Recession Fears Clobber Stocks & Currencies

Good day… And a Wonderful Wednesday to you! I had a tough row to hoe yesterday, traveling to Orlando… First of all, some guy put his big square hard and heavy luggage case in the overhead, over me. When we arrived, I decided to stay seated until the line got to me, rather than stand up and wait like I usually do. Bad decision… The dolt dropped the big square hard and heavy luggage case on my head! OUCH! I almost lost it. I was so close to being knocked out… I know the feeling from my old football playing days. Chris was at a loss, because I couldn’t speak… But I soon recovered… With a bad headache all day…

Then arriving at the Money Show, held at the Gaylord Palms Hotel… The Hotel didn’t have our reservations! And on top of that I had to deal with the “soup Nazi” (remember him on Seinfeld?) check-in lady who was mean. She raised her voice at me, and I pointed my finger at her, and said, “Don’t you dare talk to me like that!” Needless to say, we didn’t stay at the Gaylord Palms last night!

OK… Yesterday, when I was signing off, the euro (EUR) was getting sold furiously. I really didn’t see anything (yet) and noted the selling and signed off. Well, folks… It looks like the slowdown I told you would happen to the Eurozone causing the European Central Bank (ECB) to cut rates this spring, has come down the mountain. Eurozone Services fell by a large amount in January.

But then, across the pond in the United States we saw the U.S. ISM Services Sector index fall by a huge amount too! Shouldn’t this offset the Eurozone fall I asked myself? Obviously NOT! In fact the U.S. number made it all worse for the euro. The U.S. ISM fell way below the 50 level, thus indicating again, that a recession is happening. Those recession fears clobbered U.S. stocks… And the euro too.

With the euro falling by 1.5 cents, the rest of the currencies took one for the team too. One of my faves, Swiss francs (CHF) really had a tough go of it, as the Aussie rate hike left traders feeling pretty spry again, and the carry trade was back on in force!

But what were they buying? We know what they sold… Japanese yen (JPY), and Swiss francs… But what were they buying? Aussie (AUD) lost ground… Kiwi lost ground (NZD)… Sterling (GBP) held ground… (But who knows for how much longer with a rate cut coming this Thursday) Iceland (ISK) didn’t rally… And the heavens know that South Africa (ZAR) didn’t rally! In fact… South African rands are looking pretty shaky folks. I wouldn’t be surprised to see rands hit the 8 handle. Not that long ago, rands traded with a 6 handle! (Remember, rand is a European priced currency, which means as the number gets higher, the currency loses value versus dollars)

And they certainly weren’t buying stocks! Gold? No… What then? I don’t know, maybe the selling in each of these assets was so strong that the carry trade buying couldn’t offset the selling… That’s the only thing I could think of.

But then it hit me, like a big hard heavy luggage case in the head… This was a new breed of carry trades. These are seeking safety… And that safety net was being provided by Treasuries… Geez, Chuck, it took you this long to figure that one out? That big hard heavy luggage case must have knocked some of your brainpower out of whack! There! Treasuries! SLAP! Wow! I could’ve had a V-8!

There will be three Fed Heads speaking today. Fed Speak will be all over the place. Yesterday, we had Fed Head Lacker doing the Fed Speak… Lacker believes he sees a “risk of a mild recession.” and that more rate cuts are possible, and may be necessary.

I say HOGWASH! Quit giving in to the markets, and trying to save a couple of financial institutions that should be strung up and put on public display for their handling of the mortgage bubble. I had another radio interview yesterday, and I told their listeners that the Fed is out of control… They are laying the groundwork for the next bubble, and it’s called inflation!

Speaking of inflation… John Williams, the government accountant, that I’ve talked about many times before has increased his inflation call. You may recall that Mr. Williams reads the footnotes on the government reports, something the media fails to do, nor wants to. And he publishes his findings on his website:

Anyway, Mr. Williams says… That if inflation was calculated the same way it was in the Jimmy Carter years, we would be looking at inflation of 12%!!!!!!! Now, does that sound like an inflation rate that needs more rate cuts? What would a “real” central banker like Paul Volcker do at a time like this? Well… When faced with this type of rising, out of control inflation during his time at the Fed, he raised rates aggressively; he even raised rates on a Saturday night. It was known as Paul Volcker’s Saturday Night Special!

OK… I know I talk glowingly about Mr. Volcker all the time… But probably not enough! Someone at the Fed (Big Ben) needs to go to Mr. Volcker’s dry cleaners and ask for the same starch Mr. Volcker uses!

In the Asian trading overnight, little movement was made… The Japanese yen improved some, but we’re not talking earth-shattering moves here.

The Aussie dollar was unable to hold onto 90-cents yesterday and last night… You get a central bank like the Reserve Bank of Australia (RBA), doing what a central bank should be doing, fighting inflation, and providing price stability, and the currency doesn’t get to shine… That’s strange folks… This is what I would call a “warped mentality” by the markets. The markets are willing to heap praise on a currency who’s central bank cuts rates in order to protect businesses, and attempt to avert a recession that’s already here, and doesn’t heap praise on a currency who’s central bank does it by the book.

What a crazy world we live in, eh? I mean what else would you expect from a world that was able to put a man on the moon, before we figured out that putting wheels on luggage would make life easier!

What a long, strange trip it’s been…

And looky here! Overnight, without the help of a rallying euro, the Swiss franc moved back above 91-cents! Good Show!

Speaking of shows… I’m in Orlando for the World Money Show. This is my first money show since getting “the bad news” last summer. So… I’m looking forward to seeing everyone that I usually see at this show.

OK… What’s going on now? I was just about to go the Big Finish, and my trusty screen, says that euros just dropped 1/4 cent! UGH! More slippage.

Currencies today 2/6: A$ .8960, kiwi .7847, C$ .9940, euro 1.4615, sterling 1.9585, Swiss .9110, ISK 65.90, rand 7.6380, krone 5.5090, SEK 6.4570, forint 177.93, zloty 2.4535, koruna 17.55, yen 106.45, baht 30.90, sing 1.4170, HKD 7.7975, INR 39.50, China 7.1890, pesos 10.83, BRL 1.7590, dollar index 76.24, Oil $88.36, Silver $16.52, and Gold… $900 (at least Gold has climbed back to $900!)

That’s it for today… I’m sitting in the lobby of our “alternate hotel” writing the Pfennig this morning, as this is the only location in the hotel where I can get the Internet! People are all waking up and coming down for coffee, and looking at me working. I think they are amazed that someone is up this early, working on his laptop! Chris is training to run another marathon… So, he’s probably out running the streets of Orlando. Actually, we’re in Kissimmee, but who’s keeping track, eh? I had some great seafood last night, and he ate a salad. I marvel at his dedication to training… Oh well… Time to hit “send”… I hope you have a Wonderful Wednesday!

Chuck Butler
February 6, 2008

The Daily Reckoning