.1850, SEK 6.07, forint 156.30, zloty 2.1750, koruna 15.55, yen 107.60, baht 33.42, sing 1.3690, HKD 7.8080, INR 42.97, China 6.8770, pesos 10.31, BRL 1.6075, dollar index 73.52, Oil $136.50, Silver $17.28, and Gold… $888.35

That’s it for today… Finally! Some chamber of commerce type weather here in St. Louis! Spring is finally here, but wait! Next week we begin Summer! Another day of meetings for yours truly today… UGH! Well… Did you know that on June 19th, 1954, the Tasmanian Devil was introduced in the Bugs Bunny animated short Devil May Hare? We call our little Christine “Taz” on Fridays, as she comes in like the Tasmanian Devil. HAHAHAHA! Kristin will be speaking at the Freedom Fest in Las Vegas next month, along with an additional trip to Las Vegas later in the month to speak at the Wealth Masters Conference… She’s taking a load of speaking engagements off my calendar, thus allowing me to not have to travel. Of course, after hearing her speak, I’m sure the organizers will probably drop me like a bad habit! Time to go to work, before the meetings begin… I hope your Thursday is Tub Thumpin’!

Chuck Butler
June 19, 2008

The Daily Reckoning